[Authors: Sarthak Agarwal, XinYi Chen; Advisor: Chiara Hu]
Over the past decade, China has embarked on a strategic mission to reduce its reliance on the U.S. dollar in international trade and finance. It has significantly reduced its reliance of US Dollar by doing more than 50% of import and export payments in RMB in 2024 while this number used to be zero in 2010 and has currently become the 5th largest international reserve currency (2.7% global currency reserves) and consists of 7% of global market share in foreign exchange transaction. This process, often called “de-dollarization,” aims to elevate the yuan (renminbi) as a significant global currency. While the U.S. dollar has long dominated international trade and reserve systems, China’s move reflects its economic ambitions and growing influence on the global stage.
Historical Context
China’s journey toward financial autonomy did not begin recently. Efforts to internationalize the yuan gained momentum in the early 2000s as part of broader economic liberalization. In 2016, the International Monetary Fund (IMF) recognized the yuan as a reserve currency, including it in the Special Drawing Rights (SDR) basket alongside the dollar, euro, yen, and pound.
Today, China continues to position the yuan as a viable alternative for global trade and reserves. Projections suggest that if current trends persist, the yuan could challenge the dominance of the dollar in the coming decades. Yet, challenges such as entrenched dollar networks, scepticism toward China’s governance, and geopolitical resistance remain formidable obstacles.
Understanding the Push for De-dollarization
China’s de-dollarization efforts stem from both economic and geopolitical considerations. The dominance of the U.S. dollar in global trade provides the United States with immense leverage In past decade US has heavily weaponised dollar in sanctioning the nations going against US interest. This is seen in case of sanctions imposed on Russia, Iran and Venezuela which have seen crippling of their currencies into less than half of its value.
US particularly enjoys these benefits because of relatively high return on investments in USD and unmatched liquidity thanks to huge depth of US market which allows high volumes of dollar trading without any significant exchange rate fluctuation. This combined with its military might makes it the most stable currency in the entire world and today the entire world is run on American payment system (SWIFT) which can block any nation in the spirit of sanctions.
Additionally, recent events like freezing of Russia’s currency reserves after outbreak of war in Ukraine and the 2008 global financial crisis, rooted in the U.S. financial system, exposed the risks of dollar dependency for other economies. By promoting the yuan in trade and investment, China seeks to build a financial ecosystem that is less exposed to the volatility of the U.S. economy and independent of being a potential weapon of a rival superpower in future.
The Mechanisms of China’s Strategy
China is actively pursuing de-dollarization through a comprehensive approach that includes promoting yuan-denominated trade, diversifying its reserves, and establishing alternative financial systems. China is heavily promoting use of Yuan in FDI investments globally which constitute 11% of the Global FDI share. Through trade agreements with nations in Africa, Asia, and South America, particularly those involved in the Belt and Road Initiative (BRI), China is
encouraging the settlement of transactions in yuan instead of the dollar and deepening economic cooperation through infrastructure investments. To facilitate this, China has developed the Cross-Border Interbank Payment System (CIPS), which can operate independently of the SWIFT messaging system and is accepted in countries like Russia and Brazil.
Between 2021 and mid-2023, China sold $300 billion worth of U.S. Treasury and agency bonds, while also purchasing 224.88 tonnes of gold in 2023 to diversify its national reserves. The country has also issued $140 Billion of Ultralong maturity bonds with range of 30 to 50 years to fund its economic development thus trying to strengthen its economic foundation while reducing dependency on US financial system at the same time.
China’s strict capital controls, implemented during the 2008 financial crisis to stabilize the economy and prevent abrupt capital outflows, have long posed challenges for companies, particularly in attracting foreign direct investment (FDI) which is important from the perspective of demand of a currency by international investors. While these measures successfully curbed economic uncertainty during the crisis, they have since become a major disincentive for overseas investments. In response to a record quarterly low in foreign investments, China took a significant step in September 2023 by allowing companies in Shanghai and Beijing to move funds freely across borders. This relaxation of capital controls aims to boost investor confidence and attract greater foreign investment thus increasing the demand for Yuan.
China is making significant strides in reducing the time and cost of cross-border transactions by introducing its Central Bank Digital Currency (CBDC), the eCNY, for international payments. This digital currency is being utilized by major banks and financial institutions to facilitate large-scale transactions, such as payments for substantial shipments of goods or the establishment of
credit lines for securing loans. Additionally, the eCNY has enabled almost cost-free cross border peer-to-peer transactions. A notable application of the CBDC is in trade settlements between Hong Kong and China, which previously required days and involved multiple intermediaries, with the eCNY, these transactions are now completed within seconds, demonstrating its potential to revolutionize international trade and increase the use of Yuan.
Geopolitical scenario and agreements
Besides China other developing countries are also looking for opportunities to diversify their trade settlement currencies. In Southeast Asia five of the largest economies in the region like Singapore, Malaysia, Indonesia, the Philippines, and Thailand have signed a memorandum of understanding (MoU) to encourage the use of local currencies in trade settlements. India has
also approved 18 countries for rupee settlements and has signed a memorandum of understanding with countries like the United Arab Emirates (UAE) and Indonesia for bilateral currency settlements.
