China Accelerates Move Away from the Dollar

Why China sees an opening now

A sharp slide in the dollar and fresh turbulence in United States policy have created a window for China to push the yuan deeper into global finance. The greenback has endured its weakest start to a year since 1973 on key indexes, while the offshore yuan has gained modestly. Foreign inflows into Chinese assets have resumed in fits and starts, and more governments are testing alternatives to the dollar in specific trades. Beijing is moving to seize the moment.

Officials present the strategy in risk management terms. The aim is to reduce dependence on any single sovereign currency, lessen exposure to sanctions, and give Chinese firms and their partners better tools to price, hedge, and settle deals in yuan. The policies build on years of incremental work, from payment infrastructure to commodity market access, and they are being accelerated while confidence in United States fiscal and monetary management wobbles.

Recent data underline both the scale of the challenge and the space for change. The dollar still anchors the system. In the Bank for International Settlements (BIS) triennial survey for 2022, it was on one side of 88 percent of foreign exchange trades, with the yuan near 7 percent. In May, SWIFT data put the yuan at about 3 percent of global payments by value, ranked sixth, while the dollar was close to half and the euro near a quarter. Central banks, though, have diversified reserves. The dollar share is at a two decade low, and the share of gold has risen, especially among emerging markets that seek insurance against policy shocks and sanctions risk.

What Beijing is doing, in detail

The People’s Bank of China has set out a simple message. Excessive reliance on one dominant currency creates vulnerabilities, so China will expand the practical ways in which the yuan can be used and hedged. The central bank plans a center in Shanghai to support international use of the digital yuan. It has also encouraged the launch of yuan foreign exchange futures and related products that give investors more tools to manage currency risk on yuan terms.

Market access is widening alongside that push. Three major mainland exchanges have opened 16 additional futures and options contracts to qualified foreign institutional investors, covering materials such as natural rubber, lead, and tin, on top of earlier steps that broadened foreign access. The Shanghai Futures Exchange has proposed allowing collateral in foreign currencies for trades that are settled in yuan, a technical change that can draw in global hedgers without forcing them to pre fund in yuan. Authorities also approved participation by eligible foreign investors in on exchange options for exchange traded funds and waived a fee to open local accounts that give international financial institutions access to the bond market.

Global banks are responding by expanding services that connect overseas clients to these channels, from commodity brokerage to yuan clearing. Offshore, China has built a network of yuan clearing banks and continued to scale the cross border Interbank Payment System (CIPS), which processes international payments in yuan and links with domestic settlement.

Digital yuan and new pipes

The digital yuan, often referred to as e CNY, is live for retail use inside China and is now being prepared for carefully controlled cross border pilots. The multi central bank mBridge project, developed with the BIS Innovation Hub and several monetary authorities including Hong Kong and the United Arab Emirates, is testing near instant settlement of wholesale transfers with central bank digital currencies. Together with CIPS, this creates a set of payment rails that do not need to pass through dollar based systems. The goal is redundancy, lower costs, and faster settlement for trade and finance that involves Chinese counterparties.

These steps are more than branding. A wider suite of yuan hedging tools, clearer plumbing for international payments, and easier access to local markets can make it practical to price commodities, borrow, and settle in yuan. That supports a larger role for the currency in trade with emerging economies and in commodity markets, even if capital controls and convertibility limits keep the pace measured.

How trade and finance are shifting in Asia

Across Asia, more trade is being settled in local currencies, including the yuan. In Southeast Asia, authorities have promoted local currency transactions and built payment links that allow QR code purchases across borders without touching the dollar. Several countries have currency swap agreements with the People’s Bank of China, and major banks in Thailand, Indonesia, Singapore, and Malaysia connect directly to CIPS. Officials say the share of intra ASEAN trade settled in local currencies has climbed from less than 10 percent in 2019 to more than a quarter. Bilateral trade with China is tilting in the same direction. Cross border yuan receipts and payments for goods between ASEAN and China topped 2 trillion yuan in 2023, more than 30 percent of the bilateral total.

