The Chinese renminbi has been recently included in the IMF’s reserve currency basket, which previously consisted of the US dollar, the euro, the British pound, and the Japanese yen.

These currencies represent the developed world’s most stable economies, so having the renminbi among them is a nice compliment to Beijing. It is not, however, an earth-shattering move in other respects.

Many people started asking me whether the Chinese currency will ultimately become the world’s reserve currency.

In short, I don’t see the renminbi overthrowing the US dollar anytime in the next few decades. My crystal ball gets fuzzy after 2036, but for right now, it comes nowhere close to meeting the basic conditions for becoming the major reserve currency.

Let’s think about why it’s very unlikely for the renminbi to replace the dollar anytime soon.

China Has a Massive Trade Surplus

When we talk about the US dollar being the world’s reserve currency, what we really mean is that the bulk of global trade is denominated in dollars. And yes, China is doing one bilateral agreement after another in order to trade in its own currency.

Any country that does a great deal of trade with another country can create a bilateral currency agreement to be able to trade in a particular currency, but the great bulk of global trade is still in US dollars.

And you are not going to see Mexico, for example, wanting to take the renminbi for its sales of products to Great Britain. Mexicans want dollars they can readily convert back to pesos.

For a country to deliver the currency in which most global trade is done, it must supply that currency “in size” to enable the trading. The United States runs a massive trade deficit, pushing dollars all over the world to circulate among the economies of other countries.

China, by contrast, has a trade surplus. It is taking in dollars and many other currencies although it does run trade deficits with some countries.

But it is going to be a long time before China runs a net trade deficit. A long, long time. An extraordinarily long time. That reality makes the reserve status of the renminbi a moot point as far as I’m concerned because the renminbi is not going to come close to figuring into any of my transactions and investments, even those that are of the very longest term.

No One Will Ever Trade in an SDRA port in China.

The United States or England or (pick a country) is not going to conduct trade in an SDR. In the case of the United States, we could create only the equivalent of about two to three months of our trade deficit in SDRs. Seriously.

Then we would have to somehow find tens of billions of dollars of SDRs each month to maintain our current deficit, which means we would have to go out and buy currencies, shoving even more money into the world.

All of this would decimate the value of the dollar and throw the US into a depression. You’d want to dust off your post-apocalyptic science fiction novels were that to be the case.

I know this will drive the tinfoil hat crowd nuts, as they really do want to see the United States punished for its profligacy and the irresponsible actions of its central bank.

And I do hold a certain sympathy for those who think the Federal Reserve should be reined in. But there is a world of difference between what should happen and what will happen.

For the time being—that time being a very long time—the dollar will remain the global reserve currency and the primary currency of global trade.

Oh, and by the way, the SDR will never be a global reserve currency, at least not in my lifetime. First of all, there simply aren’t enough SDRs to actually conduct trade in. I mean, the SDRs amount to a few tens of billions of dollars. What do you do for trade in the second hour?

As an aside, I see a much greater probability that Bitcoin 2.0 will become a major reserve currency. And by Bitcoin 2.0, I mean the block-chain currency software restructured to create a sufficient amount of currency without Bitcoin 1.0’s inherently deflationary bias.Bitcoin 2.0 Has Better Chances

I could see a basket of commodities, equities, currencies, and bonds being used to back a new version of Bitcoin that would actually make eminent sense for global trade.

Of course, Bitcoin 2.0 would have to be transparent so that governments could collect their tariffs and taxes, but it would solve a host of other problems.

The Uncertain Future of the Renminbi

Sometime before the SDR change takes effect next October, the renminbi must drop its dollar tie and become convertible to other currencies.

In that transition, China may well come to regret winning this honor, as the RMB will lose value, possibly a lot of value.

A weaker renminbi won’t be entirely bad. It will make China’s exports somewhat more affordable for the rest of us and may help some Chinese manufacturers stay afloat.

At the same time, China will pay more for what it imports from other countries. We don’t know how that will work out. Beijing is trying to build internal supply and demand, but it isn’t clear how ready they are for a floating currency.

Subscribe to Thoughts from the Frontline

Follow Mauldin as he uncovers the truth behind, and beyond, the financial headlines in his free publication, Thoughts from the Frontline. The publication explores developments overlooked by mainstream news and analyzes challenges and opportunities on the horizon.

Read the original article on Mauldin Economics. Copyright 2015.

IMAGES:

A port in China.

Bitcoin balloons

For more on this story go to: http://www.businessinsider.com/china-yuan-not-close-to-reserve-currency-2015-12?utm_source=feedburner&amp%3Butm_medium=referral&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29