in investor sentiment contributes to significant movements in the basis. finally liberalization policy measures also have an independent effect on the basis. Overall, these results suggest that there is considerable scope for policy to affect the arbitrage working to narrow the basis, to enhance onshore-offshore renminbi market integration, and to reduce basis risk. The next section therefore turns to the role of capital account liberalization policy IV. ROLE OF CAPITAL ACCOUNT LIBERALIZATION IN RENMINBI INTERNATIONALIZATION olution of China's Capital Account Liberalization Strategy In recent years, mainland capital account liberalization has been increasingly geared towards supporting renminbi internationalization. This was partly in response to weaknesses in the international monetary system revealed in the 2008-09 global financial crisis. Specifically, the availability of dollars for trade and other cross border financing in global markets temporarily dried up during the crisis, highlighting a risk of relying on a single reserve currency. Another, more recent, consideration is that reliance on the dollar dominated system is the exposure to US unconventional monetary policies that results in global monetary and financial conditions that are excessively lax from China's perspective. This shift in policy focus is clearly evident in liberalization measures announced since 2009(Table 2). These triggered the rapid expansion in renminbi trade settlement and offshore renminbi liquidity (Figures I and 4) Renminbi internationalization and capital account liberalization are seen as a mutually einforcing process by the Chinese authorities(Zhou, 2012). This is part of broad strategy of financial sector reform and development that is aligned with a"gradual and controllable approach to capital account liberalization. However, the goal of promoting wider use of the currency in trade and related international financial transactions is broader in scope tha liberalization in that it also covers nonresidents renminbi-denominated assets and liabilities and off-balance sheet(e.g, forwards and derivatives)activities(He, 2012) Hong Kong Sar has been the primary location in which the offshore renminbi markets developed. It provided a testing ground for the various initiatives to develop the renminbi as an international currency. This reflects, in part, the close co-operation between the mainland process. The launch of offshore renminbi settlement and banking in Hong Kong SAP authorities and Hong Kong Sar that facilitated the monitoring and management of the focused initially on international trade, but the existence of the renminbi platform in Hong Kong SAR facilitated development of other type of renminbi financing and investment activities. HKMA actions have also supported renminbi market by increasing flexibility in regulations designed to limit risks from offshore use of the renminbi as banks demonstrated the capacity to manage these risk more effectively (tables 2 and 3) S A number of variables turned out to be statistically insignificant and, thus, are not reported, notably the difference between the onshore three-month forward rate and the three-month NDF, used as a proxy for expectation of futures changes in the basis9 in investor sentiment contributes to significant movements in the basis. Finally, liberalization policy measures also have an independent effect on the basis.3 Overall, these results suggest that there is considerable scope for policy to affect the arbitrage working to narrow the basis, to enhance onshore-offshore renminbi market integration, and to reduce basis risk. The next section therefore turns to the role of capital account liberalization policy. IV. ROLE OF CAPITAL ACCOUNT LIBERALIZATION IN RENMINBI INTERNATIONALIZATION A. Evolution of China’s Capital Account Liberalization Strategy In recent years, mainland capital account liberalization has been increasingly geared towards supporting renminbi internationalization. This was partly in response to weaknesses in the international monetary system revealed in the 2008–09 global financial crisis. Specifically, the availability of dollars for trade and other cross border financing in global markets temporarily dried up during the crisis, highlighting a risk of relying on a single reserve currency. Another, more recent, consideration is that reliance on the dollar dominated system is the exposure to US unconventional monetary policies that results in global monetary and financial conditions that are excessively lax from China’s perspective. This shift in policy focus is clearly evident in liberalization measures announced since 2009 (Table 2). These triggered the rapid expansion in renminbi trade settlement and offshore renminbi liquidity (Figures 1 and 4). Renminbi internationalization and capital account liberalization are seen as a mutually￾reinforcing process by the Chinese authorities (Zhou, 2012). This is part of broad strategy of financial sector reform and development that is aligned with a “gradual and controllable” approach to capital account liberalization. However, the goal of promoting wider use of the currency in trade and related international financial transactions is broader in scope than liberalization in that it also covers nonresidents’ renminbi-denominated assets and liabilities, and off-balance sheet (e.g., forwards and derivatives) activities (He, 2012). Hong Kong SAR has been the primary location in which the offshore renminbi markets developed. It provided a testing ground for the various initiatives to develop the renminbi as an international currency. This reflects, in part, the close co-operation between the mainland authorities and Hong Kong SAR that facilitated the monitoring and management of the process. The launch of offshore renminbi settlement and banking in Hong Kong SAR focused initially on international trade, but the existence of the renminbi platform in Hong Kong SAR facilitated development of other type of renminbi financing and investment activities. HKMA actions have also supported renminbi market by increasing flexibility in regulations designed to limit risks from offshore use of the renminbi as banks demonstrated the capacity to manage these risk more effectively (Tables 2 and 3). 3 A number of variables turned out to be statistically insignificant and, thus, are not reported, notably the difference between the onshore three-month forward rate and the three-month NDF, used as a proxy for expectation of futures changes in the basis