The Conflicted Emergence of the Renminbi as an International Currency

Research paper by McKinnon and Schnabl (CESifo).  I agree with the sentiment expressed in this paper.  Internationalization of the RMB will be a massive challenge with plenty of pitfalls along the way.

"China'sExchange Rate and Financial Repression: The Conflicted Emergence of theRenminbi as an International Currency"  

CESifo Working Paper Series No. 4649

RONALD MCKINNON, Stanford University - Department of Economics, CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

GUNTHER SCHNABL, University of Leipzig - Institute for Economic Policy, CESifo (Center for Economic Studies and Ifo Institute)

China has been provoked into speeding renmnibi internationalization. But despite rapid growth in offshore financial markets in RMB, the Chinese authorities are essentially trapped into maintaining exchange controls — reinforced by financial repression in domestic interest rates — to avoid an avalanche of foreign capital inflows that would threaten inflation and asset price bubbles by driving nominal interest rates on RMB assets down further. Because a floating (appreciating) exchange rate could attract even more hot money inflows, the People’s Bank of China should focus on tightly stabilizing the yuan/dollar exchange rate to encourage naturally high wage increases for balancing China’s international competitiveness.