Renminbi’s Rise: Slow Train. No, Slower Than That.

Very good Michael Pettis piece on the rise of the renminbi to global dominance and reserve status. In short, he thinks it will be slow, if ever. An excerpt:

But away from all “qualitative” arguments about why this is unlikely, and there are many, I think there is a problem with the arithmetic of reserve currency accumulation.  If the rest of the world is going to use the renminbi as a reserve or trading currency, clearly it needs a mechanism by which to accumulate renminbi.  This is something on which a surprisingly large share of people who talk about the future of reserve currencies don’t seem to focus.

Leave aside the fact that foreigners are prevented from having renminbi accounts and that it will probably be many years, if not decades, before the PBoC is willing to allow full convertibility, with limited government intervention and no control over the setting up and trading of its currency.  The world still needs a way to accumulate renminbi in order for it to be a major trading or reserve currency.

How does the world accumulate sufficient renminbi to acquire reserve status?  There are basically two ways.  First, China can run a current account deficit.  Second, foreign capital inflows into China can be matched by Chinese capital outflows.  The second way does not result in a net foreign accumulation of Chinese assets, but it allows foreigners to hold renminbi bonds and other assets to the same extent that Chinese hold assets abroad (above the current account surplus, of course).

More here.