The steady advance of the yuan

In April, the central bank established an independent international payment system to enable cross-border yuan clearance. Since 2004, permission was given to 32 banks in Hong Kong to accept yuan deposits, Hong Kong has led the way in developing the yuan's offshore role, and now accounts for 75 percent of the yuan's offshore clearing worldwide.

Recently other financial centers, led by London and Singapore, have started to compete with Hong Kong in the yuan settlement market. In January 2012, to signal the new interest of London in the yuan business, the Hong Kong Monetary Authority and Britain's finance ministry jointly launched a yuan offshore forum in Hong Kong.

In April, HSBC issued the first yuan-denominated bond outside the mainland and Hong Kong, raising 2 billion yuan ($320 million; 240 million euros) in London. The HSBC bond issue was followed in London by Banco do Brasil, ANZ, and on Nov 30 by China Construction Bank, which became the first Chinese issuer of a "dim sum" bond outside Hong Kong.

The fast growth of yuan deposits in Hong Kong, stimulated by the loss of confidence in the US dollar in 2008, slowed last year, probably indicating that the yuan deposit market is maturing into an investment market.

In August, there were 168 financial institutions worldwide offering real time gross settlement in the yuan, of which 128 were based in Hong Kong. But important technical hurdles to providing a seamless yuan cross-border settlement service remain, like translating the Chinese characters used to describe payment beneficiaries into English, and matching the internal code CNH used by banks for the Chinese currency with the international standard CNY.

In a recent speech in Hong Kong, Dai Xianglong, chairman of the Chinese National Social Security Fund and former governor of the central bank, said that no timetable had been set for yuan convertibility. Within China, the market needs to set both interest rates and the exchange rate, and the Chinese capital markets, particularly the bond market, need to develop considerably in depth and liquidity.

Outside the mainland, he said, Chinese financial institutions need to develop their branches in major economic and financial centers to increase their understanding and control of international financial flows and economic events.

Against this background of slow but solid development, 2013 looks like being another year of steady progress in making the yuan into an international currency. In 2012, Nigeria joined Chile, Brazil, Venezuela, Austria and a long list of Asian countries that hold the yuan as foreign exchange reserves, both as an investment and against imports of Chinese products.

In 2013, other countries will start to hold the yuan as a reserve asset. The case for doing so is growing stronger as China becomes a major trading partner or, in many cases, the dominant trading partner for countries which sell natural resources, and whose emerging middle classes depend on reasonably priced Chinese clothes and household products.

China is strengthening the yuan's position as a trade settlement currency, the beginnings of a yuan international bond market are appearing, and the yuan is used widely as currency in Asian countries, such as Thailand, for which China is a major trading partner.

But most of these offshore yuan in households and small businesses are still kept under the mattress because of the absence of the yuan banking facilities outside Hong Kong.

Despite all these developments, the yuan accounts today for less than 0.5 percent of global financial settlements, with the euro, US dollar and British pound between them still making up 85 percent of trade and other financial settlements, according to SWIFT. Significant financial reforms within China, and greater yuan familiarity and banking capacity outside China are necessary before the yuan can move to an internationalized currency.

The fact that the British pound, which lost its global currency status 70 or 80 years ago, still accounts for about 8 percent of global financial transactions demonstrates how long it takes for new currencies to "arrive" and old ones to "depart".

There is a long way to go before the yuan can match up to the requirements of a major international currency, which should command confidence and trade freely everywhere, be held in unlimited size by financial institutions wherever based, be used for invoicing without limitation and be widely held as a "reserve" currency by central banks as a backup to their own domestic monetary and economic systems.

It will be at least a decade before the yuan joins the euro and the US dollar as one of the principal global trading and reserve currencies. But the direction is clear. Barring a major unforeseen event, we will see more evidence in 2013 that the yuan is on the way up.

The author is a visiting professor at Guanghua School of Management, Peking University. The views do not necessarily reflect those of China Daily. Contact the writer at gileschance@yahoo.com

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