China needs to address challenges to internationalize yuan(2)

Political stability, for instance, will ensure a stable policy environment for investors who will allocate a certain portion of their portfolio to the yuan. Eichengreen suggested that China's regulatory agencies need to be independent "to foster confidence that regulatory decisions are taken with economic stability rather than political considerations in mind."

Banking systems also needed to be strengthened to prevent excess capital inflows, he added.

Eichengreen said that the dollar is the only currency in the world history that managed to transform itself from not being used at all to becoming an international currency in just a span of 10 years owing to the passage of the Federal Reserve Act in December 1913. With the U.S. Federal Reserve acting as the lender of last resort, the Fed started buying and selling dollars and created a liquid market and provided stability. By the 1920s, the dollar has become an international currency and New York eclipsed London as a key financial center.

"The lesson from this is that through concerted policy reform a large country could successfully cultivate a reputation for financial stability and develop a liquid market needed to support the internationalization of its currency and, in principle, it can do that in a short period of 10 years," he said.

The question now, is if China can match the U.S. experience, Eichengreen said.

There are good reasons that China will succeed in its plan to internationalize the yuan, he said, adding that this will also benefit global economy.

"The global economy runs on liquidity and the dollar can't continue to provide the liquidity that an expanding economy needs forever," Eichengreen said.

Emerging economies, like China, will assure that the U.S. economy's share to the global economy will go down. Which is why Eichengreen believes that the yuan's internalization will be of interest not only to China but the rest of the world as well.

"Whether China rises to the challenge will have very profound consequence not only for China but to the world," he said.