(Wei Gu is a Reuters columnist. The opinions expressed are her own)
By Wei Gu
HONG KONG, April 8 (Reuters) - Back in 2000, when asked when the yuan would be fully convertible, Nobel laureate Robert Mundell cited the 2008 Olympics. Fast forward to 2009, and it is clear China's currency still has a long way to go.
Mundell, one of the architects of the euro, now says he is not even sure whether it is even in the interest of Beijing to do so, as China has dodged heavy blows from the global financial crisis with its nearly $2 trillion foreign exchange reserves, partly the result of the yuan not being fully convertible.
Mundell, however, suggests the yuan be added next year to the currency basket that underpins the IMF's special drawing rights, which means the yuan will be used as a reserve currency, even without being fully convertible.
That will be quite an unusual thing to do. Near term, the yuan stands a better shot as an international reserve currency, with the benefits of a stable currency outweighing the lack of convertibility.
Is Beijing thinking on the same lines?
By setting a goal for Shanghai to become an international financial centre by 2020, people sense Chinese leaders are probably looking at a ten-year horizon for the yuan to become convertible, because no such centre has ever been built on a non-convertible currency.
But China also defines Shanghai's goal as a world centre compatible with the international status of the yuan, without disclosing what it thinks the role for yuan will be at that time.
A decade is a long time, but that is still an ambitious goal for China to revamp its system for full convertibility.
One common misconception is Beijing can pull the trigger overnight, but in reality yuan convertibility is a lengthy process that has been going on for years and the end is not even close.
SYSTEM ROADBLOCKS
Contrary to the common perception that Beijing has been too slow to make changes, it is at risk of moving too fast because it does not yet have the right systems and tools in place, said Nicolas Kwan, head of Asia research at Standard Chartered Bank.
China first needs to build domestic bond and money markets to absorb equity portfolio inflows, clearing and settlement systems for liquidity management, and forward exchange markets to make it easier to hedge against currency risk.
China's giant economy presupposes an equally large bond market. But China still has residual capital controls on both inflows and outflows. The government still sets bank deposit and loan rates and often directs how the money flows between markets.
These roadblocks all need to be removed to enable capital to flow freely, which will bring fundamental changes to how China runs its economy.
Even if China fulfils all those conditions, they may not be sufficient, said Stanford University Professor Ronald McKinnon, a leading advocate for China to open up using a gradual approach.
Look at Japan, which has a fairly well developed bond market with no capital controls, as an example. It has been trying for more than a decade to "internationalize" the yen, but these efforts have yielded little success. Today, the yen only accounts for about 3 percent of international reserves.
Besides not much international lending in the yen, the currency is still surprisingly little used as a currency of invoice in Japan's trade, let alone in East Asia.
That illustrates the difficulty of trade-surplus countries to push the use of their currencies in international trade, because buyers, not sellers, tend to dictate which currencies they want to use.
Thus, investors should not expect too much business for the cross-border yuan settlement centre program in Hong Kong, a big export market for China.
Buyers here are scratching their heads about where they can source the yuan, hedge currency risks, and even basics such as remitting the yuan.
Hong Kong's currency is pegged to the dollar, so using yuan adds conversion costs. Yuan appreciation risks make it even less attractive for buyers to use a settlement currency.
The value of yuan deposits in Hong Kong is less than 2 percent of its 2008 trade volume with China. The 200 billion yuan currency swap agreement China recently signed with Hong Kong helps provide enough yuan for less than two months of trade.
The swap arrangements of trading yuan for local currencies with a few trading partners are an interesting phenomenon, but their significance for yuan internationalization is small. Those swaps are not for everyday use and only meant for emergency situations when trade credit breaks.
Nevertheless, the strong demand for those swaps shows yuan's attractiveness as a reserve asset. Just don't expect it to be the next major currency anytime soon. -- At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund -- ($1=6.831 yuan) (Editing by Mathew Veedon)