Can Chinese Yuan Become an International Currency?

The possibility of the Chinese yuan dethroning the U.S. dollar and establishing itself as an international currency is a hot topic currently in the global finance market and it raises many eyebrows, particularly as China’s economy is regularly expanding around the world. With Beijing’s hard push for yuan internationalization, supported by initiatives like the Belt and Road, and its creation of an alternative cross-border payment system, this question has become more important: can the Chinese yuan, or renminbi, replace the dollar as the world’s top currency?

Why China Wants the Yuan to Go Global?

China’s aspirations to make the yuan a global currency aren’t only about pride; the country wants a good economic strategy and to reduce dependence on the US dollar. If it gets more value internationally, China could minimize its exposure to foreign sanctions. It will reduce transaction costs in global trade, and get more control over its financial ecosystem. Moreover, if the country can influence the global market through its currency, it will be according to its long-term strategic goals to power up its financial market and give its economy a good boost on the world stage.

China Faces Challenges in Internationalizing the Yuan

Convertibility and Trust

For decades, the U.S. dollar has been the gold standard of global finance. Why? Well, people trust it. They trust in the dollar’s stability and have confidence in the Federal Reserve’s transparent approach to managing it. By comparison, the Chinese yuan faces a lot more skepticism and one big reason is the country’s tight grip on how its currency can be used and exchanged. The Chinese government controls the yuan’s exchange rate and restricts capital flows, meaning it doesn’t get to “roam free” in the foreign exchange markets. So if you’re a global investor who wants a currency you can use freely anytime, anywhere, the yuan’s limited convertibility is a dealbreaker.

Centralized Control vs. Global Transparency

For a global reserve currency, it has to be stable, transparent, and have liquidity. That’s where things get complex for the yuan. The People’s Bank of China (PBoC) has a huge role in managing the currency, giving Beijing a lot of control but making the Chinese currency closely monitored. China did set up an alternative to the dollar-centric SWIFT system—known as CIPS (Cross-Border Interbank Payment System)—to help with yuan-based transactions. But CIPS has no comparison with SWIFT in independence, which limits its global reach. Beijing has also designated a few clearing banks globally to handle yen transactions, it’s a start. Still, these steps haven’t yet made the yen a serious challenger to the dollar regarding global liquidity.

Trade Dominance but Limited Financial Influence

China is a top global trader without a doubt and the yuan is trying to make some inroads in trade finance and cross-border transactions, especially with countries like Russia. In 2023, there were more yuan transactions than dollars in China’s cross-border payments a record $549.9 billion for the first time. But we have to consider the factors of how it happened, a lot of this activity happens thanks to “China Plus” countries, the ones that are either close economic partners or the nations not leaning towards the U.S.-led financial system. The majority of international transactions and reserve holdings still prefer the dollar, so while the yuan is getting some traction, it’s mostly in a limited club.

The “China Plus” Currency Effect

The yuan has earned popularity, but mainly in specific circles. China’s allies or countries that have a somewhat tense relationship with Western financial systems such as Russia, Iran, and a few others—find the yuan useful as an alternative currency. For example, Russia, with heavy sanctions, is more than happy to transact in Chinese currency. But for economies deeply tied to the Western financial ecosystem, like the European Union and Japan, the dollar is still the best choice.

