Cover Story: How the Yuan is Taking Over the Dollar’s Role in Global Trade

In the first half of 2025, the U.S. dollar experienced a dramatic decline against major global currencies, marking what experts have termed its “worst six months in modern history.” This decline is attributed to the trade policies of newly inaugurated U.S. President Donald Trump, especially the renewed focus on “reciprocal tariffs,” alongside deepening doubts concerning U.S. fiscal discipline and the independence of the Federal Reserve. As trust in the dollar wanes, global financial systems have started to seek alternatives, fueling momentum for the internationalization of China’s yuan, or renminbi, especially among institutions previously hesitant to consider it [para. 1][para. 2][para. 3][para. 4].

China’s financial authorities are capitalizing on this shift by pushing for yuan internationalization through various strategies, including roadshows across Southeast Asia and intensified regional integration efforts. Major Chinese banks are promoting yuan-denominated services abroad. International institutions such as the European Central Bank have taken note, with ECB President Christine Lagarde highlighting the impact of U.S. trade policy on global asset correlations and advocating for a stronger international role for the euro. Yet, China’s currency seems to be gathering the most momentum. The yuan has become the world’s second-largest trade finance currency and the third-largest payment currency. The rise of stablecoins—particularly the potential for an offshore yuan-pegged stablecoin—also offers a tech-driven fast track for yuan internationalization [para. 5][para. 6][para. 7][para. 8].

Nevertheless, the path remains challenging. The process is complex, requiring gradual progress and careful balancing of capital controls and market openness, as economists like Yu Yongding point out. While yuan usage and its internationalization index have increased, the currency’s reach is still limited by China’s capital controls, less developed legal systems, and relatively immature financial markets. These limitations persist despite recent reforms and the significant deflation of domestic asset bubbles, which many see as an opportunity for further steps such as greater exchange rate flexibility and cautious capital account liberalization [para. 9][para. 10][para. 11].

Globally, experts foresee a possible tripolar monetary system with the yuan, euro, and dollar sharing influence. China’s network-based approach to expanding the yuan’s use depends on scaling its “ecosystem” of payment infrastructure including the Cross-border Interbank Payment System (CIPS), which now connects 1,700 institutions across 180 countries and handled 175 trillion yuan ($24.5 trillion) in 2024, up 43% year-on-year. There are also 35 yuan clearing banks in 33 jurisdictions and 32 currency swap agreements totaling 4.5 trillion yuan [para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18][para. 19].

Yet, true global circulation remains hampered by frictions in the offshore yuan market, where users often find limited avenues for investment or expenditure. In recent years, progress has been marked by the growth of panda bonds and offshore yuan lending, and initiatives like Hong Kong’s new trade finance facility to support longer-term borrowing. Still, the dollar’s inertia remains, particularly among large state-owned enterprises and in countries with undeveloped banking sectors [para. 20][para. 21][para. 22][para. 23][para. 24][para. 25][para. 26][para. 27][para. 28][para. 29][para. 30].

For the yuan to become a true global currency, China must build deep, robust offshore markets and foster a wider range of financial products. Hong Kong remains the pivotal offshore hub, although its deposit base has stagnated while yuan lending and bond issuance have surged. Efforts to expand this ecosystem include policy reforms, bond issuance abroad, and expanding clearing bank privileges [para. 31][para. 32][para. 33][para. 34][para. 35][para. 36][para. 37][para. 38][para. 39].

Pilot reforms in China’s free trade zones, especially Shanghai’s, focus on expanding cross-border use and capital account convertibility, but the balance between control and openness remains difficult [para. 40][para. 41][para. 42][para. 43][para. 44][para. 45][para. 46][para. 47][para. 48][para. 49]. Broader initiatives such as the integrated cash pool and connect-based schemes like Stock and Bond Connect reflect cautious but ongoing progress in capital account liberalization [para. 50][para. 51][para. 52][para. 53][para. 54][para. 55][para. 56][para. 57][para. 58][para. 59][para. 60].

Emergence of stablecoins is reshaping international currency competition, with the U.S. government backing Bitcoin and regulated digital assets. In response, China’s mBridge and digital yuan projects are building cross-border payment infrastructure, with Hong Kong’s Stablecoin Regulation Ordinance opening new avenues for yuan-linked stablecoins in Belt and Road markets. Analysts suggest that rapid development in this sphere is critical if China wants to avoid losing ground to dollar-pegged stablecoins like USDT [para. 61][para. 62][para. 63][para. 64][para. 65][para. 66][para. 67][para. 68][para. 69][para. 70][para. 71][para. 72][para. 73].