One of the lessons China has learned from the financial tsunami which struck the world in 2008 is that the overwhelming dominance of the US dollar in the international financial market is an unstable factor in the global economy and financial system, and that the mismatch of the yuan's global position with the country's growing economic, trade and financial significance needs changing.

Hence, an effort to enhance the position of the yuan in the international financial market to a level commensurate with the global status of the Chinese economy, that is, a drive to encourage enterprises and individuals in other countries/economies to use it as an international currency in their local markets, or in other words, to internationalize the Chinese currency, is called for.

Can this call for yuan internationalization be justified at this stage?

It is never an easy mission for a country to internationalize its currency. It depends on an array of conditions the country needs to fulfill. More important ones include the country's influence in international trade and investment markets, its economic power, the stability of the value of its currency, and the degree of development of its financial market.

The first condition is the most important. It relates to the country's need to internationalize its currency, the confidence of other countries/economies in the usefulness of the currency, as well as the technical feasibility of the currency being used in other economies. The other three conditions are also important as they affect the recognition, trust and confidence of the enterprises and individuals in other economies in using the concerned currency for international trade and investment activities.

China has indeed achieved much in meeting these conditions. First, in respect of influence in international trade and investment markets, China is currently the world's largest exporter and second largest importer, accounting for 11 percent and 9.6 percent of global exports and imports respectively in 2010. Meanwhile, it is the second largest recipient of foreign direct investment (FDI) and the third largest international investor in terms of outbound FDI.

With regard to the second condition, economic power, China is now the second largest economy in the world, just next to the US, accounting for 9.3 percent of the global economy in 2010. This is a result of its remarkable 9.9 percent Compound Annual Growth in GDP over the past 32 years. It is also widely expected that China's economy will continue to grow rapidly in the coming decades. Moreover, China has the largest foreign exchange reserves in the world, exceeding $3.0 trillion at end-March 2011, which is more than double that of Japan which is only second to China.

The third condition, stability of the currency value, is also looking very optimistic for China. Everyone recognizes that the currency is on an appreciating trend in the coming years on the back of the country's fast-growing economy, largest foreign exchange reserves in the world, continuous economic and financial reforms, as well as strong purchasing power. This is in fact the yuan's biggest attraction for other economies at the moment.

The fourth condition has to do with the degree of financial market development. Admittedly, this is a weaker area for China in comparison to other more developed economies at this stage. This weakness lies in the depth and diversity of China's financial market in terms of the sophistication of products, standards of services, modes of operation, methods and techniques of risk management and the degree of market penetration. Meanwhile, the yuan's current account is not yet fully opened and it is not yet fully convertible. These are major obstacles for its internationalization at the present stage. However, the scale of China's financial market is among the largest in the world, in line with its economic scale. It is worth noting that four Chinese banks were among the top 10 in the world in 2009 in terms of market capitalisation, according to a Frankfurter Allgemeine Zeitung report. More importantly, the country has been making remarkable progress in financial market development over the past decades. Its financial market has been not only growing at a fast pace but also undergoing comprehensive and intensive restructuring with sweeping financial and banking reforms. The restructuring is set to accelerate in the years to come. With regards to reform of the yuan exchange rate regime, its current account is already partially open, and this will continue until it is near-fully open in the next five to 10 years, when the yuan will become mostly convertible. That is to say, this obstacle for the yuan's internationalization is being gradually removed. Offsetting its existing weaknesses in these significant ways is expected to make the outlook of China's financial market more encouraging than at present.

In view of the above, taking both necessity and feasibility into consideration, the call for the yuan's internationalization is a natural and timely one.

The author is senior vice-president, chief economist/strategist for China banking at CITIC Bank International. The opinions expressed here are entirely his own.

(HK Edition 05/05/2011 page2)