Why the Yuan Won’t Replace the U.S. Dollar in Global Reserves

Global Reserve Holdings and Structural Limits

The International Monetary Fund reported that the U.S. dollar made up 57% of global foreign exchange reserves in the first quarter of 2026, marking a one percentage point increase from the previous quarter driven largely by mild dollar appreciation. In contrast, the yuan accounted for just 2% of global reserves during the same period, edging up from 1.95% in the prior quarter. Jean Lu pointed to limited liquidity in offshore markets as the primary obstacle for the Chinese currency. Chinese capital controls restrict the yuan from flowing freely into global markets, with Lu noting that total offshore pools sit below 2 trillion yuan, and nearly half of that total resides in Hong Kong. “There is no way—at least in my career—for the RMB to challenge the USD,” Jean Lu said during the roundtable. However, she suggested that the Chinese currency could soon rival other second-tier global assets. “Compared to the yen or pound, the RMB may have a chance,” she added.

Policy Initiatives and Regional Settlement Growth

Beijing continues to implement policies to expand the yuan’s international footprint, highlighted by the most recent five-year plan released in March, which outlines government goals to broaden international market participation through Panda and Dim Sum bonds—RMB-denominated debt issued inside mainland China and in offshore markets, respectively. The People’s Bank of China has driven these internationalization efforts by appointing major institutions like Deutsche Bank as offshore clearing banks to streamline European access and launching new repo facilities to provide foreign central banks with yuan liquidity. Regional adoption is accelerating rapidly, particularly in Southeast Asia. Standard Chartered reported that settlement volumes between China and Southeast Asia surged 50.7% in 2025 to reach 8.9 trillion yuan, or approximately $1.3 trillion. ASEAN corporations are increasingly utilizing RMB capital markets for hedging and fundraising, demonstrated by Singapore Airlines making its debut in the offshore yuan market in June by issuing a 1.5 billion yuan Dim Sum bond.

Geopolitical Shifts and Supply Chain Expansion

Geopolitical conflicts have further accelerated yuan adoption outside traditional Western financial systems. U.S. sanctions on Russia following the invasion of Ukraine prompted Moscow’s trading partners, including China and India, to adopt the yuan for bilateral trade. Following U.S. strikes on Iran earlier this year, Tehran requested that shipping vessels crossing the Strait of Hormuz settle toll payments in yuan. At the same time, trade between Southeast Asia and China has reached historic highs, aided by infrastructure developments such as the Pinglu Canal connecting southwestern China to the Beibu Gulf, which reduces logistics costs by up to 30%. Patrick Lee, Standard Chartered’s ASEAN and Singapore CEO, noted at the September 29 roundtable that geographical proximity, shared cultural heritage, and ongoing supply chain realignments make ASEAN an attractive destination for Chinese businesses establishing manufacturing ecosystems.

Industrial Overcapacity and Manufacturing Investments

The influx of Chinese trade has presented hurdles for local manufacturers in Southeast Asia, where competitors grapple with overcapacity. Thailand recorded over 2,000 factory closures in 2024 driven by cheap Chinese steel and imports, while Indonesian textile producers faced intense competitive pressure, according to Shay Wester of the Asia Society Policy Institute. Despite these localized manufacturing struggles, Standard Chartered executives maintained that Chinese corporations are establishing long-term manufacturing operations within ASEAN rather than merely exporting excess output. Patrick Lee stated that major state-owned and privately-owned Chinese enterprises are laying down operational roots to support the upskilling and upgrading of ASEAN economies. Jean Lu dismissed assertions that China is simply dumping industrial overcapacity abroad, emphasizing that the threat of trade restrictions and tariffs has motivated international markets to invite Chinese manufacturing partnerships to construct local industrial capacity and train domestic workforces.