Bank on convertibility
The mainland has accelerated steps to making the yuan a global currency, and the United States Federal Reserve's decision to allow Chinese banks to expand their operations in the US will give further impetus to it.
Last month, HSBC said it would issue the first international yuan-denominated bond in London, which currency experts say signals an important stage in the mainland currency's journey towards full convertibility.
HSBC announced that it planned to sell 2 billion yuan (US$317 million) of yuan-denominated bonds in London with a yield of 3 per cent, the first-ever international yuan-denominated bonds to be sold outside the mainland's sovereign territories.
The move coincided with British Chancellor of the Exchequer George Osborne speaking of his country's ambition to boost London as an offshore trading centre for the yuan.
The Federal Reserve revealed that three of the mainland's largest state-owned banks, Bank of China, the Agricultural Bank of China and ICBC, have been given approval to expand their operations in the US.
In a research report, ING Bank says that from pilot schemes for inward and outward foreign direct (FDI) investment, and the expansion of China's Qualified Foreign Institutional Investor (QFII) scheme, it sees the mainland taking further positive steps to open up the market and achieve yuan convertibility.
Tim Condon, chief Asia economist of ING Bank, says China needs a currency befitting of an economy that accounts for 10 per cent of global trade. He says it is remarkable that the authorities promoted an offshore market in their own currency, an experiment with no historical precedent, at a time when global financial market volatility is at an all-time high.
'Were internationalisation to lead to capital account convertibility it would be the most significant pro-market economic reform since China acceded to the World Trade Organisation in 2001,' Condon says. 'From what we have seen, I expect the renminbi to become fully convertible in five to 10 years from 20 years, as previously expected.'
ING says the mainland has come a long way since it authorised Hong Kong banks to offer yuan deposit services in 2003 and launched a pilot yuan trade settlement scheme in 2009.
Condon cautions that the yuan's internationalisation is only the first step in achieving the status of a reserve currency. Future steps will require further moves towards capital account opening. The recent pilot schemes for inward and outward FDI and the expanded QFII scheme, which was raised from US$30 billion to US$80 last month, are signs that China intends to expand trade clearing as a stepping stone to full capital account convertibility.