The internationalization of the Chinese yuan or renminbi, is still in the early stages and the currency may become the lead reserve currency in future, rivaling the U.S. dollar, the European Central Bank Executive Board member Yves Mersch said Wednesday.
Speaking at the Renminbi Forum in Luxembourg, Mersch said, "Having become an important trading and payment currency, the renminbi is now taking the first steps towards establishing itself as an international investment currency."
"If it can do so successfully, it might one day become a leading reserve currency," the policymaker said. He also said yuan internationalization is rapidly moving forward and it could reshape the world's monetary system.
"In particular, due to the size of China's economy and its importance in global trade and, potentially, finance, the renminbi might ultimately come to challenge the U.S. dollar," Mersch said.
However, he said it is too early to predict the implications for international financial stability. The central banker urged authorities and investors to be ready for a world in which the yuan will play a much more important role.
Saying that yuan internationalization provides many opportunities both for China and internationals investors and corporates, Mersch urged China to continue reforming its economy, in particular its financial sector. Reforms should be aimed at minimizing risks and boosting confidence, he said.
In Eurozone, Mersch sought a macro-prudential monitoring of risks arising from increased exposure to renminbi-denominated assets and liabilities in euro area banks.
The increasing presence of Chinese banks in Eurozone also raises challenges for banking supervision and requires greater cooperation and exchange of information, he said.
Further, Mersch said China's decision to launch direct trading between the euro and the yuan in the Shanghai foreign exchange market brings several benefits.
Such benefits include enhancing price discovery for the currency pair, encouraging a decline in transaction costs and facilitating the access of European banks to the Chinese onshore foreign exchange market, among others.
"However, should trading volumes remain low, some of these advantages, such as lower trading costs, might prove elusive," the policymaker said.
He also cautioned market participants not to expect the opening-up process of the Chinese currency to be absolutely smooth. Further, they should not should think that periods of increased volatility can be entirely avoided.
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