THE mainland's ambition to turn the yuan into an international currency will increase the nation's economic clout, but the process is fraught with costs, risks and frustrations. We should not despair. It's a lot like the trials and tribulations of raising children.

The offshore yuan market in Hong Kong has undergone rapid development in the past 18 months.

Since July 2010, deposits in Hong Kong have increased from around 100 billion yuan (US$15.8 billion) to 620 billion yuan, and the value of trades settled in yuan has increased nearly 15-fold. These numbers point to an acceleration in the internationalization of the currency.

Not only has the pace quickened, but the thinking has also broadened and several new initiatives have been implemented.

At the same time, debate about how to proceed with internationalization has intensified, both inside and outside of the country. In the last six months, there has been an easing in the growth of offshore yuan deposits in Hong Kong, and for the first time, there are expectations of a depreciation of the yuan in the offshore market.

These developments prompt several questions:

1. Before Chinese mainland completes the reform of its top-level mechanisms for interest rates, exchange rates and capital account controls, and in the light of the current balance of trade, is it appropriate or feasible to proceed with the internationalization of the yuan now?

2. Is the yuan's internationalization justified at this stage given the risks and costs involved?

3. Now that a large part of yuan deposits in Hong Kong has returned to the mainland, will Hong Kong be able to effectively advance the internationalization of the yuan? And will the process actually benefit Hong Kong?

Raise a child

Let me stop here and illustrate my points by drawing an analogy involving some popular thinking about raising children.

The Chinese people have a traditional concept that no matter how hard times are, they must have children to ensure support in their old age. The internationalization of the yuan is, for Chinese mainland, similar to raising a child: it involves birth, gradual growth and the eventual moving out of the home to become international currency beneficial in trade settlement, pricing, investment and reserves.

It is important to raise this child because Chinese mainland is now the world's second-largest economy, and its currency, which is relatively closed, is starting to hinder further economic development.

If the mainland is to achieve its long-term goal of securing greater global economic and political influence, it is important that it let the yuan participate in international currency systems in a more proactive manner. In other words, the mainland has reached a point where it has to consider raising its own child. Only by viewing the big picture can we objectively address the frustrations, risks and costs associated with the process. Below are my brief thoughts on the three key questions I raised earlier.

1. Although the mainland has yet to complete the overhaul of its top-level financial mechanisms, the reform of these systems should not be a precondition for the internationalization of the yuan. Just as there is no absolutely perfect moment to give birth to a child, there will probably never be such a moment to launch the internationalization.

To be sure, the long-term absence of top-level mechanisms would ultimately restrain the pace of internationalization. As the "baby" grows, we have to improve its living standards and environment for it to thrive.

Will the mainland's structural trade surplus frustrate the internationalization process?

To answer that, we need to look at the mainland's trade structure from a dynamic perspective. Changes affecting surpluses and deficits, appreciation and depreciation will be a constant. The ever-changing global trade structure will also create favorable conditions for the internationalization of the yuan.

2. We have to provide the internationalization process with sufficient "nutrients" and "care," and that will understandably cost money, take time and involve risk. Weighing risks and costs needs to be conducted within the larger framework of the long-term objectives of the internationalization process. Some of the risks and costs are short-term, some are bearable and some are controllable. Once we clearly identify the long-term objectives, we have to stay firm and move ahead boldly.

We also need patience and care, resisting the temptation to blame the process if it is not a high achiever at the start. This is a long-term process. If we harbor unrealistic expectations, we will jeopardize its development.

In short, like raising children, the internationalization of the yuan will not be without hardship, difficulties and challenges. We don't refrain from having children because of those considerations. Rather, we endure any difficulties because of the ultimate benefits.

3. Hong Kong was a natural choice to start the internationalization process. The city played the role of a "nursery" to provide a safe and reliable testing ground. Currently, in the absence of a rich supply of offshore yuan products, the overwhelming majority of offshore yuan deposits immediately return to the mainland without playing a large role in offshore markets. As a result, some may doubt the functionality of Hong Kong as a "nursery."

It is important to note that nature of the deposits has changed. They are now owned by non-mainland citizens and have the freedom to cross the border more easily. A child in a nursery goes home every day, but when that child enters primary or secondary school, it may go home during weekends only. When the child enters university, home visits may occur only during the summer. And once the child is out in the work force, home appearances may be limited to holidays or festivals.

The yuan in Hong Kong now returns directly to the mainland because there are insufficient offshore products available. In future, when the offshore currency system is further developed, international confidence in the currency will increase and offshore yuan will stay overseas for longer periods of time.

Growing nursery

This is why the Hong Kong Stock Exchange is working hard to promote the rapid development of yuan equities in Hong Kong. This is also why the exchange will continue to promote the development of yuan interest-rate and currency-product markets, as well as commodity derivative markets.

Some may doubt the direct benefits that Hong Kong accrues from internationalization, but I believe the benefits are there.

In the short term, they are more intangible. Having served as the "nursery," Hong Kong has made a tremendous contribution to the development of the country at a most critical juncture.

In the long term, once the "nursery" phase is over and the internationalization begins to deepen, Hong Kong's role may expand to the "primary school," "secondary school" and even "university" stages. This is an enormous business opportunity for Hong Kong.

In conclusion, the long-term objective is to build an international monetary structure that gives Chinese mainland greater global economic and political influence. With this long-term objective in mind, one must accept the permanence of the process and the costs and prices related to it. Returns may not be immediate. Risks and effort are involved. The process may be fast or slow, but its course forward is inevitable.

The article first appeared in the Charles Li Direct column on the Website of Hong Kong Exchanges and Clearing Ltd. Shanghai Daily condensed the article.