Will the yuan rule?

There is no doubt that China is determined to fully internationalise its currency. The only question is the speed at which this will occur.

Professor Eswar Prasad, of Cornell University, discussed the subject in a recent talk at the Foreign Correspondents' Club in Hong Kong. The snappily entitled 'Will the renminbi rule the world?' certainly made people sit up and pay attention, but Prasad, like a lot of the world's investors, is sensibly hedging his bets.

Prasad co-wrote a study for the US policy think tank Brookings Institution in February, assessing the currency's role in the global monetary system. Prasad thinks the yuan will become a reserve currency in the next decade, but that it won't displace the US dollar.

While many investors await every titbit of news that heralds further liberalisation of the yuan, some think it's a case of Beijing expecting to have its cake and eat it. Prasad refers to this as 'capital account liberalisation with Chinese characteristics'. In other words, Beijing wants to open its financial markets but retain some control over capital flows.

One vital concern Beijing is testing is the settlement of cross-border trade transactions in yuan, in which Hong Kong plays a key role. Although cross-border trade settlement is not confined to Hong Kong, Prasad's study reveals that the city's banks handled 73 per cent of China's trade settlement in 2010, which rose to 86 per cent in the first quarter of last year.