A Few Steps China is Taking to Increase the Yuan’s Appeal

1. Building CIPS as a SWIFT Alternative: China knows that if it wants the yuan to become an international currency, it needs to cut down on reliance on the dollar-dominated SWIFT system. The answer to this is the launch of CIPS: a payment network that allows banks to process transactions in yuan without SWIFT. This move gives a way for the country to create a less vulnerable global financial system to foreign sanctions. But CIPS is still in its early stages and doesn’t have anywhere near the reach or adoption of SWIFT—ambitious, but with a long way to go.
2. Expanding Trade Deals and Payment Systems: China doesn’t want to wait for its currency to catch on; there are continuous trade deals to encourage yuan-denominated transactions. With major trading partners like Russia, Saudi Arabia, and Brazil, the country’s government is negotiating to settle payments in yuan, especially for key resources like oil. Russia, in particular, has jumped on board, with more of its oil exports to China now priced in local currency. Brazil has also recently warmed up to the idea, with some agreements to process payments in the China currency.
3. Pushing the Yuan into New Markets: China’s Belt and Road Initiative (BRI) is a major initiative to nudge more countries to use the yuan. Through the BRI, the funds infrastructure projects in countries that need it, often with a “friendly” nudge to use it in financing infrastructure projects and trade. On top of that, the country has expanded yuan-clearing banks in key regions like Europe and the Middle East. It’s a bold strategy that could pay off—assuming the involved countries are willing to use this payment source and trust it as much as China hopes they will.

Why the Dollar isn’t Losing Its Place Anytime Soon?

Even though there are some positive signs of the Chinese renminbi in the global finance market, the yuan has a long way when we can say it has the same dollar’s reliability, liquidity, and established infrastructure. The U.S. dollar enjoys a special position with its historic petrodollar arrangement, high liquidity, and especially the backing of the U.S. Treasury bond market – a trusted haven for global investors.

To add more, U.S. central bank policies are famous for their stability and transparency, and they give a lot of confidence to international investors. In comparison to that, China’s government-led economic policies, though important in many ways but these usually lack the transparency level preferred by global investors. The dollar’s primacy is therefore more than an economic preference but a reflection of political trust and the perceived strength of the U.S. financial system.

Can the Chinese Yuan Will Rise Further?

For a better future for the Chinese yuan to realistically stand as a global currency, the government would have to allow more freedom in its currency exchange and improve the financial market’s access to foreign investors. Further, the currency should be widely accessible in international markets, so it gives foreign investors a level of security even if they hold it in big amounts. They don’t have to be concerned over sudden policy changes or capital control restrictions by Chinese authorities.

The International Monetary Fund has included the yuan in its Special Drawing Rights basket, but the currency only has a small share of global foreign exchange reserves in contrast to the dollar and the euro. If China’s economy is able to have stable growth while gradually opening up its financial sector, the currency will have a chance to see a rise as the more prominent reserve currency.

The Digital Yuan is China’s Secret Weapon

China’s digital currency or digital renminbi, also abbreviated as the RMB, e-CNY, or DCEP (Digital Currency Electronic Payment), is more of a technological leap in the internationalization game. China’s central bank, the People’s Bank of China has issued this currency and the reason for this digital yuan is to make transactions faster, traceable, and less dependent on foreign payment platforms.

However, international acceptance of the e-CNY will require countries to trust the Chinese state with sensitive data related to payments. It’s a good step, but it alone is unlikely to make the yuan a dominant global currency. While digitalization brings flexibility, there is no change in the fundamentals of currency convertibility, liquidity, or economic stability.

Will the Yuan Replace the Dollar?

Can the yuan replace the dollar as the dominant international currency? In a word: not soon. China’s yuan internationalization strategy is strong, but the road to global acceptance is long. As a currency, it is rising, but to get to the top it needs sustained economic growth, a more open financial system and trust from the international community.

At best the yuan will be a player alongside the dollar and euro in a multi-currency world, instead of dethroning the dollar outright. Many countries, especially in the Global South will use the Chinese currency for specific trade agreements. But they won’t abandon the dollar altogether as it’s too deeply rooted in global finance.

A Bright Future for the Yuan, but Not as the Sole Leader

Chinese yuan’s journey to international prominence is one of progress, not replacement. The currency will most probably become more widely accepted and used in international transactions, especially as China continues to build economic influence through initiatives like the Belt and Road. However, taking over the US dollar is not that easy and requires more than economic clout—there should be trust, transparency, and stability and it comes with time and reform.

In short, it is not a wise approach to completely rely on yuan to process international transactions. The dollar has a strong influence rooted in the global market, and China has to put a lot of effort and implement wise strategies to make the yuan a currency the world trusts on par with the greenback.