The renminbi settlement experiment will benefit enterprises, banks and the implementation of global financial strategies. First and foremost, it will guarantee the currency's stability and reduce the risks of exchange rate fluctuations for holders of renminbi-denominated reserves, Lian said.

Currently, there are two ways for commercial banks to provide renminbi-based settlement services. A Chinese bank can either entrust a foreign bank to be its agent bank or ask its overseas branch to offer renminbi account-based services. But Lian pointed out that the second way better suits banks with overseas branches; otherwise, an agent bank is needed.

Far from being global

Chinese economists said the renminbi settlement program marked key progress in making the renminbi an international currency, but there is still a long way to go to achieve the final goal.

The country first must address two issues before making its currency a true international one, said He Liping, an economics professor at Beijing Normal University. The two issues are improving the exchange-rate forming mechanism and making the renminbi convertible in the capital account which includes items such as direct investments, international loans and securities investments. Currently, the renminbi is convertible in the current account for trade in goods and services.

Although China stopped pegging the renminbi to the U.S. dollar in July 2005 and adopted a floating rate, it still needs more time to improve the exchange rate forming mechanism, He said. Also, the country cannot pledge capital account convertibility for the time being. This is because the free renminbi convertibility of the capital account requires that the central bank have sufficient forex reserves and be capable of buying and selling large amounts of foreign currencies in the market to keep the reserve volume within a target range, he said. In addition, it requires a large domestic capital market to cushion and absorb any external impact. And because neither of these conditions exists, the Chinese financial market will face enormous risks if the country practices full convertibility, he said. The lack of full convertibility in the short term explains why the renminbi cannot be an international currency in the near future, he added.

Li Daokui, an economics professor at the School of Economics and Management at Tsinghua University, said in a statement the Chinese currency had to meet five conditions in order to be an international currency. It has already met the first three in that the renminbi itself has become an open international currency, China has become a large economy, and the country has a large trade volume. The other two are that the renminbi has appreciated steadily against other major currencies, and China's financial market has provided sufficient investment choices.

But the country still must meet the last two conditions, which it will not be able to do in the short term, Li said. While it is an indisputable fact that the renminbi is moving toward becoming an international currency, the government should not pursue the goal hastily, he said. Also, the renminbi becoming an international currency would mean that other countries would hold large renminbi-denominated reserves and large trade surpluses with China, which would weaken China's economy, he said.

Xu, the businessman, said that whether overseas importers recognize the renminbi as an international currency also would affect the future of it being a true international one. Last year, he said, he proposed using the renminbi for trade settlement to a trade partner, but the latter declined because he thought the currency was inconvenient to use.

"Most of China's exports are shipped to the United States and European countries where the Chinese currency has less recognition than the U.S. dollar does," he said.

Xu suggested the Chinese Government approach the matter more from the angle of overseas trade partners while anticipating that the renminbi will play a more important role in the global arena. He said the government should consider whether overseas enterprises would have convenient and easy access to the currency, if there would be enough outlets for them to complete transactions in the renminbi, and whether they could invest the renminbi in diversified products such as financial derivatives. Only after these matters are addressed will overseas enterprises be willing to hold the renminbi, leading to the smooth implementation of the renminbi-based trade settlement pilot program, he said.