Second stage

The yuan must satisfy three conditions in order to become an international currency. First, a certain amount of yuan cash must be circulated in foreign countries, with a certain proportion of yuan-settled trade in overall international trade. Second, yuan-denominated financial products must become investment tools for major international financial institutions, including central banks. Third, most countries must accept yuan as their reserve currency.

The yuan has entered the second stage of internationalization, when its investment function has become a core issue.

"The settlement function is only one of the necessary conditions for internationalization of a currency. To be international, the yuan must realize its investment function," said Yang.

On May 2, the central bank released guidelines on the implementation of the Renminbi Qualified Foreign Institutional Investor (RQFII) program, further regulating issues such as account opening and application procedures for international fund management companies to enter the inter-bank bond market. By the end of March 31 this year, 29 institutions had received RQFII qualifications, with a total quota of 70 billion yuan ($11.27 billion) being approved.

According to the central bank guidelines, overseas institutions under the RQFII pilot program should open three types of deposit accounts: RQFII basic deposit accounts, special deposit accounts for settlement at stock exchanges as well as special deposit accounts for settlement at inter-bank bond market.

Lu Zhengwei, chief economist of Industrial Bank Co. Ltd., said that the RQFII program should be expanded to cover more overseas institutions, and the ultimate goal is to allow worldwide yuan funds to be invested in RQFII.

A long way to go

"To make the yuan a real global currency, China must allow for its full convertibility," said Qu Hongbin, chief economist at HSBC China.

At present, the yuan is freely convertible under the current account but not capital account. Qu thinks many conditions for full convertibility are ripe, including balanced payments under the current account, a more flexible exchange rate and the rapid use of yuan in overseas markets. In the meantime, reform of the financial system in the mainland is accelerating, and a modern corporate governance system has been improved. Chinese companies can freely convert yuan, and China has signed currency swap currency with more than 20 countries and regions. The time has come to gradually relax control of the capital account.

According to Qu, the reason why the Chinese Government hasn't committed to a clear timetable to open the capital account is related to the value of the yuan and the stability of the Chinese market. Since the yuan is part of the capital markets, if the central bank has set a clear timetable, there will be risks of arbitrage activities in the money markets. "It is inappropriate for the central bank, the supervising authority, to give the market excessively high expectations. That will impose huge pressure to the market," Qu said.

Xie Yonghai, chairman of BOCI-Prudential Asset Management Ltd., delivered a speech for the School of Management at Fudan University on April 15, saying that the public should not be too optimistic about the yuan's internationalization because it faces three major risks.

First, management risks. To make yuan an international currency, China must deal with the problems of capital flow, monetary policy and exchange rate policy. Second, backflow risks. If the amount of offshore yuan keeps growing, it may adversely impact the domestic yuan market when flowing back to China. Third, circulation risks, which need some contingency measures.

Xie said that based on these risks, yuan's internationalization must be advanced under the prerequisite of China's financial security, which is a long process.

Zhang Monan, associate researcher with the Economic Forecast Department of the State Information Center, said that currency internationalization is ultimately the result of market choices instead of being pushed forward by policies. The crucial point for yuan's internationalization is whether the Chinese economy can maintain sound and sustainable growth in the next 20 years and whether China's financial markets can be better developed. Under the present conditions of an underdeveloped domestic financial market, and the fact that interest rate and exchange rate schemes are not completely market-oriented, yuan internationalization should not be the government's focus.

"Yuan internationalization cannot be achieved overnight, nor should it be hastened. Domestic financial and economic reform should be the focus," Zhang said.

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