Financial markets are mirroring that shift. Dealers report more demand for currency hedges that bypass the dollar. Instead of pricing every hedge through a dollar leg, firms are pairing the yuan with the Hong Kong dollar, the dirham, the yen, and the euro. Banks in Southeast Asia are setting up desks dedicated to the Chinese currency, and demand for yuan loans is rising for projects with China linked suppliers and buyers.

Beyond Asia, some importers in India and Bangladesh have paid for Russian goods in yuan. More Russian energy cargoes clear in non dollar currencies. Motives vary, from cost savings to sanctions risk, yet the effect is similar. Fewer transactions must route through New York, and companies that sell to, or buy from, China can hold smaller working balances in dollars.

The numbers behind dollar dominance and yuan limits

The dollar remains the system’s anchor because it offers unrivaled liquidity, deep markets for short term funding, and a legal framework trusted by global investors. In the BIS survey cited above, it dominated foreign exchange turnover. Dollar funding still makes up the majority of international debt issuance by non United States borrowers. Commodity benchmarks are mostly priced in dollars, and cross border liabilities at banks are largely dollar denominated.

Reserve managers are nudging the system rather than overturning it. The dollar still accounts for the largest share of official reserves. That share has fallen to a two decade low, and the share of gold has risen, a trend strongest in emerging markets. This tilt toward gold has helped drive prices higher and offers a buffer against exchange rate swings and sanctions.

Private portfolios are shifting too, if slowly. Foreign investors own a smaller slice of the Treasury market than at the peak of globalization, down to about 30 percent from more than half during the global financial crisis. Less foreign demand can push yields higher at the margin. In many emerging economies, households and companies still prefer to hold bank deposits in dollars. China is an outlier. The share of dollar deposits has declined since 2017 as regulators have promoted the yuan in cross border transactions and domestic finance, and as residents gained confidence that they can access yuan based tools to manage risk.

What changed since China’s last push for a global yuan

The current approach reflects lessons from a difficult episode. After the 2008 crisis, China kept a soft peg to the dollar that supported exports, built foreign exchange reserves close to 4 trillion dollars by 2014, and won inclusion of the yuan in the International Monetary Fund Special Drawing Rights basket. The Belt and Road Initiative and large policy bank lending abroad were expected to lift global use of the currency.

Then the policy trilemma came into view. A country cannot hold a fixed exchange rate, free capital flows, and independent monetary policy at the same time. When the Federal Reserve raised interest rates in 2015 and the outlook for China cooled, the yuan looked overvalued. Capital outflows surged in 2016 as households moved savings abroad and state owned companies bought overseas assets. The central bank responded by letting the currency fall, tightening capital controls, and guiding the exchange rate into a managed float that moves with the business cycle.

Since then, China has kept reserves near 3 trillion dollars, limited outbound mergers and acquisitions for years, and allowed more two way movement in the currency. The ambition of a global yuan standard has been replaced by a practical focus, settle a larger share of trade in yuan and build the legal and technical infrastructure that lets partners use the currency without fully opening the capital account.

Energy and commodities, where change is more visible

Commodity trade is often where currency change shows up first. Russia now sells more energy products in local currencies to friendly buyers. Some cargoes settle in yuan, others in the dirham or the ruble. China, India, and Turkey are involved in deals that do not touch the dollar. For buyers and sellers, this reduces the need to hold dollar reserves for working capital and makes it easier to hedge in the same currency as the underlying trade.

Producers in the Gulf are watching these shifts and building options. The petrodollar system still frames oil pricing and reserve management, yet several states are exploring deeper connections with Chinese settlement systems and digital currency pilots. The digital yuan and mBridge offer a path to faster wholesale settlement across borders. A likely path is managed evolution, a gradual expansion of yuan settlement for a slice of oil trade while dollar benchmarks remain the reference for pricing.

China is preparing market infrastructure accordingly. By widening access to commodity futures, allowing foreign currency collateral for yuan settled trades, and scaling clearing capacity, policymakers are inviting global firms to manage commodity price risk on yuan terms. This creates a base for more commodity contracts to be priced and hedged in yuan over time.

