Only China's yuan could rank with the dollar and euro as pillars of the global monetary system, given time and five key tests, Hong Kong's former Monetary Authority chief Joseph Yam was quoted as saying.
Yam, now vice-president of the China Society for Finance and Banking, a thinktank under the People's Bank of China, told China's state-run Xinhua news agency in an interview carried on Sunday that the international monetary system needed a third leg, and the yuan, also known as the renminbi, was the only candidate among national currencies.
The two existing legs, the dollar and euro, did not command the level of international confidence needed to sustain their status, leaving the system structurally unstable.
If the third leg falls in the form of a sovereign currency, it must be the renminbi, he said.
Other, non-sovereign options for a third leg were the Special Drawing Rights of the International Monetary Fund or a new Asian Currency Unit, but few economies were willing to use the former and few would trust the latter after recent wobbles in the euro.
Yam said recent moves by the PBOC, China's central bank, to make the currency more flexible showed it was pushing forward with gradual internationalisation of the currency.
But there were five criteria to meet before it could serve as a third leg of the world's monetary system: size, economic strength, convertibility, an extensive yuan-denominated market and a modern settlement system.
Convertibility could only be achieved slowly, he said.
The full liberalisation of the capital account has wider ramifications than the internationalisation of the renminbi and will therefore have to be handled carefully, emphasising on gradualism, controllability and the ability to take the initiative.
In terms of size, China's economy would need to be similar to that of the U.S. and eurozone. China's gross domestic product, at $5 trillion in 2009, was only about a third of the size of the U.S. and eurozone economies.
Yam said China could further develop yuan-denominated business in Hong Kong by setting up an architecture to enable the on-shore impact of off-shore activities to be monitored closely, allowing Hong Kong to manage yuan business in its own ways as long as the risks were controllable, and enhancing the mobility of yuan between the two markets. (Editing by Will Waterman)