Analysis: Dollar’s Pain Is Yuan’s Gain

1. China's push to internationalize the yuan has entered a more difficult phase, where expanding the currency's global use requires more than simply settling trade in yuan. For over a decade, the yuan's international use mainly expanded through cross-border trade settlement, but this alone is insufficient unless yuan liquidity can circulate more freely through global investment and financing channels. Geopolitical fragmentation and weakening confidence in dollar assets are creating new momentum for the yuan to evolve beyond a settlement currency into a financing, pricing, and reserve currency. [para. 1][para. 2][para. 3]

2. Former People’s Bank of China Governor Zhou Xiaochuan stated that the current transformation of the international monetary system is being driven largely by the U.S., citing tariffs, sanctions, and geopolitical conflicts that have eroded global trust in the dollar. A survey by the Association of German Chambers of Commerce and Industry found that German companies' willingness to invest in the U.S. had weakened due to tariff uncertainty, while attention shifted toward China and other Asian economies. Experts see a growing opportunity to position the yuan as a low-cost financing currency, as China’s interest rates remain comparatively low among major currencies. [para. 4][para. 5][para. 6][para. 7]

3. The yuan's financing advantage is visible in cross-border markets: it has become one of the world's top three trade financing currencies, and issuance of yuan-denominated bonds by foreign entities has accelerated sharply. In the first four months of 2026 alone, panda bond issuance on the Chinese mainland exceeded 100 billion yuan ($14.7 billion), while Hong Kong dim sum bond issuance topped 310 billion yuan. Beyond funding costs, investors are increasingly treating yuan assets as a diversification tool due to the historically low correlation of Chinese assets with U.S. markets. [para. 8][para. 9]

4. The yuan’s exchange-rate stability has reinforced its appeal. After falling to 7.35 per dollar following a new round of U.S. tariffs in April 2025, the yuan rebounded as China's trade surplus remained resilient, appreciating nearly 7.5% by April 2026. Even during the recent U.S.-Israel war with Iran, the currency weakened only marginally against the dollar. [para. 10]

5. Beijing has rolled out measures to support wider yuan circulation. Regulators have expanded cross-border lending quotas, updated rules for overseas yuan financing, and opened China’s government bond futures market to qualified foreign institutional investors for hedging purposes. Allowing foreign investors to trade government bond futures gives them an additional tool to manage risk in yuan bond holdings, reducing the need to cut positions during periods of volatility. [para. 12][para. 13][para. 14]

6. Despite these measures, important gaps remain. Andrew Batchelor, head of ForexClear at London Stock Exchange Group, noted that the yuan is not yet a payment-versus-payment settlement currency within the global Continuous Linked Settlement system, which increases settlement risk and limits the scale of yuan business some banks are willing to conduct. [para. 15]

7. Another challenge is pricing power. Chinese economists argue that China’s role as one of the world’s largest commodity importers and a dominant manufacturing power should eventually translate into greater yuan use in trade pricing, not just settlement. The idea of a future “petroyuan” has gained renewed attention following the U.S.-Israel-Iran conflict. Deutsche Bank AG said in a recent report that geopolitical tensions could deepen cracks in the petrodollar system and encourage greater use of the yuan in energy trade. [para. 16][para. 17]

8. Yet economists caution that pricing power is far harder to build than settlement infrastructure. Miao Yanliang, chief strategist at China International Capital Corp. Ltd., said that dominant pricing currencies have become “vehicle currencies” used even between third countries — a role still overwhelmingly occupied by the dollar. This helps explain why Beijing’s ambitions remain constrained by structural realities. The yuan’s share of global foreign-exchange reserves has risen modestly but remains below 2%, far behind the dollar. [para. 18][para. 19]

9. The core constraint is whether global investors are prepared to hold and recycle yuan assets at scale, which depends on the depth, liquidity, and credibility of China’s financial markets. The broader geopolitical environment under the Trump administration—marked by tariffs, sanctions, and conflicts such as the U.S.-Israel war with Iran—has created both challenges and opportunities for the yuan’s internationalization. [para. 20][para. 3][para. 4][para. 5][para. 10]