BRICS and the Global South, ambition and reality

BRICS governments and many countries in the Global South want more financial autonomy. They have pledged to use local currencies more often in trade, expanded swap lines, and deepened yuan infrastructure through clearing banks and payment links. The renminbi is the most advanced of these options, especially in bilateral trade tied to China’s supply chains and lending.

Progress comes with limits. The yuan is not freely convertible, and China maintains capital controls. The euro faces constraints that limit its appeal as a safe haven outside Europe. Other BRICS currencies are volatile or lack liquid hedging markets. A common currency for a diverse group is a distant prospect. The pathway that is gaining traction is more local currency settlement and collaboration on central bank digital currencies that can interoperate across borders.

Reserve diversification is gradual but persistent. Surveys of central banks point to rising concern about United States politics and fiscal sustainability, and to a tilt toward more gold and some additional euro holdings. Meanwhile, work continues on alternatives to SWIFT and on parallel systems that reduce single point vulnerabilities. The dollar still provides the deepest safe asset pool and the broadest legal protections. The direction of travel points to a more plural system.

What it means for markets

For the United States, the risk is a steady erosion at the edges rather than a sudden loss of status. If more trade is invoiced and settled in other currencies, demand for dollars nudges lower. If foreign buyers take a smaller share of Treasuries, yields rise. A softer dollar can benefit exporters, yet it complicates the task of financing large deficits and anchoring inflation expectations. Confidence in United States institutions and policy steadiness will remain the most important anchors for dollar demand.

For emerging markets, a weaker dollar and better access to non dollar funding and hedging are tailwinds. Local currency bonds in several countries become more attractive when United States rates retreat. Corporates with China linked supply chains can borrow and hedge in yuan without taking on extra basis risk through a dollar leg. Commodity producers that sell to China gain pricing and settlement options that match their customer base.

For China, the opportunity is strategic. Building a credible international currency requires predictable rules, open and deep markets, and legal certainty. Progress on market access, transparency, and the rule of law will determine how fast investors shift allocations. New trading products help. Stable policy and clear communication can matter just as much.

What to watch next

Several signposts will show whether momentum holds. Track the yuan share in the SWIFT payments tracker, participation in CIPS, and volumes in yuan futures and options. Watch how often energy cargoes settle in yuan and whether Gulf producers accept more yuan for oil. Monitor growth in swap lines with the People’s Bank of China and the rollout of e CNY for cross border pilots. Pay attention to the use of yuan loans in emerging economies and to the share of trade invoices in Asia that avoid the dollar.

United States policy choices will shape the other side of the ledger. The fiscal path, the use and scope of financial sanctions, and the steadiness of monetary policy influence global appetite for dollars. Upgrades to dollar based payment infrastructure and clear rules for dollar instruments in digital form, including tokenized deposits and stablecoins, would reinforce incumbency. A more fragmented payments world is taking shape, and China is racing to ensure the yuan is embedded within it.

At a Glance

• The dollar has had its weakest start to a year since 1973, while the yuan has strengthened modestly and drawn new inflows.
• China is opening more futures and options to foreign investors, promoting yuan hedging tools, and planning a digital yuan center in Shanghai.
• CIPS participation and offshore yuan clearing networks continue to expand, giving counterparties more ways to settle in yuan.
• Local currency settlement in Southeast Asia has climbed to more than a quarter of intra regional trade, with growing use of QR based cross border payments.
• BIS and SWIFT data show that the dollar still dominates global finance, while the yuan remains small but is growing steadily.
• After capital outflows in 2016, China tightened capital controls and adopted a managed float, pivoting from a global yuan push to trade settlement in yuan.
• Commodity trade shows the most visible shifts, with more Russian energy sold in non dollar currencies and broader access to yuan commodity markets.
• BRICS countries are expanding local currency use and exploring central bank digital currencies, while central banks diversify reserves toward gold and the euro.
• Key indicators include the yuan’s share of payments, CIPS participation, yuan derivatives volumes, and decisions by Gulf producers on oil settlement.