CHINA’s currency, the renminbi, could become a regional currency among Asian emerging economies in the new decade, according to Citigroup, citing the country’s growing trade ties with its neighbors.

But it may take more than a decade before the renminbi becomes an international currency, one that is used outside China and Asia as a medium of exchange, store of value and unit of account, the US banking giant said in its latest Asia Macro View research report.

“The renminbi will likely be regionalized before being fully internationalized,” Citi said. “For a currency to be accepted internationally, it may require the home country to run current-account deficits.”

China has been running current-account surplus since the early 1990s and Citi believes the country—which is expected to overtake Japan this year as the world’s second-largest economy—is unlikely to reverse its current-account position any time soon.

Its surplus, however, has largely originated from the advanced economies, such as the US and those in Europe.

Citi thus believes the renminbi may be first accepted in those emerging markets that are running trade surpluses with China.

“China had been a net importer from Taiwan, Korea, Malaysia, Thailand and the Philippines in the past decade,” the bank noted. “Some regional cooperation in trade/currency has occurred recently, promoting the visibility of the Chinese currency in the region.”

Citi said the use of the renminbi as a regional currency should bode well for China, whose foreign-exchange reserves—at almost $2.4 trillion at the end of 2009—have reached an “alarming” level that requires reforms. The increase in reserves, according to analysts, partly reflects China’s purchases of other currencies to prevent its currency from appreciating.

“The regionalization of the renminbi provides a unique opportunity to reduce the holding of FX reserves. If more transactions are denominated in renminbi, China would need to hold less FX reserves, and capital outflows would be encouraged by a fair-valued currency,” it said.

Citi said the US dollar’s dominance in the currency system is expected to continue even if emerging markets are likely to increase further in size in the new decade and have started to embrace the eurozone’s currency, the euro.

But the trend of diversification is also expected to continue, it said, consistent with the shift of trade away from the developed world.

“Alongside the increasing size of the emerging market economies, [the shift] could give birth to a new emerging-market currency that could more reflect the upward growth momentum in this area,” the bank said.

“Considering the preconditions that qualify an international currency, we think the renminbi is the front-runner among currencies in emerging economies,” it added.

China’s export-market share in Asia, excluding Japan, has risen from below 15 percent in 1999 to around 20 percent recently, the bank noted.

But for the renminbi to be a regional currency, Citi said the currency must be traded actively in the foreign-exchange markets.

Citing data from the Bank of International Settlements (BIS), it said the renminbi’s share in the global foreign-exchange market turnovers was only 0.25 percent in 2007, ranked 20th in the world and fifth among Asian emerging-market currencies.

“Considering the scale of the economy, China’s FX market share was ranked the last in the 22 currencies surveyed by BIS,” it said. However, the renminbi FX market started from scratch in the recent decade, whose share in FX market turnover was only 0.1 percent in 2004.”

This shows, according to Citi, that the momentum for an active Chinese currency is building up quickly.