Internationalization of the renminbi: towards a global multi-currency system

The Chinese renminbi has recently expanded its global footprint, particularly in the capital and commodity markets – the cornerstones of the US dollar’s global supremacy. This has reignited the debate over whether the renminbi will one day dethrone the dollar as the world’s top reserve currency. While few expect this to happen anytime soon, some investors are reconsidering their exposure to the dollar and looking for alternatives.

Contrary to conventional wisdom, Beijing’s monetary policy may not be aimed at toppling the dollar. The goal is more likely to ensure that the dollar system cannot be used against it.

The crucial question is not whether the renminbi can replace the dollar, but whether the global currency system becomes less concentrated.

What happened to spark the debate?

• In late September, China began sharply increasing its imports of soybeans from Argentina, following similar steps by Brazil, with most of the trade handled in renminbi.
• In October:
  • Australia’s BHP Billiton, one of the world’s largest iron ore miners, has agreed with Chinese buyers to settle 30% of its spot iron ore trade (equivalent to 6% of annual global iron ore trade) in renminbi instead of dollars.
  • Indonesia has issued its first offshore bond (‘dim sum’), worth RMB 6 billion (~€851 million). The issue was 3.7 times oversubscribed
  • Traders selling Russian oil to India have started asking Indian state refiners to do so pay in Chinese Yuan
  • The People’s Bank of China (PBoC) authorized First Abu Dhabi Bank (FAB) as a renminbi clearing bank in the United Arab Emirates (the first local bank to acquire this role in the region), effectively connecting Emirati banks to the Chinese payment system.
• In November:
  • China has issued a government bond worth $4 billion in Hong Kong 30 times oversubscribed. The issue price was between zero and three basis points compared to US government bonds. That was less than the 1 to 3 basis point spread of China’s dollar-denominated government bonds issued in Saudi Arabia in November 2024.
  • China and South Korea have signed a five-year currency swap worth RMB 400 billion ($56.3 billion), the latest in a series of such arrangements following similar deals with Turkey in June, Thailand in August, and the EU, Switzerland and Hungary in September.
  • Other step-by-step steps include Ethiopia, Sri Lanka And Kenya converting their dollar-denominated debt into renminbi-denominated bonds, and Argentina pay the International Monetary Fund’s debt in renminbi.

The tactics of cutting salami

These creeping moves to internationalize the renminbi and erode the dollar’s dominance are not newand they underscore the progress of Beijing’s “salami-slicing” tactics.

By further expanding the use of the renminbi into the resources sector, Beijing is doing just that shake up a linchpin of dollar supremacy.

China’s success in issuing dollar government bonds at razor-thin spreads over US government bonds underlines the progress of its “one dollar for one dollar” strategy to become a dollar liquidity manager. This approach diverts liquidity away from the US, which needs large, sustained financing given its current account and budget deficits.

The movements too deepen the internationalization of the renminbi by encouraging emerging countries to convert dollar-denominated debt into renminbi-denominated debt.

Granted, each salami slice is small on its own. Taken together, however, they send the signal that the renminbi is becoming increasingly international and are breaking down the supremacy of the dollar by building a new system. renminbi-dominated system parallel to the dollar.

If more countries join these initiatives, China could build a large, liquid offshore renminbi market, leading to a gradual migration of working capital and trade finance to a multi-currency system.

Beijing is developing a process to change the world’s currency systems, not through grand pronouncements or by clashing with the dollar, but through thousands of individual purchasing and payment decisions.

TINA protects the dollar

Despite all the talk of de-dollarization, it is unlikely that a seismic currency shift will happen anytime soon, simply because there is currently no alternative to the dollar (a phenomenon called ‘TINA’).

The BIS 2025 Triennial Central Bank Questionnaire shows that the dollar still dominates global currency markets, accounting for 89.2% of all transactions, up from 88.4% in 2022. Although the renminbi has risen to become the fifth most traded currency in the world, its share is small at 8.5% (see Figure 1).

Data from the international SWIFT payment system shows a similar picture. The renminbi accounted for just 3.2% of global payments value in September, compared to the dollar’s 47.8%. This suggests that despite the increased momentum, the internationalization of the renminbi in recent years has been incremental and not revolutionary.

Economic fundamentals argue that there is no alternative to replace the dollar in the medium term. The US current account deficit (reflecting the savings deficit) must be offset by a capital account surplus, with resources coming from countries that have current account surpluses. As a result, most of the world’s savings surplus is invested in US government bonds – a deep, liquid market that can absorb these surpluses.

If foreign countries (and investors) want to stop financing the U.S. deficit (or buying U.S. assets), they must stop generating current account surpluses by boosting domestic spending and investment. This is unlikely to happen anytime soon, so there will continue to be demand for US dollar assets.

Except for a few months in early 2025, foreign investors have been net buyers of U.S. assets (see Figure 2). The ‘TINA’ phenomenon is reinforced by China’s inconvertible capital account and incomplete financial liberalization. These characteristics keep the renminbi market small and illiquid, depriving it of the ability to hedge risks.

Not to overthrow the dollar

Beijing has prioritized policy control – especially monetary sovereignty (i.e. controlling interest rates) – over open markets. Currency policy has thus focused on the functional roles of the renminbi (medium of exchange, invoicing and financing) rather than on fundamental roles such as store of value and reserve capital.

However, China does not want to completely relinquish control over the exchange rate. It has opted for limited capital account convertibility at the cost of limiting the reach of the renminbi to challenge the supremacy of the dollar.¹

The policy goal is not to overthrow the dollar, but simply to ensure that the dollar-dominated system cannot be used against China; it is a defensive move. After Russian reserves were frozen in 2022 following the outbreak of the conflict in Ukraine, this is no longer a theoretical risk. Gold in the vault and a broader mix of dollar and non-dollar currencies are sensible countermeasures.

The ongoing internationalization of the renminbi has reshaped the ‘plumbing’ of the system, with potentially significant consequences for the longer-term global monetary order.

China’s ‘plumbing’ – the renminbi-dominated Cross-border Interbank Payment System (CIPS), cross-border swap lines, offshore renminbi clearing banks and offshore renminbi bond markets – is small for now. But it is growing and offering the world an option for a non-dollar financial infrastructure.

While global markets can still price goods and commodities in dollars, and countries can hold most of their reserves in dollars, they can also increasingly settle some flows in renminbi, finance projects with dim sum bonds, and add more renminbi to savings and reserves.

Where does this leave the dollar?

The dollar still leads in payments, savings, financing and swap-line backstops. The SWIFT and BIS currency trading rankings show how anchored the position is.

Much of the talk about de-dollarization confuses the “use” (or functional role) of money with its “centrality” (or fundamental role). An increase in the use of non-dollars – for example for renminbi transactions or financing agreements – does not in itself threaten the central position of the dollar, which is anchored in US capital markets, the rule of law, deep collateral chains and the credibility of the US Federal Reserve. The renminbi cannot challenge this at the moment.

However, the question of whether and when the renminbi can replace the dollar misses the point.

A better question is whether the global system becomes more stable through a multi-currency framework that can provide an alternative financial infrastructure.

When strategically positioning the currency, investors should consider the relative weighting of the dollar and the renminbi, rather than choosing between one or the other.

[1] This is simply the ‘impossible trinity’, as China is forced to choose between control over the interest rate or the exchange rate, but not both, through an open capital account. By opting for limited opening of capital accounts, Beijing is trying to maintain some control over the exchange rate, at the expense of the currency’s convertibility.