Soheir El Sherbiny‏‏

The global financial system is undergoing significant <a href="https://www.globalneighbours.org/cover-story-how-the-yuan-is-taking-over-the-dollars-role-in-global-trade/" rel="noopener noreferrer" target="_blank">transformations</a>, driven by U.S. President Donald Trump’s erratic trade policies as well as the widening U.S. budget deficit, and doubts questioning the independence of the Federal Reserve. Amid this turbulent landscape, China finds a strategic opportunity to consolidate the yuan's position within the international trade and financial system. China is gaining momentum as one of the leading powers seeking to reshape the international currency landscape. While the U.S. dollar has maintained its dominant position since the end of Second World War, Beijing is emerging with an ambitious strategic project aimed at internationalizing the yuan.The Chinese strategy is not isolated from the current geo-economic context; rather, it embodies a political and economic will to enhance financial independence and reduce reliance on the dollar. It holds specific importance as trade tensions escalate and restrictions imposed on international payment systems continue. Moreover, it aligns with Beijing's "de-dollarization" policies, through which it seeks to reduce the use of the dollar in <a href="https://www.scmp.com/economy/china-economy/article/3315941/summer-davos-debate-chinas-yuan-ready-challenge-us-dollar-dominance" rel="noopener noreferrer" target="_blank">global trade</a> and financial transactions.Chinese Efforts With the accelerating shift towards a multipolar global financial system, China is steadily working to solidify the yuan's position in international transactions. This is driven by a series of technological and institutional initiatives that can be summarized as follows:1- Chinese Regulators' Efforts to Increase Yuan Lending: Driven by the desire to increase the yuan's exchange, Beijing has sought to encourage its trading partners to accept the Chinese currency as a means of payment. Consequently, demand for yuan-denominated loans has increased among developing countries seeking to reduce financing costs and diversify their foreign exchange reserves. More than 70 monetary authorities have already included the yuan in their reserves, prompting global financial institutions to restructure their currency portfolios and encouraging companies to adapt to a multi-currency trading environment.2- Raising the Minimum Share of Yuan-denominated Trade: In May 2025, the People’s Bank of China (PBC) raised the minimum percentage of yuan-denominated <a href="https://www.economist.com/china/2025/09/10/china-is-ditching-the-dollar-fast" rel="noopener noreferrer" target="_blank">transactions</a> settled across borders from 25% to 40% within its Macro-Prudential Assessment (MPA) framework. The MPA framework is a systemic risk assessment process used to identify weaknesses in the financial system and implement preventative measures to ensure its stability. While this decision is not binding, banks that fail to comply may face lower regulatory ratings, potentially hindering their future expansion.3- Doubling the Yuan’s Share in International Payments: Since 2022, China’s trade denominated in its local currency has risen to over 30% of its total trade in goods and services, compared to just 14% in 2019. This was prompted by structural changes in the domestic economy. China now settles more than 50% of its cross-border revenues, including financial flows, in yuan. This has increased from less than 1% in 2010, reflecting a significant increase in the international acceptance of the Chinese currency.4- Launching Interbank Cross-Border Payment System: The Cross-Border Payment System (CIPS) is a cornerstone of China’s strategy to internationalize the yuan, serving as a Chinese alternative to the Western <a href="https://www.economist.com/china/2025/09/10/china-is-ditching-the-dollar-fast" rel="noopener noreferrer" target="_blank">SWIFT</a> network. Launched in 2015, the system has since expanded rapidly. By March 2024, approximately 52.9% of China’s cross-border payments were settled in yuan through this system, surpassing the dollar’s ​​42.8% share. More than <a href="https://www.economist.com/china/2025/09/10/china-is-ditching-the-dollar-fast" rel="noopener noreferrer" target="_blank">1,700</a> banks worldwide have joined the system, an increase of approximately one-third compared to the period before the outbreak of the Ukrainian war. Transaction volume also increased by 43% in 2024, reaching 175 trillion yuan, equivalent to about US$24 trillion. Clearing banks for yuan payments have been established in 33 