Check out these 5 prerequisites for RMB internationalization

But analyst warns of risks.

According to UBS Investment Research, for renmibi (RMB) internationalization to happen, an international currency (i) should have no restrictions on the freedom of its trading, (ii) can be held by foreign entities onshore and offshore; (iii) can be used by both foreign and domestic entities to issue or hold financial instruments in both onshore and offshore; and (iv) as Eichengreen (2013) summarized, has the scale, stability and liquidity.

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Therefore, we think the prerequisites for RMB internationalization are:

An open capital account – currently there are still extensive restrictions on the movement of RMB related to cross-border investment (capital account) transactions.

A more flexible exchange rate – the value of the RMB in daily transactions should be more determined by market forces without frequent and notable administrative intervention.

Liberalized interest rates – the prices of various financial instruments should be determined by the market without notable restrictions of administrative interventions.

A deeper and more liquid financial market – the type of financial products and services, the size of the market, and the pricing of the products, especially bonds and other fixed income products, all need to be developed much further to allow for “scale and liquidity”.

A more stable, transparent and efficient macroeconomic and policy framework, which could underpin the stability and creditability of the currency.

Achieving these prerequisites, however, does not guarantee the success of internationalization of the currency. As revealed by historical experiences, the process of currency internationalization is largely market-driven.

Although policy makers can implement measures to promote the international use of a specific currency, market participants would collectively make the final decision, and it is far from straightforward for the international community to accept a new currency in trade and investments, as a unit of account, and even more difficult, as a store of value (reserve currency).

Aware of the uncertainties, the Chinese government has nevertheless embarked on a path to facilitate the internationalization of the RMB.