Yuan to join world’s top three currencies for payments

Key challenges persist in internationalization process, experts warn

The yuan is expected to become the third-largest payment currency after the U.S. dollar and the euro by 2018, an expert said during the 2016 International Monetary Forum in Beijing on Sunday, while noting that the currency's internationalization still faces key challenges.

"The yuan is expected to surpass the Japanese yen and the British pound to become the third-largest payment currency," said Xiang Songzuo, a vice director of the International Monetary Institute (IMI) under Renmin University of China.

The yuan's internationalization has progressed steadily in recent years, according to the 2016 Renminbi Internationalization Report, which was released by the institute during the forum.

As of the end of 2015, the Renminbi Internationalization Index (RII) stood at 3.6, a year-on-year increase of 42.9 percent and an increase of more than 10-fold over the previous five years, said the report.

The RII is used by the institute to measure the internationalization of the yuan. It takes into account the currency's status in international trade and finance and in official foreign reserves.

A currency's internationalization can range from zero to 100.

The yuan ranked sixth in terms of payments as of June 2015, Chen Yulu, a vice president of the People's Bank of China (PBC), the country's central bank, told the forum on Sunday.

Chen noted that 36 countries and regions had signed currency swap agreements with China as of June this year, with a total volume of 3.3 trillion yuan ($494.3 billion).

The factors driving the yuan's internationalization are the steady performance of China's economy, its orderly pursuit of financial reform and its enhanced financial infrastructure and support mechanisms that are in line with international standards, the report said.

China's GDP grew by 6.7 percent in the first half of 2016, after expanding 6.9 percent in 2015, according to data released by the National Bureau of Statistics on July 16.

The yuan's internationalization has moved forward in steps. For example, in October 2015, China launched the first phase of the yuan's Cross-border Interbank Payment System, which provides clearing and settlement service to domestic and foreign financial institutions for cross-border and offshore yuan businesses, according to a statement on the PBC's website at the time.

Then in November 2015, the IMF announced it would include the yuan in the basket of currencies for its Special Drawing Rights reserve unit.

That move is scheduled to take effect in October 2016.

However, the yuan's internationalization still faces big challenges amid a complex, volatile and cloudy international monetary environment, Xiang warned.

One challenge is investors' confidence in the country's economy, Tu Yonghong, a professor who specializes in international currencies at Renmin University of China, told the Global Times on the sidelines of the forum.

Since the global financial crisis in 2008, many structural obstacles have emerged in China's economy.

These include weak innovation abilities, an unbalanced economic structure, difficulties in channeling finance to small and medium-sized companies, said the report.

Xia Le, chief economist for the Asia research department of Banco Bibao Vizcaya Argentaria, told the Global Times in an interview during the Beijing event that China may have to further liberalize the yuan's exchange rate.

But he said this process should be slow, as it may lead to capital outflows if the yuan sharply depreciates.

The core task of China's monetary authorities when it comes to macro financial management is to establish comprehensive, targeted strategies to achieve financial stability, concluded the report.

China should also communicate with private companies in Western countries including the US, the UK and Europe to understand how their policies are formulated, rather than communicating only on a government-to-government level, Alistair M. Michie, secretary-general of the British East Asia Council, told the Global Times in an interview on the sidelines of the financial forum.

"With the rapid pace of China's economic upgrading and reform, the yuan's inclusion in the SDR basket and the country's 'Belt and Road' initiative, the yuan will be needed more by the market," Chen said.