markets, some of which joined as recently as 2025, including financial institutions in Turkey and Mauritius.5- Intensifying Investment in the Digital Yuan (e-CNY): The PBC’s digital currency <a href="https://www.scmp.com/economy/china-economy/article/3315941/summer-davos-debate-chinas-yuan-ready-challenge-us-dollar-dominance" rel="noopener noreferrer" target="_blank">e-CNY</a> is a key pillar of Beijing’s strategy to internationalize the yuan. The total value of transactions using the e-CNY exceeded US$7.3 trillion, with the number of users reaching more than 260 million by 2025.6- Launching the Non-bank Digital Payment Ecosystem: In addition to the official digital currency, Beijing has been working to expand the non-bank digital payment ecosystem, which relies on technologies such as <a href="https://apcoworldwide.com/blog/qr-diplomacy-chinese-payment-companies-expansion-in-southeast-asia/" rel="noopener noreferrer" target="_blank">QR codes</a> and is widespread in Asian markets. China has also moved to expand the use of this currency in cross-border applications, particularly through the <a href="https://holbornassets.asia/blog/cross-border-payment-innovations-in-asia/" rel="noopener noreferrer" target="_blank">mBridge</a> project. In cooperation with the Bank for International Settlements (BIS) and several global central banks, China aims to provides countries—stretching from Russia to Kenya—with viable alternatives to the dollar. Billions of dollars have already been traded through this shared network, while Chinese regulators have directed local banks to increase their use of the platform.7- Establishing a Network of Bilateral Currency Swap Agreements: China has strengthened its external monetary structure by establishing a network of bilateral currency swap agreements with more than 30 <a href="https://www.reuters.com/world/china/china-ramps-up-global-yuan-push-seizing-retreating-dollar-2025-04-29/" rel="noopener noreferrer" target="_blank">countries</a>, allowing foreign central banks to borrow yuan in exchange for their local currencies. In March 2023, China and Brazil signed an agreement to settle trade transactions in their respective local currencies, followed by Argentina in April 2023. The relationship with Russia has also undergone a dramatic transformation, with the yuan's share of the Moscow Exchange rising from 4% in 2022 to 99.8% of total foreign exchange trading. The Chinese currency also accounted for approximately 42% of Russia's total international transactions between 2023 and 2024.8- Establishing a Financial Safety Net Parallel to the IMF: Since launching the yuan's internationalization, China has extended a total of 4.5 trillion yuan, or approximately US$630 billion, in the form of swap lines to <a href="https://www.globalneighbours.org/cover-story-how-the-yuan-is-taking-over-the-dollars-role-in-global-trade/" rel="noopener noreferrer" target="_blank">32 central banks</a> worldwide. Currency swap lines, in this context, refer to an agreement between two central banks to exchange their local currencies at a fixed exchange rate. These lines allow central banks to temporarily obtain foreign currency during times of economic stress, providing their financial institutions with necessary liquidity. Although the actual use of these lines remains limited, their purpose is to secure access to the yuan during crises, thus giving countries confidence in using it as an alternative reserve currency and effectively creating a global financial safety net that rivals the International Monetary Fund in size and function.9- Issuance of Yuan-Denominated Bonds and Securities by Foreign Countries: The internationalization of the yuan has expanded to include bond markets. In July 2025, Hungary issued approximately 5 billion yuan worth of <a href="https://www.economist.com/china/2025/09/10/china-is-ditching-the-dollar-fast" rel="noopener noreferrer" target="_blank">Panda bonds</a>, which are yuan-denominated bonds issued by foreign borrowers outside of China and offered and sold in the Chinese currency. In September 2025, Russian energy companies received approval to issue yuan-denominated securities, while Kenya is considering converting its dollar debt to China into yuan. These developments represent a continuation of China's strategy to decouple the yuan from the dollar, a process that began in <a href="https://markets.financialcontent.com/stocks/article/marketminute-2025-9-10-the-yuans-ascendant-arc-beijing-fuels-global-dedollarization" rel="noopener noreferrer" target="_blank">2005</a> and culminated in July 2024 when the yuan's share of global payments reached 4.74%, according to SWIFT data, making it the fourth