The Rmb's prospects as a reserve currency will be influenced by 1) China's economic size, 2) capital account openness – the currency must be easily tradable in global financial markets with no restrictions on capital flows, 3) flexible exchange rate, 4) financial and capital markets development – strengthen the banking system, develop broader and deeper financial markets denominated in Rmb, and 5) credible macro policies – a commitment to maintaining low inflation, sound fiscal position and sustainable debt levels. China's ability to meet these challenges will determine the balance and sustainability of its economic development as well as its currency's role in the global monetary system.

What is interesting is that the current Rmb phenomenon differs from the historical circumstances of the rise of the US dollar, the Yen and Deutschemark, in that the Chinese government is actively promoting the international use of its currency. Germany, Japan and the US were less active in promoting the international use of their currencies for fear that their exporters stood to lose competitiveness if international demand for the currency were to rise. In this regard, China faces a dilemma in its quest for the internationalisation of the Rmb – fears of a stronger currency and its effects on manufacturing exports and enterprises' cost competitiveness. We view full-fledged internationalisation of the yuan as a distant goal. China is clearly more influential than in the past and the internationalisation of the Rmb has sped up. But it will take many more years, perhaps another 5-10, for the Rmb to be fully global and convertible. Some soft capital controls will remain for some time until domestic banks are equipped to cope with the financial volatility associated with capital account openness. Talks are already underway to include the Rmb in the basket of currencies that make up the IMF's Special Drawing Rights basket within the next five years

Eoin Treacy's view The topic of the Renminbi's value, particularly against the US Dollar, tends to be a political football. However, the media's fascination with China's monetary policy masks the fact that every country manages its currency to one extent or another. The UK benefitted enormously during the financial crisis from the swift devaluation of the Pound while Singapore has bolstered its credentials as a safe haven by managing the steady appreciation of its currency. China will eventually move to a fully covertible currency system but will naturally seek to do so from a position of strength

Despite wide variation in the value of the US Dollar against other major currencies, the Renminbi has appreciated steadily against it. In fact it has had no meaningful devaluation against the US Dollar since 1994. That is why the Renminbi's recent weakness is not simply an aberration and can be interpreted as deliberate policy.

The US Dollar found a medium-term low at CNY6.2769 in May and rallied back above the 200-day MA for the first time in a decade. It has been consolidating above the MA since early June in what appears to be a first step above the base. A sustained move below CNY6.3550 would be required to question potential for additional US Dollar strength.