In 2013, China continued to promote the internationalization of the yuan, or Renminbi, with media and analysts buzzing about the effect of recent reforms on the increasingly global currency.

The country made progress in facilitating RMB-denominated international trade and investment, developing RMB offshore businesses, and establishing more currency swap lines and other financial agreements.

Financial reform measures announced in the last two months by China, especially a 30-point guideline issued by the central bank to support the country's first free trade zone in Shanghai, are set to help speed up RMB internationalization.

Media outlets worldwide hyped the news that the RMB had overtaken the euro and become the second-most used currency in global trade finance. Of much more significance, however, are figures related to actual trade settlement in yuan.

According to global transaction services organization SWIFT, the RMB remained the 12th payments currency in the world, with a mere 0.84 percent share of all global payments in October, even lower than the Thai baht and Swedish krona.

In comparison, the US dollar and the euro accounted for 38.1 percent and 34.7 percent of all global payments, respectively, followed by 9.9 percent for the British pound.

China is the world's second-largest economy after the US It is the world's largest exporter and second-largest importer of goods. The international use of the RMB is not at all commensurate with the importance of China's economic status.

Progress in 2013

The internationalization of the Renminbi, by definition, is the process of promoting its use outside of the Chinese mainland.

According to HSBC chief China economist Qu Hongbin, an internationalized currency means a currency that is widely accepted for investment, as a financing and payment vehicle and as a reserve, intervention and anchor currency in all countries across the world.

Sovereign currencies usually enter the global market only after the opening of the country's capital account.

However, China has been trying to introduce the RMB into the global market in an unprecedented fashion. It has been pushing the RMB into the overseas market through cross-border trade settlement since June of 2009, as its capital account is largely closed.

Since 2009, China has promoted RMB internationalization with a three-pronged approach: facilitating international trade and investment denominated and settled in RMB, encouraging offshore RMB services centers to develop offshore RMB-denominated financial products, and encouraging central banks to hold RMB as part of their foreign exchange reserves.

"The currency's stable valuation and steady appreciation are encouraging investors to include more RMB products in their portfolios," Diana Cesar, head of retail banking and wealth management at HSBC in Hong Kong, wrote in an article earlier this month.

With the wider use of the RMB in international trade and investment activities, demand for RMB financial services from overseas individuals and corporations has increased gradually.

"This attracts overseas financial centers to promote their RMB business. There are now multiple offshore RMB centers around the world, including Hong Kong, London, Singapore and Taiwan," said a report titled "Offshore Renminbi Center" released on Dec. 12 by the Research Office under the Legislative Council of Hong Kong.

Hong Kong, which started its offshore RMB business in February of 2004, is the first mover in offshore RMB business and the world's largest offshore RMB center.

In 2013, Singapore and Taiwan started their offshore RMB business. Singapore aims to serve ASEAN countries, and its RMB customer deposits had reached 140 billion yuan (23 billion US dollars) by July of 2013. Taiwan is handling cross-Strait trade and financial transactions. Its RMB deposits rose to 123 billion yuan at the end of October.

In October, Hong Kong's RMB deposits saw their biggest rise since April 2011 to hit a record high of 781.6 billion yuan, according to the Hong Kong Monetary Authority.

The growth in offshore RMB deposits, especially in Hong Kong and Taiwan, helped the Standard Chartered Renminbi Globalization Index (RGI) to rise 2.4 percent to 1,220 in October from September, the banking multinational said in its latest index update.

The RGI, which stood at 809 in January of 2013, is an index that measures the internationalization of the offshore RMB across markets. The bank said it is the first industry benchmark to track the progress of RMB business activity.

Standard Chartered launched the RGI in November 2012. The RGI's base value is 100, set for Dec. 31, 2010. The index now covers the top four markets in offshore RMB business: Hong Kong, London, Taiwan, and Singapore.

The index measures business growth in four key areas: deposits, bonds and certificate of deposits, trade settlement and other international payments, and foreign exchange.

As for cross-border RMB trade settlement, RMB settlements for trade of goods reached 4.05 trillion yuan in the first 11 months, the People's Bank of China (PBOC, central bank) said in a statement. It represented 17.2 percent of China's total trade in that period, higher than the 14.7 percent for the first half of this year.

As comparison, China's trade settled in RMB amounted to 506.3 billion yuan in 2010, 2.08 trillion yuan in 2011, and 2.94 trillion yuan for 2012.

Cross-border RMB transactions have been conducted in 220 countries and regions, said Xing Yujing, a senior PBOC official. In addition, China had signed currency swap agreements with 23 countries and regions by the end of September of this year.

In October, the PBOC and the European Central Bank signed a 350-billion-yuan currency swap agreement, bringing the volume of currency swap deals to 2.2 trillion yuan in total, according to Xing.

Reform measures

As Hong Kong, London, Singapore and Taiwan compete with each other for offshore RMB business, Chinese authorities have announced a slew of major financial reform measures since last month.

A reform blueprint, unveiled on Nov. 15 after a key meeting of the Communist Party of China Central Committee, addressed all of the key financial reforms that the market has long been expecting, said Qu of HSBC in a research note.

Key reform measures include accelerating interest rate liberalization, reforming the RMB exchange rate regime, speeding up RMB capital account convertibility by promoting the two-way opening up of capital markets, and the easing of restrictions on cross-border capital and financial transactions.

As China has traditionally conducted major reforms on a trial basis in a designated place, the market has expected these financial reforms to be tested in the Shanghai Free Trade Zone (FTZ). On Dec. 2, the PBOC unveiled a guideline containing 30 points on financial measures for the FTZ.

The bold move not only offered financial support for the FTZ in Shanghai, but also pushed forward liberalization in cross border investments and trade while deepening financial reforms, Qu said.

He said there were several upside surprises in the guideline, which suggest a marked acceleration in capital account liberalization, including allowing residents of the FTZ to set up free trade accounts denominated in both yuan and foreign currencies, allowing individuals working in the FTZ to invest overseas, and allowing financial institutions and corporations in the FTZ to carry out investments and trade in securities and futures exchanges in Shanghai.

The PBOC is also trying to promote RMB cross-border usage through current account transactions and direct investment in the FTZ in Shanghai.

"We believe that progress on the RMB capital account convertibility will be faster than many expect. The next step will be expanding portfolio flows," Qu said. "Get ready for a series of concrete actions to be carried out over the coming quarters."

David Cui, with Bank of America Merrill Lynch, said in his research note that the key surprise of the PBOC guideline is that cross-border capital flow via the FTZ may become much easier than expected, which suggests China's capital account could be opened faster than expected.

"The fact that there is no explicit quota limit on fund transfers is a major step, in our opinion. The PBOC will also allow full RMB convertibility within free trade accounts and free trade accounts for non-residents when ready," Cui said.

The report by the Hong Kong Legislative Council interprets the establishment of the Shanghai FTZ differently.

"The proposed financial liberalization measures have aroused concerns over the challenges posed by FTZ to Hong Kong as an offshore RMB center... One should not lose sight of the potential of Shanghai as an offshore RMB market," it said.

As Chinese mainland regulators set their own pace in internationalizing the RMB, the report suggests the Hong Kong city government should "do more on promoting the local RMB market such as the development of more RMB products and an active RMB repo market in Hong Kong."