By Mauro F. Guillen and Emilio Ontiveros

While the controversy about the dollar-yuan exchange rate and its impact on China’s export competitiveness and the U.S. trade deficit continues to be relevant, the international status of the Chinese currency will surely attract greater attention and debate in years to come. Before one thinks about the use of the yuan in international transactions and as a reserve currency, one must first analyze the prospects of its convertibility.

The Chinese economy is the world’s second largest, and will soon become the largest. It is already the world’s leading export power, and one of the most heavily involved in foreign direct and portfolio investment.

Another factor in the equation has to do with the size of China’s foreign exchange reserves, now topping 3.2 trillion dollars. A number of countries maintain liquid assets in yuan, and China has concluded currency swap arrangements with South Korea, Hong Kong, Malaysia, Belarus, Indonesia, Argentina, Iceland, Singapore and other countries.

The global economic and financial crisis has elevated China to a prominent supporting role in the global economy. Chinese economic growth is one of the few bright points in an overall picture that does not leave much room for optimism.

China can play a constructive role at the G20 and in the creation of a firewall to prevent the eurozone crisis from spiraling out of control. In other parts of the world, especially Africa and Latin America, China has become a major trading partner and investor. Its footprint is now evident around the world.

Steps taken to bring the yuan into play as a convertible currency are not be understood as the beginning of the end of the U.S. dollar as the world’s reserve currency. The volume of trade and financial transactions accounted for by the dollar is just overwhelmingly important and will continue to be so for the next decades. Most Chinese trade, in fact, is denominated and settled in dollars. Chinese financial markets, especially bond markets, are still underdeveloped.

One of the most vexing problems surrounding the yuan has to do with the capital controls that China has in place. Before such controls are removed, China needs to strengthen the institutional structure of its financial system. An important aspect of this will be giving financial intermediaries and banks more leeway when it comes to making decisions about credit.

China must develop a regulatory and supervisory structure that is not intended to serve as a protectionist mechanism. China will be able to project its voice and influence in international organizations to the extent that it reforms its financial system.

The reform measures adopted as part of the 12th five-year plan are very important in this respect. If successful, they will promote a second transition in the Chinese economy, from export-oriented manufacturing to the service sector. Financial system reform is certainly part of this shift, and it will enable China to play a more prominent role in global financial affairs.

Mauro F. Guillen is director of the Lauder Institute at the Wharton School. Emilio Ontiveros is president of AFI and a professor at the Autonomous University of Madrid.