China's currency, the yuan, has achieved a significant milestone, now settling over half of the country's cross-border transactions. This development marks a pivotal moment in Beijing's long-term strategy to increase the international use of its currency, though significant hurdles remain before it can challenge the U.S. dollar's global dominance.
In 2023, the yuan was used in 53% of all of China's cross-border payments, which includes trade, foreign investment, and bond purchases, surpassing the dollar's share for the first time. In trade specifically, nearly one-third of China's massive $6.2 trillion in global goods trade is now settled in its own currency, a substantial increase from just 20% in 2022.
Key Takeaways
- The yuan now settles 53% of China's total cross-border payments, overtaking the U.S. dollar's share for the first time in 2023.
- Nearly 30% of China's $6.2 trillion in annual goods trade is now conducted in yuan.
- Despite its growth in trade, the yuan makes up only 2.4% of global currency reserves, far behind the dollar's 58%.
- China prioritizes the yuan's role in the real economy (trade) over its use as a global financial currency, maintaining strict capital controls.
- A separate financial infrastructure, including the CIPS payment system and a digital yuan, is being built to reduce reliance on Western systems.
A Deliberate Strategy Unfolds
The push to internationalize the yuan, also known as the renminbi, is not a recent development. It began in earnest following the 2008 global financial crisis, when concerns grew in Beijing about its heavy reliance on the U.S. dollar. The People's Bank of China (PBOC) initiated a pilot program in July 2009 to allow for cross-border trade settlement in its own currency.
Sixteen years later, that initiative has gained considerable momentum. According to PBOC Deputy Governor Zhu Hexin, the share of trade settled in yuan has reached 30%. This steady progress reflects a calculated approach by Chinese authorities.
From Regionalization to Global Ambition
Analysts suggest Beijing's primary goal is not necessarily to dethrone the dollar overnight, but rather to establish the yuan as a dominant regional currency, particularly within the Global South. "A more accurate description of China's intention is the regionalization of the yuan," said Dan Wang, China director at Eurasia Group, a political risk consultancy. This involves leveraging China's economic power to encourage trading partners to adopt its currency.
This strategy is evident in recent deals for energy and commodities. China has increasingly used its negotiating power to settle purchases from countries like Russia in yuan, often securing favorable terms and discounts in the process. State-owned enterprises are reportedly leading this charge, asking foreign suppliers to accept a higher ratio of payments in the Chinese currency.
Building an Alternative Financial System
Beyond encouraging its use in trade, China is actively constructing a parallel financial architecture to operate independently of the dollar-centric global system. This multi-pronged approach involves creating new payment systems, establishing currency hubs, and pioneering digital currency technology.
Yuan by the Numbers
- 5.8%: The yuan's share of the global trade finance market in 2023, briefly overtaking the euro.
- 82%: The U.S. dollar's dominant share of the same market.
- 2.4%: The yuan's share of global currency reserves, an all-time high but still minimal.
- 58%: The U.S. dollar's share of global currency reserves.
The CIPS Alternative
At the core of this effort is the Cross-Border Interbank Payment System (CIPS). Launched as an alternative to the SWIFT messaging network that underpins most international bank transactions, CIPS provides a direct channel for yuan-denominated payments. Alongside CIPS, China has established yuan clearing hubs in major financial centers like Singapore, London, and Frankfurt to facilitate smoother transactions.
The Digital Frontier
The PBOC is also at the forefront of central bank digital currency (CBDC) development with its digital yuan pilot. Now accessible in over 20 countries, the e-CNY is designed to streamline cross-border payments further, potentially reducing the role of Western commercial banks as intermediaries in international trade.
"This could be another channel whereby China internationalizes its currency by being a pioneer at the avant-garde of digital sovereign money."
- Miguel Otero-Iglesias, senior fellow at the Elcano Royal Institute
Additionally, China has signed currency swap agreements with more than 50 countries. These deals allow central banks to exchange their local currency for yuan, providing a crucial buffer for nations like Russia and Iran that face U.S. sanctions and have limited access to dollars.
The Limits of Control
Despite these advancements, the yuan's path to becoming a true global reserve currency is blocked by a significant, self-imposed obstacle: strict capital controls. Unlike the dollar or the euro, the yuan is not fully convertible and cannot be freely exchanged without government oversight. Beijing remains wary of opening its financial system to the volatility of global capital flows, fearing it could lead to speculative attacks and a loss of economic control.
This cautious stance is intentional. "China wants the yuan to become internationalized for trade — for the real economy," explained Miguel Otero-Iglesias. "It is less interested in the yuan becoming a financial currency.” Beijing's philosophy is that finance should serve the real economy, not dominate it.
This command-and-control approach means that while the yuan's use in trade may continue to grow, its role as a currency for global investment and reserves will likely remain limited. International investors and central banks prioritize currencies that are freely convertible, stable, and backed by transparent institutions and the rule of law.
Economic Headwinds at Home
The campaign to promote the yuan also faces challenges from within China's own economy. Weakening domestic demand, fueled by a persistent crisis in the real estate sector, means Chinese factories are producing more goods than the country can consume. This makes the economy increasingly reliant on exports to sustain growth.
This dependence on foreign markets creates a dilemma. While China wants more of its trade settled in yuan, it needs its trading partners to be willing and able to accept it. Building that level of trust requires more than just economic might; it requires a strong, transparent, and predictable economic environment, something that becomes more challenging as domestic issues mount.
As Dan Wang of Eurasia Group noted, future growth in yuan usage "has to come from overseas." This places even greater importance on global trade for China's economic stability, at a time when geopolitical tensions and trade disputes continue to simmer. The yuan's journey has reached a new stage, but the final destination remains far from certain.
