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UK-ECB-MERSCH:China s yuan might ultimately challenge dollar - ECB s Mersch
Reuters A U.S. $100 banknote is placed on top of 100 yuan banknotes in this picture illustration taken in Beijing May 7, 2013. REUTERS/Petar Kujundzic

LUXEMBOURG (Reuters) - China's yuan currency is gaining importance in international trade and investment and might ultimately challenge the U.S. dollar, European Central Bank Executive Board member Yves Mersch said on Wednesday.

Speaking at a conference on the renminbi, or yuan, in Luxembourg, Mersch urged the Chinese government to continue reforming its economy and its financial sector because the yuan was taking the first steps towards establishing itself as an international investment currency.

"If it can do so successfully, it might one day become a leading reserve currency," Mersch said in a text of a speech.

"Due to the size of China's economy and its importance in global trade and, potentially, finance, the renminbi might ultimately come to challenge the U.S. dollar," Mersch added.

Luxembourg is competing with other European financial centres, including London, for a major role in the growing market for offshore yuan.

Mersch said from a euro zone perspective, the yuan's growing internationalisation also called for closer monitoring of risks stemming from increased exposure to yuan-denominated assets and liabilities in euro zone banks.

"The increasing presence of Chinese banks within the euro area also brings its own challenges regarding banking supervision, including the need for greater cooperation and exchange of information between home and host authorities," Mersch said.

(Reporting by Carolyn Cohn; writing by Eva Taylor; Editing by Ruth Pitchford)