OREANDA-NEWS. March 28, 2014. The reforms finalised at China’s Third Plenum in November 2013 were the boldest package of policies seen in decades, indicating the new leaders’ determination to put the country on a new course. But subsequent concerns about shadow banking, local-government debt and possible defaults have made policymakers even more determined to speed up financial reforms.

Beijing is already freeing up interest rates for foreign-currency deposits, easing restrictions on cross-border capital flows in the Shanghai free-trade zone and easing foreign investors’ access to Chinese markets. The daily trading band for the renminbi-dollar rate has now been doubled to + or -2 per cent.

China has a three-pronged approach to renminbi internationalisation: expand the currency’s role in foreign trade settlement – it has already overtaken the euro to become the second most-used currency in traditional trade finance, after the dollar – encourage its use in cross-border investment, and develop offshore renminbi centres.

As a consequence, several foreign central banks now hold renminbi reserves, suggesting some already see the renminbi as a viable reserve currency. But becoming a true reserve currency depends on the size of the home economy, deep and open financial markets with the currency used for cross-border transactions, supportive government policies and macroeconomic stability.

The renminbi scores well on all counts. And as China’s financial reform continues, we believe the renminbi will play a much more prominent role on the world stage. Making the currency convertible is key, and Beijing has now made it clear that convertibility will be speeded up.

China is learning from other countries’ mistakes. It opened its current account well before the capital account, and in a controlled manner. To mitigate the risks of opening the capital account, reforms will be tested in the Shanghai free-trade zone before being rolled out nationwide.

Reform measures include the deregulation of services sectors, the simplification of customs clearance and liberalisation of interest rates. They have also improved cross-border trade settlement, and allowed foreign companies to issue renminbi bonds and access the domestic equity market.

The Shanghai free-trade zone should prove as significant for China as the setting up of the Pudong New Area in the same city in the 1990s, or entry to the World Trade Organization in 2001.

In light of all this, we now expect full renminbi convertibility to come earlier than many expect – probably in the next two to three years, when last year we projected ‘within five years’. That will give bigger quotas for overseas investors, freeing outward direct investment, easing rules on foreign ownership of banks, and lifting the ceiling on individual currency purchases.

As renminbi internationalisation and financial reforms accelerate, the currency’s role in global reserve management should expand quickly. It will soon be ready to take its place at the top table. That doesn’t mean the redback will replace the dollar as the world’s dominant reserve currency, but it will help create a multiple reserve currency system in which the dollar, euro and renminbi all play their part.