Foreign banks' share of total banking system assets remained stagnant at around 2%. After the opening of a commercial-paper market in 2005, efforts to free up the bond markets struggled and while issuance rose, trading volumes remained anemic, making the bond markets useless for the pricing of capital. After the reform of government shareholding in listed companies in 2006 and a short-lived stock market bubble in 2007, Chinas equity markets languished and remained dominated by state-controlled firms. In short, market-oriented financial reform had virtually halted in the face of stiff resistance from existing state-owned financial institutions and a political leadership that had little interest in relaxing the central governments grip on the levers of finance In this context, the RMB internationalization campaign can plausibly be read as a back-door effort to get domestic financial reform going again. The apparent logic was that with the creation of a market-driven RMB interest rate offshore, opportunities would arise for arbitrageurs to profit from the difference between market-driven offshore rates and administered onshore rates The only way to eliminate this arbitrage gap would be to dismantle capital controls, thereby forcing convergence of the offshore and onshore rates. Better yet, the interest-rate gap could be largely eliminated by domestic interest rate liberalization before capital controls were removed So the"premature"internationalization of the RMB, although highly unorthodox and evidently sold to the leadership as a means of freeing China from the hegemony of the Us dollar, was more likely a stratagem by reformers to nudge along the domestic financial liberalization process. In this regard it is interesting to note that the momentum behind RMB internationalization which was dramatic in 2010-11 with large increases in RMB deposits and bond issuance in Hong Kong, and rapid adoption of RMB invoicing by Chinese importers and exporters-slowed notably in 2012. The RMB's share of foreign-currency deposits in Hong Kong rose from 2% in 2009 to a peak of just over 20% by November 2011; it then subsided to a steady level of around 17% in 2012. RMb bond issuance was about the same in 2012 as in 2011. at around Rmb100 bn (although issuance of RMB certificates of deposit rose substantially) Domestic interest rates: deregulation through inaction Yet even as the offshore rMb market cooled, the onshore"shadow finance system was exploding, most obviously through the proliferation of so-called "wealth management products (WMPs). Although they vary in structure, WMPs are in essence a close analogue of the money market mutual funds that arose in the United States in the 1970s as a way of giving savers higher rates of return than offered by bank deposits, whose rates- both in the us in the 1970s and in China today -were subject to regulatory ceilings. The stock of bank-issued WMPs rose from I make this argument in more detail in Chinas Global Currency: Lever for Financial Reform, Brookings Institution,April2013(http://www.brookings.edu/research/papers/2013/04/china-global-currency-financial-Foreign banks’ share of total banking system assets remained stagnant at around 2%. After the opening of a commercial-paper market in 2005, efforts to free up the bond markets struggled, and while issuance rose, trading volumes remained anemic, making the bond markets useless for the pricing of capital. After the reform of government shareholding in listed companies in 2006 and a short-lived stock market bubble in 2007, China’s equity markets languished and remained dominated by state-controlled firms. In short, market-oriented financial reform had virtually halted in the face of stiff resistance from existing state-owned financial institutions and a political leadership that had little interest in relaxing the central government’s grip on the levers of finance. In this context, the RMB internationalization campaign can plausibly be read as a back-door effort to get domestic financial reform going again. The apparent logic was that with the creation of a market-driven RMB interest rate offshore, opportunities would arise for arbitrageurs to profit from the difference between market-driven offshore rates and administered onshore rates. The only way to eliminate this arbitrage gap would be to dismantle capital controls, thereby forcing convergence of the offshore and onshore rates. Better yet, the interest-rate gap could be largely eliminated by domestic interest rate liberalization before capital controls were removed. So the “premature” internationalization of the RMB, although highly unorthodox and evidently sold to the leadership as a means of freeing China from the hegemony of the US dollar, was more likely a stratagem by reformers to nudge along the domestic financial liberalization process.4 In this regard it is interesting to note that the momentum behind RMB internationalization – which was dramatic in 2010-11 with large increases in RMB deposits and bond issuance in Hong Kong, and rapid adoption of RMB invoicing by Chinese importers and exporters – slowed notably in 2012. The RMB’s share of foreign-currency deposits in Hong Kong rose from 2% in 2009 to a peak of just over 20% by November 2011; it then subsided to a steady level of around 17% in 2012. RMB bond issuance was about the same in 2012 as in 2011, at around Rmb100 bn (although issuance of RMB certificates of deposit rose substantially). Domestic interest rates: deregulation through inaction Yet even as the offshore RMB market cooled, the onshore “shadow finance” system was exploding, most obviously through the proliferation of so-called “wealth management products” (WMPs). Although they vary in structure, WMPs are in essence a close analogue of the money market mutual funds that arose in the United States in the 1970s as a way of giving savers higher rates of return than offered by bank deposits, whose rates – both in the US in the 1970s and in China today – were subject to regulatory ceilings. The stock of bank-issued WMPs rose from 4 I make this argument in more detail in China’s Global Currency: Lever for Financial Reform, Brookings Institution, April 2013 (http://www.brookings.edu/research/papers/2013/04/china-global-currency-financial-reform￾kroeber)