China almost a third of its trade of 6,2 trillion dollars realized in yuan instead of dollars - compared to 20 percent in 2022. Will the Chinese manage to "suppress" the dollar and reduce dependence on the American currency?
China's effort to reduce its dependence on the US dollar crystallized during the global financial crisis of 2008–2009.
Alarmed by aggressive money printing by the U.S. Federal Reserve, which threatened the value of Beijing's $1,9 trillion in foreign assets, the People's Bank of China (PBOC) launched a pilot program in July 2009 to "settle" cross-border trade in yuan or renminbi. Deutsche says.
That pilot program was the prelude to a 16-year campaign that has resulted in the yuan now being used for 30 percent of China's $6,2 trillion global trade in goods, China's central bank deputy governor, Zhu Hexin, said at an economic summit in June.
If all cross-border payments are included - including bond purchases and foreign investments - the yuan's share rises to 53 percent, with it "leaping" China's dollar trade for the first time in 2023.
Last year, the yuan briefly overtook the euro as the second most used currency in global trade transactions. The share of Chinese currency in global foreign exchange reserves also reached the highest level ever in the second quarter of this year (2,4 percent), the International Monetary Fund (IMF) announced in October.
The yuan's global role is growing stronger – but with limitations
While the BRICS countries have recently explored alternatives to the dollar, including proposals to establish a common currency, China has taken a more pragmatic course, gradually building the role of the yuan in global trade while maintaining control over currency transactions.
"China wants the yuan to be internationalized as a trade currency - for the real economy. It is less interested in the yuan becoming a financial currency," Miguel Otero-Iglesias, a senior fellow at the Royal Elcano Institute in Madrid, explains to DW.
If Beijing were to allow the yuan to be used in global financial markets for capital flows, investments and financial instruments, as well as for trade, it would reduce the Chinese Communist Party's control over the domestic credit system, Otero-Iglesias points out, saying:
"Beijing believes that finance must be the servant, not the master, of the real economy."
The media often portrays the yuan's recent rise in value 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 over 58 percent of international transactions and foreign exchange reserves.
But Dan Wang, China director at political risk consultancy Eurasia Group, believes the real situation is somewhat more subdued.
"Beijing has never called it dedollarization," Wang tells DW. "A more accurate description of China's intentions is to regionalize the yuan."
Over the past three years, China has used its enormous economic influence and the geopolitical fallout from the war in Ukraine to secure favorable energy and commodity arrangements – including deep discounts from Russia – with a growing share of that exchange settled in yuan.
"Over time, especially when China has bargaining power, it could demand an even larger share (of yuan trade). This is what Chinese state-owned enterprises are already doing with foreign commodity suppliers," Wang explains.
The key role of the yuan in debt financing
Another pillar of Beijing's efforts to encourage the use of the yuan is foreign lending, which "embeds" the Chinese currency into the debt structures of developing countries.
Chinese banks' foreign investment in yuan - loans, deposits and bonds - has quadrupled to $480 billion in five years, according to the Financial Times, adding to China's share of "hard" lending by about $1 trillion through China's Belt and Road Initiative (BRI).
With yuan interest rates 200 to 300 basis points below the dollar, the Financial Times business daily notes that Kenya, Angola and Ethiopia have "converted" their old dollar debts into yuan this year, while Indonesia, Slovenia and Kazakhstan are now issuing bonds in the Chinese currency.
Beyond trade and lending, Beijing has built a third line of defense: a separate financial architecture that can operate independently of dollar-dominated systems. At its center is CIPS, the Chinese Cross-Border Interbank Payments System, which offers an alternative to SWIFT for international transactions.
Yuan clearinghouses have opened in major financial centers such as Singapore, London, and Frankfurt. The People’s Bank of China is also piloting a digital yuan, a central bank digital currency (CBDC). With access extended to more than 20 countries, the digital yuan should further simplify cross-border payments and reduce dependence on Western banks.
"It could be another channel through which China internationalizes its currency, by pioneering the vanguard of digital sovereign money," Otero-Iglesias told DW.
China has also signed currency swap agreements with more than 50 countries. Those agreements allow central banks to "switch" their local currencies into yuan on demand, giving countries like Russia and Iran a key safeguard against U.S. sanctions that block access to the dollar.
Beijing will maintain tight control over the yuan
Unlike Western currencies, the yuan remains tightly controlled by Beijing and cannot be freely exchanged for other currencies without government oversight.
China's domestic credit system is still largely run by state-owned banks, which are under political supervision. Beijing is wary because it believes that allowing an unrestricted flow of money in and out of the country could expose the Chinese currency to speculative attacks and other foreign influences. Therefore, full convertibility remains until further notice - excluded.
"Beijing will not take a liberal approach," emphasizes Otero-Iglesias. "The internationalization of the yuan would follow the logic of command and control of the Chinese Communist Party."
But without full convertibility, the yuan is unlikely to become the dominant financial currency for global investment or reserves. Beijing's cautious strategy could limit how far the yuan can extend.
Efforts to expand yuan-based trade also face obstacles due to China's own economic imbalances. Domestic demand is weakening, private consumers and companies are spending less, partly due to the deterioration of the real estate market and the crash that occurred.
China's factories are producing more than the country actually needs, so Beijing has to rely more on exports to drive growth in its economy. Without a consistent demand side, the fallout from US President Donald Trump's tariff war could halt growth in yuan trading volumes.
"Growth must come from abroad," believes Wang from the Eurasia Group. "This means that global trade now becomes even more important for China."
And if China demands that more business be done in its currency, trading partners must be ready to accept that, which analysts say will require greater trust, transparent institutions and a stronger economy.
