Renminbi may become global reserve currency

"Offshore and onshore markets are only partially integrated so far. This results in small but persistent discrepancies in exchange and interest rates between the onshore markets and offshore markets," Mersch said.

Market fragmentation also creates liquidity risk, such as when an offshore investor faces a "sudden and temporary renminbi shortage that cannot be met by quick transferring from the mainland", Mersch said.

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Mersch said the renminbi swap line signed between the ECB and the People's Bank of China last October will help to address this liquidity problem. The swap line is valid for three years and has a maximum size of 350 billion yuan ($57.1 billion).

Swap agreements allow central banks to address liquidity problems. Renminbi swap lines with foreign central banks boost overseas investors' confidence in yuan-denominated investments.

Mersch added that further liberalization of financial flows by China would promote further integration of the onshore and offshore markets.

He said the integration of the currency into the world financial system would require continued development of the relevant payment infrastructure, and ultimately the integration of onshore and offshore activities, so that cross-border renminbi payments can be processed quickly and efficiently.

European regulators are also striving to devise appropriate methods to regulate growing yuan-denominated transactions in the eurozone, Mersch said.

The increasing presence of Chinese banks in the euro area also brings its own challenges regarding banking supervision, including the need for greater international cooperation and exchange of information, he said.

Mersch said the yuan's internationalization could have a significant impact on the international financial landscape.

But he warned that "it is too early to say what the implications for international financial stability could be".

 

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