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All Aboard the Renminbi Train as Global Currency Status Beckons

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One of the world's multi-national banks is currently running a series of advertisements with a tag line suggesting that 2013 is the year of the renminbi. It appears this might be more than just marketing hype. The Chinese government has enabled a conduit for the offshore form of the currency, the trading of which has had a healthy last few years, to return to the mainland. While the amount that can be invested by foreign institutions in domestic bonds and equity is so far limited to just 70 billion yuan (about $11 billion), the regulator has stated that a further 200 billion yuan will be available shortly.

The point being, while an ability issue bonds in, hold and trade the currency offshore is useful, it is the freely tradeable nature of the domestic currency that is the key to a more stable global economy. And while we are not there yet, these latest measures make one think that this will be happening sooner rather than later. The idea that the world will have an alternative to the dollar as a reserve currency in about 20 years' time looks a bit conservative. Perhaps half that number is realistic, which in the scheme of things could be described as being in the "short term".

How will a liquid and tradeable yuan with (more or less) supply-and-demand led floating exchange rate help economic stability? By redressing the balance of the equation "surplus foreign exchange reserves in Asia-Pac and OPEC countries = excess liquidity in Western banks needing a home."

(More on CNBC.com: Internalization of China's Renminbi)

The above imbalance was one of the causes of the 2007-08 crash. Just as a surfeit of "petro-dollars" recycled to Western banks helped cause the Latin American sovereign debt crisis of the early 1980s, so an excess of funds placed at Western banks in the years 1999-2007 helped drive excessive lending growth in areas such as sub-prime real-estate.

An ability to hold yuan makes recycling of dollars less likely to be the cause of the next crash. It will also mean that, as the amount of US dollars held by external investors decreases, U.S. governments will have to attempt to exercise slightly greater fiscal discipline than they have done in the last 20 years.

(Read More: Currency Wars Return, 1930s Style: Who Will Lose Out?)

All of this is a "good thing". So if we accept that the renmimbi is on its way, how should banks gear up for this? By setting up an ability to trade and settle the currency itself, as well as handle bonds and equity denominated in it. At the moment, just about every bank worthy of the name would offer a U.S. dollar account, either directly or via an agent, to its corporate customers (and a fair few of them to their retail customers). Replicating this ability for the renminbi, for the big day when we can all trade it, would be no bad thing to have on one's medium-term strategic plan.

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Professor Moorad Choudhry is at the Department of Mathematical Sciences, Brunel University and author of The Principles of Banking (John Wiley & Sons Ltd 2012).