China Focus: Reforms key for internationalization of RMB

More reforms are expected to be unveiled to accelerate the internationalization of the yuan, or the RMB, experts said Thursday.

"China has tasted the sweetness of reforms during the past year, when the RMB was admitted by the International Monetary Fund (IMF) into the currency basket of the Special Drawing Rights(SDR)," said Zhang Shuyu, a researcher with the University of International Business and Economics.

The RMB's inclusion into the SDR basket came after a flurry of reforms, including the exchange rate formation mechanism and cross-border interbank payment.

"China did not stop its reform steps after the IMF's SDR inclusion of the RMB and will not relax its efforts," said Zhang, citing the central bank's moves to pilot RMB convertibility on the capital account and publish the China Foreign Exchange Trade System (CFETS) exchange rate composite index on December 11.

The People's Bank of China (PBOC) approved RMB convertibility on the capital account within a prescribed limit of 10 million U.S. dollars for the Tianjin, Guangdong and Fujian free trade zones on Dec. 11, a historic step by China to open up its capital accounts.

The move came less than two weeks after the RMB was admitted by the IMF into its SDR basket alongside the dollar, euro, pound sterling and yen on Nov. 30.

China allowed RMB convertibility on the trade accounts nearly two decades ago, but almost all capital account transactions in the mainland remain under varying degrees of control.

On Dec. 11, the central bank released the yuan exchange rate composite index measuring the currency's strength relative to a basket of other currencies to better reflect the market.

Analysts believe it will help bring about a shift in how the public and the market observe RMB exchange rate movements, as the CFETS exchange rate composite index measures the yuan's strength relative to a basket of 13 foreign currencies, including the U.S. dollar, euro and Japanese yen, weighted according to their trade volume with China.

"Compared with just one currency, a basket of currencies can better capture the competitiveness of a country's goods and services and better enable the exchange rate to adjust imports, exports, and investment activities and the balance of payments position," said the PBOC in a note.

However, valuing against a basket of currencies does not mean a peg to the basket, said the PBOC, adding that market demand and supply will also play a key role in formulating the interest rate.

The establishment of the China-initiated Asian Infrastructure Investment Bank on Dec. 25 in Beijing will also help the internationalization of the RMB, as it creates more possibilities for the international use of the currency, according to a report by Stcn.com, a People's Daily affiliate.

"In the future, China will unswervingly push forward financial reforms. The pace of market-oriented interest and exchange rate reforms will pick up speed," said Yang Ping, analyst with the People's Bank of China, on Wednesday.

China will seek to optimize the interest rate transmission mechanism and exchange rate formation mechanism as well as improve transparency of monetary policies, according to Yang. Endi