Clearing, settlement arrangements extend to banks across Europe and Asia, reports Jiang Xueqing

China is strengthening its policy on yuan internationalization by promoting wider use of the currency around the world.

The People's Bank of China signed a memorandum of understanding regarding yuan clearing and settlement arrangements with the Bank of Korea on July 3, just several days after it signed similar arrangements with the central banks of Luxembourg and France.

Earlier in June, London and Frankfurt joined Hong Kong, Macao, Taiwan, Singapore and Malaysia in having designated yuan clearing banks. The PBOC appointed China Construction Bank in London and Bank of China in Frankfurt.

Deutsche Bank strategist Liu Linan said in a recent report, "We believe establishing yuan clearing banks in Europe is another major policy mile-stone in yuan internationalization, and with closer economic and business cooperation between Europe and China in the years to come, offshore yuan business has significant growth potential in Europe."

Liu said Europe is likely to become the second-largest offshore yuan market following Hong Kong. He expected a broader adoption of the yuan in EU-China bilateral trade and yuan settlement to triple to 5 percent to 6 percent of China's global trade in the next three years.

The European Union was China's largest trading partner in 2013, with bilateral trade accounting for 13 percent of China's $4.16 trillion global trade volume. Although the yuan trade settlement volume has grown rapidly in recent years, the amount of yuan cross-border trade settlement in Europe accounted for less than 1.7 percent of China's global trade as of 2013, according to the report.

The nation has taken increasingly rapid steps toward internationalizing its currency since it established an offshore yuan market in 2004 with the launch of personal yuan banking in Hong Kong. In 2010, Hong Kong was declared the first offshore yuan center.

During the past three or four years, the yuan has become one of the top currencies in trade settlement. It is now the world's seventh most-used currency in goods and services payments, having climbed from 20th rank in 2013, according to data from international financial communications platform SWIFT.

It will become an interesting currency in investment and as a reserve currency, said Nicholas Mackel, CEO of Luxembourg for Finance, a promotion agency for the Luxembourg financial sector.

"The internationalization of the yuan is the single most important monetary event from the last decade because it will completely change the international monetary landscape," Mackel said.

Leading European financial centers are all wooing China to become the regional center for offshore yuan businesses, after China designated the first yuan clearing bank outside the country in Singapore in 2013.

Mackel said interest in yuan internationalization is enthusiastic. Major European financial centers, active in different fields, are competing for the attention of the Chinese.

London is strong when it comes to foreign exchange and derivatives. Frankfurt and Paris are strong in terms of trade settlement. Luxembourg's strengths are investment funds, bonds, deposits and loans.

"For the Chinese, we are complementary because each of us offers China our traditional strength and can offer a different channel to internationalize its currency, "Mackel said.