largest international payment currency.10- Lending Australian Iron Ore Giant its First Yuan-denominated Loan: In August 2025, China <a href="https://discoveryalert.com.au/news/china-yuan-internationalization-corporate-finance-2025/" rel="noopener noreferrer" target="_blank">took</a> a significant step in its strategy to internationalize the yuan by securing a record-breaking 14.2-billion-yuan (US$1.98 billion) loan agreement with Fortescue, an Australian iron ore giant. This landmark deal, arranged by the Bank of China, marked the first overseas syndicated yuan loan to an Australian company and the largest yuan-denominated loan ever extended to a non-Chinese company.Structural ChallengesDespite significant progress in China’s efforts to expand the international use of the yuan, the path to internationalizing the Chinese currency still faces a number of deep-rooted structural challenges. These challenges pose fundamental obstacles to achieving a sustainable global position for the local currency. The most prominent of these challenges can be summarized as follows:1- Sustained Dollar Dominance in Foreign Exchange Trading Volumes: In 2022, the US dollar <a href="https://www.jpmorgan.com/insights/global-research/currencies/de-dollarization" rel="noopener noreferrer" target="_blank">accounted</a> for 88% of foreign exchange trading volumes, while the Chinese yuan represented only 7%, according to data from the Bank for International Settlements. Similarly, there are few indications of a decline in the value of the US dollar in trade invoices. On the contrary, the share of the US dollar and the euro has <a href="https://www.jpmorgan.com/insights/global-research/currencies/de-dollarization" rel="noopener noreferrer" target="_blank">remained stable</a> over the past two decades at around 40-50%. Although the yuan’s share in China’s cross-border transactions has increased as it moves towards conducting bilateral trade in its local currency, it remains low compared to the dollar. The US dollar has maintained its strong dominance in cross-border obligations, with an estimated market share of 48%. In the foreign currency debt issuance market, its share has remained stable at around 70% since the global financial crisis.2- Further Controlling Capital Flows: China continues to implement a strict system for managing capital flows to curb speculation and protect its domestic financial <a href="https://markets.financialcontent.com/stocks/article/marketminute-2025-9-10-the-yuans-ascendant-arc-beijing-fuels-global-dedollarization" rel="noopener noreferrer" target="_blank">stability</a>. However, this approach poses a fundamental challenge to the yuan's internationalization efforts. Achieving a broader international role for the national currency requires a greater degree of convertibility and capital account openness. Beijing is gradually pursuing this within a tightly controlled framework to avoid the risks of sudden speculative flows. The main dilemma lies in striking a balance between enhancing the yuan's attractiveness as a reserve and settlement currency and maintaining the stability of the domestic financial system. This delicate balancing act will determine the pace and extent of China's success in internationalizing its currency.3- Balancing Stable Growth and Monetary Openness: China’s growth model remains anchored in exports and heavy industrial investment. Therefore, any significant re-evaluation of the yuan could harm its competitiveness and weaken its <a href="https://markets.financialcontent.com/stocks/article/marketminute-2025-9-10-the-yuans-ascendant-arc-beijing-fuels-global-dedollarization" rel="noopener noreferrer" target="_blank">manufacturing sector</a>, which employs millions of workers. Furthermore, currency revaluation could lead to a faster decline in export demand than an increase in domestic consumption, potentially causing economic instability and raising the risk of higher unemployment. This likely explains the Chinese authorities' reluctance to allow their currency to appreciate despite external calls to do so.4- Limited Openness of Chinese Financial Markets: Chinese bond and stock markets remain less open than those in the United States or Europe. Despite the existence of programs like Bond Connect and <a href="https://www.sifma.org/news/blog/promoting-a-stable-transparent-and-resilient-u-s-china-financial-relationship" rel="noopener noreferrer" target="_blank">Stock Connect</a>, foreign investor participation remains relatively limited. This relative closedness may reduce the yuan's liquidity in global markets and prevent China from developing advanced financial instruments used for hedging or international