China’s drive to reduce dependence on the US dollar became evident during the global financial crisis of 2008–2009.
Concerned by the US Federal Reserve’s aggressive money printing, which threatened the value of Beijing’s $1.9 trillion (€1.65 trillion) overseas assets, the People’s Bank of China (PBOC) launched a pilot scheme in July 2009 to settle cross-border trade in yuan or renminbi for the first time.
The pilot marked the beginning of a 16-year campaign under which the yuan is now used to settle 30% of China’s $6.2 trillion global merchandise trade, Zhu Hexin, deputy governor of the Chinese central bank, told an economic summit in June.
If you count all cross-border payments – including bond purchases and foreign investment – the yuan’s share rises to 53%, overtaking China’s dollar trade for the first time in 2023.
In another milestone, the yuan overtook the euro as the second-most used currency in global trade finance last year, though with 5.8% versus the dollar’s 82%, according to SWIFT, the global messaging network used by banks.
The Yuan’s share in global currency reserves also reached an all-time high of 2.4% in the second quarter of the year, the International Monetary Fund (IMF) said in October.
The yuan’s global role grows across borders
While the BRICS countries of the Global South have recently explored alternatives to the dollar, including proposals for a common currency, China has taken a more pragmatic approach, steadily building up the yuan’s role in global trade while maintaining deliberate control over currency exchange.
“China wants the yuan to be internationalized for trade — for the real economy,” Miguel Otero-Iglesias, senior fellow at the Elcano Royal Institute in Madrid, Spain, told DW. “It has less interest in the yuan becoming a financial currency.”
Otero-Iglesias said if Beijing allows the yuan to be used for capital flows, investments and financial instruments as well as trade in global financial markets, it would reduce the Chinese Communist Party’s control over the domestic credit system.
“Beijing believes that finance needs to become the slave, not the master, of the real economy,” he said.
Headlines often frame the yuan’s recent rise as a direct challenge to the dominance of the dollar, which has been the global reserve currency for nearly 80 years and is still used in more than 58% of international transactions and foreign exchange reserves.
But Dan Wang, China director at political risk consultancy Eurasia Group, sees a more sober reality.
“Beijing has never called it dedollarization,” Wang told DW. “A more accurate description of China’s intentions is regionalization of the yuan [toward the Global South],
Over the past three years, China has taken advantage of its immense economic clout and the geopolitical fallout from the Ukraine war to secure favorable energy and commodity deals – including deep discounting from Russia – with a growing stake in the yuan.
“Over time, especially when China has negotiating power, it may demand a greater proportion [of trade in yuan]“Chinese state-owned enterprises are already doing the same with foreign commodity suppliers,” Wang said.
Yuan’s key role in debt financing
The second pillar of Beijing’s efforts to promote the yuan’s use is foreign borrowing, embedding the Chinese currency in the debt structures of developing countries.
According to the , Chinese banks’ external yuan holdings – loans, deposits and bonds – have quadrupled in five years to $480 billion. financial TimesThat represents a growing portion of China’s nearly $1 trillion external debt, financed through the country’s Belt and Road Initiative (BRI).
With yuan interest rates 200-300 basis points below dollar levels, the business daily noted that Kenya, Angola and Ethiopia have converted old dollar debt into yuan this year, while Indonesia, Slovenia and Kazakhstan are now issuing bonds in the Chinese currency.
Beyond trade and lending, Beijing has created a third line of defense: a separate financial architecture that can operate independently of dollar-dominated systems. At its heart is CIPS, China’s cross-border interbank payment system, which provides an alternative to SWIFT for international transactions.
Yuan clearing hubs have been opened in major financial centers such as Singapore, London and Frankfurt. The PBOC is also piloting the digital yuan, a central bank digital currency (CBDC). With reach expanding to over 20 countries, the digital yuan is set to further streamline cross-border payments and reduce reliance on Western banks.
“This could be another channel whereby China can internationalize its currency by becoming a leader in pioneering digital sovereign money,” Otero-Iglesias told DW.
China has also signed currency swap agreements with more than 50 countries. These agreements enable central banks to exchange their local currencies for the yuan on demand, giving countries like Russia and Iran a vital hedge against US sanctions that have blocked access to the dollar.
They are also a boon for countries like Argentina, Pakistan and Türkiye that depend on Chinese trade and investment.
Beijing will maintain a strong hold on the yuan
Unlike Western currencies, the yuan is strictly managed by Beijing and cannot be exchanged for other currencies without government oversight.
China’s domestic credit system is still largely directed by state-owned banks under political supervision. Beijing is wary that allowing the unrestricted flow of money in and out of the country could leave the Chinese currency exposed to speculative attacks and other foreign influence. Hence full convertibility remains off the table.
“Beijing is not going to take a lenient stance,” Otero-Iglesias told DW. “The internationalization of the yuan would follow the Chinese Communist Party’s logic of command and control.”
But without full convertibility, the yuan is unlikely to become the dominant financial currency used for global investments and reserves. Indeed, Beijing’s cautious strategy may limit how far the yuan can go.
Efforts to expand yuan-based trade also face headwinds from China’s own economic imbalances. Domestic demand is weakening, with consumers and businesses spending less, partly due to worsening real estate declines.
Chinese factories are producing more than the country needs, so Beijing must rely more on exports to prop up its economy. Without sustained foreign demand, yuan-denominated trade growth could stall as a result of U.S. President Donald Trump’s tariff war.
“Growth must come from overseas,” said Eurasia Group’s Wang. “This means global trade has now become even more important for China.”
If China demands that more deals be settled in its own currency, trading partners must be willing to accept it, which analysts say will require greater trust, transparent institutions and a stronger economy.
Edited by: Uwe Hessler