China should formulate policies to encourage more companies to use the yuan in the settlement of their outbound direct investment (ODI), said a central bank official.

"The scope of applications for the yuan is not much different from that of the US dollar and euro ... and it will not be long before the yuan becomes fully convertible," said Xing Yujing, deputy director of the People's Bank of China's monetary policy department II.

That division is in charge of driving the yuan's internationalization. Using the yuan in ODI could ease financing obstacles faced by companies investing overseas and let other countries share the fruits of China's strong economic growth, Xing said on Sept 9.

Xing made the comments at a supplementary forum of the 15th China International Fair for Investment and Trade.

Minister of Commerce Chen Deming on Sept 8 called for stronger support for companies investing abroad, including "a broader channel for cross-border flows of yuan".

Xing said: "Many companies were easily exposed to the risk of exchange-rate fluctuations in the global market. You can't expect everyone to be a forex expert, thus using the yuan is a more secure method."

Moreover, the fear of a second global crisis could result in a "dollar shortage" because of its status as the "reserve currency", and that has led to heavy demand for dollar-denominated loans at a high cost, Xing said.

"But the liquidity of the yuan is still guaranteed, and it is also a much simpler process than to swap twice when settling in dollars," she said.

The central bank has been formulating policies to provide yuan loans for overseas projects, with nine banks offering such services, she added.

As of the end of 2010, China's total ODI was $317.2 billion, the 17th largest in the world, with investments in 178 nations and regions. The Asia-Pacific region and Latin America were the top two destinations for China's ODI.

A survey by HSBC Holdings Plc in May suggested that yuan would replace the British pound as the third most popular currency for trade settlement globally in the second half of 2011.

According to Xing, overall cross-border settlements in yuan exceeded the equivalent of $1.1 trillion in the first seven months of this year, compared with $500 billion last year, involving more than 140 countries and regions worldwide.

Edwin Fung, global chair of KMPG's Global China Practice, said using the yuan in ODI would surely benefit many companies that face financing difficulties.

"Many Chinese companies could hardly get a loan from a foreign bank, for they have no credit record abroad," Fung said.

According to Xing, using the yuan would also be a benefit for destination countries, as they could use the yuan for foreign direct investment (FDI) in the Chinese bond market.

The Chinese bond market is the world's fifth largest, with more than 200 billion yuan ($31 billion) in cash deals a day. The injection of foreign capital would have little impact on the overall stability of the Chinese financial market, Xing said.

FDI projects still require individual approval, but policies will be issued in the near future to change the process, Xing said.

Vice-Premier Li Keqiang said during a visit to Hong Kong in August that the central government will strive to build the city into an offshore center for yuan businesses.

The Financial Times, meanwhile, reported that the United Kingdom was likely to become another offshore market for the yuan, and it said Vice-Premier Wang Qishan's UK visit was part of a bilateral effort toward that goal.

The yuan already meets the conditions to be an international currency for reserve and settlements. It will play an important part in achieving close relations with emerging economies and establishing a new international monetary system, Xing said.