pricing.5- The Ongoing Trade War between China and the West: China's efforts to internationalize the yuan are taking place in a tense international environment, particularly with the <a href="https://carnegieendowment.org/research/2024/10/us-china-relations-for-the-2030s-toward-a-realistic-scenario-for-coexistence?lang=en" rel="noopener noreferrer" target="_blank">United States</a> and the European Union, which could hinder the yuan's acceptance in Western financial systems. Furthermore, U.S. sanctions on some Chinese entities and concerns about financial ties to China are causing many Western banks and companies to be cautious about conducting transactions in yuan. A threat that could slow down the internationalization of the Chinese currency.Future ScenariosIn light of the above, three possible scenarios can be considered regarding the future of yuan internationalization, as follows:1- Accelerated Efforts by Beijing to Internationalize the Yuan: According to this scenario, China is expected to implement gradual financial <a href="https://www.spglobal.com/ratings/en/regulatory/article/china-small-bank-reform-tail-risks-are-reducing-s101640746" rel="noopener noreferrer" target="_blank">reforms</a>, including liberalizing the capital account, enhancing transparency in the banking system, and strengthening the independence of the PBC. This would be coupled with expanding the development of the Cross-Border Yuan Settlement System (CIPS) to become an effective platform for international trade transactions, thereby reducing reliance on the SWIFT network. In light of this scenario, the yuan will see increased use in energy and strategic commodity trade with Asian, Middle Eastern, and Latin American countries, supported by global economic shifts. This would elevate the yuan’s position in the IMF’s Special Drawing Rights basket and potentially lead to a greater role in the global financial system if China continues on this reform path.2- Beijing Adopts a Gradual Approach to Internationalizing the Yuan: According to this scenario, China is likely to maintain a balanced reform approach that allows for partial opening of financial markets while continuing to <a href="https://carnegieendowment.org/research/2024/10/us-china-relations-for-the-2030s-toward-a-realistic-scenario-for-coexistence?lang=en" rel="noopener noreferrer" target="_blank">monitor</a> capital flows. This, in turn, will lead to a gradual expansion of the yuan's use in regional trade and Belt and Road projects, thus broadening the use of the Chinese currency in Asia and Africa. Meanwhile, its presence in Western markets will remain limited, as the yuan will continue to play an influential regional role without becoming a globally dominant currency, while China maintains its domestic financial stability and prudent monetary policy.3- Beijing's Efforts to Internationalize the Yuan Could Falter: Domestic economic <a href="https://www.sifma.org/news/blog/promoting-a-stable-transparent-and-resilient-u-s-china-financial-relationship" rel="noopener noreferrer" target="_blank">challenges</a>, such as slowing growth and real estate debt, as well as the impact of financial restrictions and sanctions on Chinese banks resulting from geopolitical tensions, could diminish China's ability to advance the yuan's <a href="https://www.jpmorgan.com/insights/global-research/currencies/de-dollarization" rel="noopener noreferrer" target="_blank">internationalization process</a>. According to this scenario, the yuan will remain strong domestically in China but will face difficulties in consolidating its global position, given the continued international reliance on the U.S. dollar. Consequently, the global financial system will settle into a limited multipolarity, with the dollar remaining the dominant currency in international trade and reserves.Overall, China’s diversification of instruments—from the digital yuan to swap networks, and from Panda bonds to cross-border platforms—reflects a comprehensive strategic vision aimed at restructuring the international monetary system and establishing the yuan as a pillar of the global economy in the coming decades. Based on current data, China is likely to gradually move towards a more multipolar financial system through its monetary reforms, expanding the yuan’s role in international trade, and strengthening its position as a major settlement and trade currency within Asia and with economic partners in the Global South. While the yuan may not reach the dollar’s ​​global status in the near or medium term, it is poised to become a cornerstone of a more balanced and stable monetary system.

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