Up until very recently, China has been running surpluses on both the current and capital accounts. The result is that, far from Renminbi accumulating abroad, China has accumulated a massive stockpile of $3 trillion in foreign currency reserves. Foreign buyers can’t pay for Chinese exports in Renminbi because, in net terms at least, they’ve had little chance to earn Renminbi. And unless China starts running a trade deficit, or opens its capital account and allows a lot more investment to flow overseas, any yuan the Chinese use to pay for imports only adds to the sum of foreign currency left in China’s official reserves – heightening, rather than reducing, China’s dependence on dollars. For the Renminbi to take on a more prominent international role, much less emerge as the world’s chief reserve currency, would require a dramatic change in China’s relationship to the global economy – a change it is far from clear China either anticipates or desires.
…
Allowing free flows of capital is really the only way China can – in time – develop into the kind of global financing hub that could support a truly international currency. The problem, for China’s leaders, is that achieving that goal requires giving up a substantial amount of control over the economy. Economists call it the “trilemma,” or the “impossible trinity”: no country can allow free flows of capital, support a fixed exchange rate, and manage an independent monetary policy at the same time. One of them has to go. And as the Japanese discovered with their “big bang” in the mid-1990s, opening China’s financial system to outside market forces would make it a lot harder to hide and quietly manage any bad debt problems lurking in Chinese banks.