In 2018, the People’s Bank of China (PBOC) launched the Shanghai International Energy Exchange for trading oil derivatives from countries such as Iran, Venezuela, and Russia, with contracts exclusively denominated in yuan. By 2022, the PBOC had authorized 31 yuan clearing banks in 29 countries and regions, fostering its use in international trade. For example, Turkey’s central bank signed a currency swap agreement with the PBOC in 2019 and used the swap lines in 2020 to settle trade with China. This strategy has been especially evident in China’s trade with Russia, where Ruble-Yuan trade surged by over 40% within nine months of Russia’s invasion of Ukraine. Two-way trade between China and Russia reached a record high of $240 billion in 2023,
a 26.3% increase from the previous year, with the yuan becoming the most traded currency in Russia.
China’s trade with Saudi Arabia further underscores this shift, with China importing 1.8 million barrels of oil daily and securing a $7 billion currency swap agreement with Riyadh to reduce reliance on the dollar. Currently 20% of the transactions in the global oil trade are now conducted in currencies other than dollar and this trend gained further momentum after expiration of petrodollar in June 2024. To maintain confidence in the yuan, China has ensured a stable exchange rate in 2024, avoiding the similar instability caused by the 2015 devaluation that has led to a temporary reduction in the use of the yuan for trade for a long time thus reflecting the criticality of a stable currency to persuade trading partners in regions like Southeast Asia to adopt the yuan in place of the dollar.
Challenges
The internationalization of any currency other than the U.S. dollar remains a distant prospect. The enduring dominance of the dollar reflects a strong vote of confidence from diverse market participants, including governments, corporations, and households. Establishing a credible alternative would require not only bilateral agreements but also the creation of new, trusted institutions and multilateral frameworks founded on the principles of rule of law, transparency, and accountability.
China’s Cross-Border Interbank Payment System (CIPS) represents one such effort. However, it processes only 25,900 transactions daily, a fraction of the 500,000 transactions amounting to $1.8 trillion handled by the U.S. Clearing House Interbank Payments System. Notably, 80% of CIPS transactions still rely on SWIFT messaging system, underscoring the global reliance on dollar-centric mechanisms. The trust built by the dollar over eight decades further cements its position.
Even countries that have formalized trade agreements with China to use the Yuan in transactions often benchmark their transactions against the dollar due to concerns about the Yuan’s stability. For example, Brazil continues to reference the dollar before trading in Yuan.
Further negotiating such agreements may be feasible with smaller economies, but persuading businesses in larger markets like the EU which is China’s second-largest trading partner after ASEAN, is far more challenging. This hesitation again stems from the Yuan’s high exchange rate risks and volatility, which undermine trust of its use in transactions.
Thus, conclusively while China is making strides in its de-dollarization strategy, the yuan’s global acceptance remains limited, and the dollar’s dominance is unlikely to wane soon without substantial systemic changes and the establishment of globally trusted financial frameworks. However, China’s proactive measures, towards expanding yuan-based trade partnerships and letting any stone remain unturned towards increasing its adoption, have positioned it as a credible contender in reshaping the global economic order, with significant potential for long term impact.
SOURCES
1. Russia’s shocking rebound:
Tankersley, J. (2015, April 13). Russia’s shocking rebound: The ruble has climbed 34 percent in just two months. The Washington Post. https://www.washingtonpost.com/news/wonk/wp/2015/04/13/russias-shocking-rebound-the-ruble-has-climbed-34-percent-in-just-two-months/
2. Capital control (China):
CNN Business. (2023, September 22). China loosens capital controls. CNN. https://edition.cnn.com/2023/09/22/economy/china-loosens-capital-controls-intl-hnk/index.html
3. CBDCs and international trade:
Disruption Banking. (2024, October 14). How are CBDCs impacting international trade? https://www.disruptionbanking.com/2024/10/14/how-are-cbdcs-impacting-international-trade/
4. China’s main export partners:
Statista. (n.d.). Main export partners for China. https://www.statista.com/statistics/270326/main-export-partners-for-china/
5. China’s de-dollarization strategy:
Swanstrom, N. (2023, October 3). Two tines, one fork: China’s de-dollarisation and bond issuance drive economic independence. Institute for Security & Development Policy (ISDP). https://www.isdp.eu/publication/two-tines-one-fork-chinas-de-dollarisation-and-bond-issuance-drive-economic-independence/
6. Geopolitical trends in post-dollar era:
Mohan, G. (2024, January 29). Economic pragmatism vs geopolitical principles in a post-dollar era. Observer Research Foundation (ORF). https://www.orfonline.org/expert-speak/economic-pragmatism-vs-geopolitical-principles-in-a-post-dollar-era
7. Global currency status, yuan motivations & de-dollarization:
GIS Reports. (n.d.). Can the yuan unseat the dollar? https://www.gisreportsonline.com/r/yuan-unseating-the-dollar/
8. Currency swap agreements (China):
Rappeport, A. (2022, September 21). China is using yuan swap lines to counter U.S. dollar dominance. Foreign Policy. https://foreignpolicy.com/2022/09/21/china-yuan-us-dollar-sco-currency/
9. Challenges for Yuan internationalization:
The Japan Times. (2023, December 25). Challenges for yuan in international trade. https://www.japantimes.co.jp/commentary/2023/12/25/world/yuan-international-trade/
10. Yuan use in payments and past devaluation issues:
Kynge, J., Yu, S., & Leng, C. (2023, October 16). China steps up push to internationalise renminbi. Financial Times. https://www.ft.com/content/ae08b6ed-d323-4a95-a687-0172a98857f4
0 Comments