Authorities have given tentative support to the idea of establishing the renminbi as an international currency, but the debate continues over how to achieve such a task.

Guo Shuqing, a deputy governor of China's central bank and the chairman of the State Administration of Foreign Exchange (SAFE), told local media in March that the government supports the increasing "internationalization'' of the renminbi.

But it is impossible for the renminbi to become a world currency by international agreements, as the US dollar has done.

It would also be difficult for the renminbi to establish itself, as the Japanese yen has done, through strong international trade.

The prospects of the renminbi becoming an international currency are limited at present because it has not realized its full convertibility.

And the Chinese Government, under pressure from the International Monetary Fund (IMF) to quicken reform, still has no timetable for the currency's full convertibility.

As a result, the settlement role of yuan in border trade may be an efficient way to boost its international status in the interim.

China's trade with countries on its borders has been developing fast in recent years.

There is also growing use of the renminbi in areas bordering China that increasingly rely on cross-border trade.

China's border trade reached more than US$26 billion last year.

The renminbi is the principle trading currency in Laos, Myanmar, Cambodia and Viet Nam.

In Myanmar and Laos, the Chinese currency substitutes for weak local currencies like the Myanmar kyat and Laotian kip.

Along the Thai banks of the Mekong River, Chinese traders from Yunnan do business without necessary to convert their renminbi into Thai baht.

According to official statistics, there are 99.5 million yuan (US$11.9 million) in outstanding renminbi banknotes in Russia and 3.5 billion yuan (US$422.9 million) in Viet Nam.

In Thailand, a total of 4.4 billion yuan (US$531.6 million) is circulating.
The fact that the renminbi is being increasingly used as a settlement currency in border trade reflects its reputation and the recognition of its strength.

It is one step towards the maturation and internationalization of the renminbi.

If in another 10 years, the renminbi is also accepted in Europe and America, then it will be truly an international currency.

But it will take a long time for the renminbi to achieve such a status through border trade alone.

Despite its rapid growth, border trade remains a small part of China's total foreign trade.

And the volume of border trade settled by renminbi is smaller again.

Only when border trade settled by renminbi reaches a sizeable volume can it gradually become an international currency.

But the renminbi faces many unanswered questions along the way:
"What currency should banks in both countries choose for settlement? How do we prevent exchange rate risks? Should renminbi bills beyond the border be diverted back?''

Using the renminbi for border trade payments reduces China's foreign exchange spending and facilitates trade, but may complicate China's money supply policies as part of the cash is flowing outside the system.

Although quantity of external renminbi cash is still tiny given the trillions in China's broad money supply, precautions are necessary.

As the volume grows, the government should consider the trend's implications for monetary policy.

The SAFE has recently completed reports on the macro-economic implications of the renminbi's outflow and its increasing role in border trade settlement.

The authorities are considering how to set up a system to monitor renminbi circulation in border areas.

The underground settlement of the renminbi in neighbouring countries also increases the financial risks to the currency.

The growing circulation of external renminbi has benefitted unauthorized money changers on the border.

In Viet Nam, such money changers, dubbed "ditan'' or stand banks in Chinese, a Vietnamese woman often sits on a mat behind a big iron box, in which bunches of bills in both the Vietnamese dong and renminbi are neatly placed.

Some say 90 per cent of border trade in many regions is settled at stand banks.
It is difficult for the government to supervise the renminbi that circulates outside the banking system.

It is also hard for them to calculate the true amount of renminbi circulating outside the country.

The authorities should work out how to make renminbi settlement easier in the banking system and monitor its circulation there.

The yuan's growing role in trade settlement has prompted action from the Chinese authorities.

At the end of September, the government issued a circular urging Chinese commercial banks to forge ties with their counterparts in neighbouring countries to facilitate border trade settlement.

Meanwhile, commercial banks in six border provinces and autonomous regions were also allowed to provide yuan exchange rates against the currencies in neighbouring countries.

The moves aimed to provide convenient foreign exchange services to gradually replace stand banks.

But banks have not been as decisive, weighing up the exchange rate risks of holding more unstable foreign currencies and the costs of declaring war on illegitimate money changers.

Only a meagre 4 to 5 per cent of Industrial and Commercial Bank of China's foreign exchange business currently comes from border trade.