Yuan can supplant yen, pound to be world’s third most-used currency if reforms keep pace

China’s renminbi can supplant the yen and the pound sterling to become one of the three most used currencies on earth in five years, if the Chinese government can keep financial reforms on pace, and commit to further integrate the economy with the rest of the world.

“The key to pushing for the yuan’s internationalisation as a global currency is to make it into a tool for global investors to share in the benefit brought by a growing Chinese economy,” said Zhou Chengjun, deputy director general of the research bureau of the People’s Bank of China, during a panel at the China International Import Expo in Shanghai. “The tolerance for a freer exchange rate, the free cross-border flow of capital, a deep, sophisticated financial markets, and an offshore yuan market with active trade are crucial.”

Zhou’s comment underscores the road ahead for the central bank and for the Chinese government, four decades after the world’s most populous nation was yanked from Soviet-era central planning and thrown into the capitalist markets. The economy has expanded 225-times in the forty years since 1978, and is projected to surpass the United States around 2030, based on the current growth projection.

The renminbi, also known as the yuan, overtook the Canadian and Australian dollars in November 2014 as the fifth most-used global payments currency, according to data by the Society for Worldwide Interbank Financial Telecommunication (Swift).

The Chinese leadership has been pushing the yuan’s usage as a global currency. The mission received a boost in 2015 when the International Monetary Fund included the yuan among its Special Drawing Right basket, with a weighting of 10.92 per cent, less than the US dollar’s 41.73 per cent and the euro’s 30.93 per cent. Japan’s yen is in fourth place at 8.33 per cent while the pound sterling is in fifth place at 8.09 per cent.

Still, the Chinese currency accounts for less than 2 per cent of global payments now, compared with 40 per cent by the US dollar, according to Swift’s data.