Beijing’s efforts to internationalize the renminbi (RMB), or yuan, are proceeding incrementally, driven as much by geopolitical considerations as by economic goals. While the currency is seeing increased use in trade settlements, particularly with countries seeking alternatives to the U.S. Dollar, significant hurdles remain, including capital controls and concerns about currency stability.
The yuan has gained traction as a settlement currency in China’s international trade, rising to account for 39% of China’s goods trade in the first three quarters of , up from just 4% in before the U.S.-China trade war. This increase is attributed to a “dramatic change in the global geopolitical landscape,” according to analysis by Betty Wang, head of North Asia research at Oxford Economics. However, despite this growth, daily transactions cleared through China’s Cross-Border Interbank Payment System – averaging around 700 billion yuan (nearly US$100 billion) – remain significantly smaller than the roughly US$2 trillion routed daily through the U.S. Dollar-based Clearing House Interbank Payments System.
China is actively pursuing several strategies to expand the yuan’s reach. These include expanding currency swap arrangements with trading partners and increasing the use of the yuan in trade settlement, especially with commodity exporters. Lending in yuan to countries in the Global South is also a key component, positioning China as an alternative financial provider for nations facing sanctions or seeking to reduce their reliance on the dollar. Earlier this month, China pledged $9.2 billion in credit to Latin American leaders, stipulating that the funds be borrowed in yuan, a departure from previous U.S. Dollar-denominated loans.
However, the path to widespread internationalization is fraught with challenges. Maintaining currency stability is paramount. “Wild swings raise costs of hedging, uncertainties, and reduce the appeal of holding the yuan as a reserve currency,” noted ING’s Song. The risk of capital flight also looms large. “There are a lot of Chinese who would love to get their money out of the country if they could,” said Lin from The Asia Group, highlighting the constraints imposed by China’s capital controls.
The potential consequences of unchecked capital outflow are severe. If China were to exhaust its foreign reserves, it would lose its ability to import dollar-denominated commodities, attract foreign direct investment (FDI), or defend the currency, a scenario described by Lin as a “nightmare for China.” This concern is a major factor limiting the pace of liberalization.
Beyond trade and finance, the push for yuan internationalization is viewed as a tool of geopolitical influence. As more countries adopt the yuan for investment and capital-raising, Beijing gains greater control over capital flows and can direct funds toward its strategic priorities. “This currency liberalisation attempt is essentially how China expands its influence across not only the trade domain or the security domain, but increasingly the currency domain as well,” Lin explained.
The internationalization of the RMB is also linked to China’s efforts to create alternatives to the SWIFT system, the dominant messaging network for international financial transactions. The ability for countries to operate “more or less as normal” if cut off from SWIFT is a key consideration for China, as it seeks to mitigate vulnerability to financial coercion. This is driving investment in alternative financial infrastructure, such as the Cross-Border Interbank Payment System (CIPS).
Despite China’s ambitions, the yuan’s global footprint remains limited. Yuan-denominated debt issuance in international markets accounts for only 0.8% of the global market share, despite modest gains in recent years. The currency’s convertibility remains a significant obstacle, unlike the euro, the yuan has not fully capitalized on the dollar’s recent fluctuations.
Experts caution that the process of internationalizing the yuan will be lengthy and gradual. “I think it’s likely going to happen – and China is signalling that, but it will probably be many, many years. And even now, China is very hesitant to open up the capital control,” Lin stated. The next steps are expected to be incremental, focusing on expanding swap arrangements and increasing yuan usage in trade, particularly with commodity exporters. The long-term success of China’s yuan strategy will depend on its ability to balance the desire for greater international influence with the need to maintain financial stability and control.
