BRUSSELS - Beijing should keep a "gradual pace" in expanding the scope and speed of internationalizing China's currency, the renminbi, suggested a Canada-based international think tank.

The Center for International Governance Innovation said government officials should consider the risks inherent in that process and take full advantage of Hong Kong's position as a world financial hub in reaching their goals for the renminbi. The center also called on policymakers to carefully take into account how the United States, the United Kingdom, Japan, the European Union and other powers respond to plans to make the renminbi international.

The think tank offered the suggestions to Chinese officials just before the G20 summit, which is to take place on Thursday and Friday. The internationalization of Chinese currency and the country's exchange rate are expected to be among the topics appearing on that event's agenda.

The center has been closely watching China's steps to make the renminbi an international currency, a goal policymakers have moved toward faster since the advent of the 2008 financial crisis. The think tank said that Beijing, with the help of Hong Kong, has been successful in promoting a gradual increase in the international use of the currency.

The work in that direction has gone beyond central banks agreeing to swap currencies among themselves. Trade accounts are now being settled in renminbi and financial investments made in renminbi-denominated assets.

Meanwhile, the international demand for renminbi-denominated financial products and trade transactions is increasing at a rapid and steady pace.

To further that work, Gregory Chin, China research chair at the think tank and the director of the Global Development Program, said Beijing should cooperate more with regulators and the financial community in Hong Kong.

"They (Hong Kong regulators) have a unique role to play in guiding the innovation process - by helping to identify risks, given their deep regulatory experience, and technical knowledge on banking and financial practices, and demand trends," Chin said.

In addition to learning from Hong Kong, Chin said the Chinese government should encourage more investments to be made in long-term renminbi-denominated investment vehicles and that it should discourage investments in highly speculative short-term activities.

"This is key for monetary and financial stability, and this is also a lesson from the 2007-09 global financial crisis," Chin said.

Chin said making the renminbi an international currency is in China's medium- and long-term interests, because it helps reduce the need for holding large amounts of foreign currency.

"Given China's prominence in world trade, in manufacturing, and increasingly in financing, it would be natural for the (renminbi) to become one of three or four major international currencies in the world economy," Chin said, stopping short of predicting when the planned internationalization will become a reality.

He said making the renminbi an international currency will help lead to the existence of a more diverse, multiple currency, international monetary system, which is preferable to Chinese authorities.

"The challenge for China is to make sure (the renminbi) internationalization is a force of stability in an increasingly complex, even fractured, international monetary system - and does not destabilize further," Chin said.

China Daily

(China Daily 11/02/2011 page3)