Direct conversion between yuan and euro is on the way

Direct conversion between the renminbi and the yen, which began about two years ago, has been an important milestone in the process of internationalising the Chinese currency.

Although there has been a lot of progress towards the free conversion of the renminbi over the past two years, the outcome has yet to meet market expectations. Direct exchange with major Western currencies is a necessary component of this process and there is no doubt that the euro will be another important option.

China has recently overtaken the US to rank first in global trade and many countries maintaining large trading relationships with China want direct currency exchange with the renminbi, to reduce foreign exchange costs and boost bilateral trade.

Yves Mersch, a member of the executive board of the European Central Bank, said recently that the direct conversion of the euro with the renminbi would be conducive to growth in both economies. Although neither side mentioned the possibility of direct convertibility when President Xi Jinping visited Europe in March, expanding financial cooperation was undoubtedly a key reason for his visit.

As evidence, the Chinese government granted France a quota of 80 billion yuan (HK$100 billion) for its renminbi Qualified Foreign Institutional Investor programme, and the central banks of China and Germany signed a memorandum of understanding on establishing a renminbi clearing and settlement mechanism in Frankfurt.

In fact, once this business begins in Frankfurt, it could mean direct exchange between the euro and the renminbi would start in Germany. However, this would not necessarily signal the official start of direct convertibility in the entire euro zone.

Direct conversion between the renminbi and the euro is likely to be launched after consultations between the Chinese government and each sovereign European state, rather than being decided by the European Central Bank and the People's Bank of China.