It is an indisputable fact that China has become the world's major economic power. Based on market exchange rates, the size of China's overall economy is already the world's fourth largest, accounting for one sixth of the US economy and one second to two third of Japan's economy. If calculated in accordance with the actual purchasing power of RMB, China has already become the world's second largest economy. However, it is also undeniable that China's currency monetary system does not match the scale of its economy. The internationalization of the RMB is an issue which has not been taken seriously enough and needs a quick resolution.

The RMB is not an international currency. This is most apparent when considering how very little international trade was conducted in RMB (mainly in Hong Kong and neighboring countries in South Asia). Although the central bank recently approved IFC and the Asian Development Bank to issue bonds in Yuan, the volume of debt circulated in the valuation of the RMB in the international financial market is zero. The volume of RMB assets held by the world's financial institutions �C including the national debt carried by central banks �C is also zero. All these are disproportionate to China's status as an economic power.

Countries with a bigger economic scale than China �C such as the United States, Japan and Germany �C all have internationalized currency.

There are benefits to a country when its currency is internationalized: it will be able to issue financial instruments for the valuation of its currency which create a financing tool for crisis prevention for the enterprises in the country.

Barry Eichengreen, a Professor at the University of California at Berkeley, has brilliantly noted that developing countries shoulder the burden of ��original sin'. In other words, as developing countries cannot issue bonds in their own currency in international financial markets, they have to issue bonds valuated in US dollars. If financial volatility occurs, especially the devaluation of currency, these countries and their enterprises would face a payment crisis. Most of their cash flow is valuated according to the national currency but their liabilities are valuated in foreign currency. This is the most fundamental cause of international financial crisis. Developed countries have shifted the risks of exchange rates entirely to developing countries. It is acknowledged by the international community that the current international financial system is extremely biased.

If the Chinese government and enterprises could issue RMB bonds in international financial markets, then, even if the RMB exchange rate did fluctuate, they would not have to worry about a crisis in the balance of payment. This is the greatest incentive to developing countries to internationalize their currencies.

There is another obvious advantage to the internationalization of the RMB. Once the RMB is internationalized, the central bank will be able to enjoy seigniorage when issuing international currency. The People's Bank of China could expand the issuance of RMB to purchase sovereign or corporate bonds. Once these bonds are available in the international market, they will become value-added assets which can be used to obtain hard currency and commodities. In other words, the People's Bank of China could obtain international assets using international purchasing power generated by printing currency. It is by depending on this mechanism that the United States has maintained its long-term position as economic and financial power. Relying on this mechanism, the US can wear long-term fiscal and trade deficits without fear of a payment crisis. All it has to worry about it is the devaluation of the US dollar exchange rate.

Finally, if the RMB becomes an international currency, Chinese enterprises would be able to demand valuation in RMB more conveniently in import/export business (which, of course, also depends on bargaining power). In this way, both costs and sales would be calculated in RMB. Once the difference between the external and internal trade is eliminated, the risk of exchange rate fluctuations will be shifted to foreign companies.

The benefits are obvious. China has become a world economic power and the RMB has to be internationalized. The first step is to seize the golden opportunity of appreciation and issue bonds valuated in RMB to overseas markets, therefore paving a road for the internationalization of RMB.

By People's Daily Online; the author is the Director of China and the World's Economic Research Center at Tsinghua University