ECB sees yuan challenging greenback

More Chinese banks in euro area will increase need for co-operation between authorities

PUBLISHED : Friday, 28 February, 2014, 1:10am
UPDATED : Friday, 28 February, 2014, 5:01am

The yuan might one day challenge the role of the US dollar as the world's leading reserve currency, European Central Bank executive board member Yves Mersch said.

"Having become an important trading and payment currency, the renminbi is now taking the first steps toward establishing itself as an international investment currency," Mersch said at Luxembourg's Renminbi Forum on Wednesday.

"Due to the size of China's economy and its importance in global trade and, potentially, finance, the renminbi might ultimately come to challenge the US dollar" as a leading reserve currency.

The central government has been gradually allowing the currency to float more freely in recent years, while keeping strict limits on the amount of money that can flow from the mainland. The yuan became one of the top 10 currencies used for payments last year as its use in settling trade has increased.

Introducing direct trading between the euro and the yuan at the Shanghai foreign exchange will "bring benefits for the euro area and China", Mersch said.

The ECB and the People's Bank of China established a currency swap agreement in October under which up to €45 billion (HK$480 billion) can be made available as a backstop against possible liquidity shortfalls.

The yuan's internationalisation could have implications for global financial stability, Mersch said, adding that "investors need to prepare for a world in which the renminbi will play a much more important role".

He said from a euro zone perspective, the yuan's growing internationalisation called for closer monitoring of risks stemming from increased exposure to yuan-denominated assets and liabilities in euro zone banks.

"The increasing presence of Chinese banks within the euro area also brings its own challenges regarding banking supervision, including the need for greater co-operation and exchange of information between home and host authorities," Mersch said.

President Xi Jinping presented a wide-ranging programme of reforms in November, including a progressive easing of the restrictions on the nation's financial markets.

Bloomberg, Reuters