Is the Chinese renminbi an alternative to the U.S. dollar?

The U.S. dollar is by far the world’s main reserve currency and is held by central banks and used in most international trade, finance, and investment. An alternative to the dollar would mean another currency that could rival or replace the dollar’s role in global finance and trade. The Europeans have been slow to develop the Euro and a proper bond market and the convoluted bureaucracy of the EU will likely not lead to an alternative using the Euro. The top four currencies (USD, EUR, JPY, GBP) constitute the vast majority of all exchange, with the USD far exceeding others in daily turnover. China wants to get involved and get important. The yuan / renminbi’s international use has grown through China’s trade ties, offshore markets, and payment systems such as CIPS, but it remains much smaller than the dollar’s footprint. China’s Cross-Border Interbank Payment System (CIPS) is an authorized, central, and independent clearing/settlement mechanism for RMB-denominated, cross-border financial transactions. Launched in 2015, it acts as a direct alternative to SWIFT, enabling faster transactions and reducing reliance on the US-dollar-dominated system. However, China’s share of global foreign-exchange reserves and official international use is still very low compared with the dollar, euro, and even some other currencies.

At the same time, China wants the renminbi to become more widely used internationally. This includes encouraging trade settlements in renminbi (including oil sales in so-called “petro-yuan” deals). China and Saudi Arabia have engaged in transactions using the Chinese renminbi for oil payments and have established frameworks for further renminbi-based trade. The People’s Bank of China and the Saudi Central Bank signed a 3-year local currency swap agreement in late 2023 worth 50 billion renminbi (approx. $6.93 billion) to strengthen financial cooperation. Some oil deals allow for settlement in renminbi, with options for Saudi Arabia to convert excess yuan into gold through the Shanghai Gold Exchange. This shift helps China internationalize the yuan and reduces reliance on the US dollar, while Saudi Arabia seeks to diversify its economy and strengthen ties with Beijing. While usage is increasing, the U.S. dollar still dominates, but this marks a gradual shift in bilateral trade in an increasingly polarized world.

China is also keen on promoting renminbi bonds (e.g., dim sum bonds) and financial instruments abroad. Dim sum bonds are bonds denominated in Chinese renminbi, but issued and settled outside mainland China, primarily in Hong Kong, but also listed in places like Luxembourg, offering international investors access to the yuan market while helping China promote the RMB’s global use, distinct from onshore Panda bonds, issued within mainland China by foreign entities. They function as an offshore RMB market, allowing companies to raise funds in RMB without mainland China’s capital controls, with the name referencing Hong Kong’s popular small-dish cuisine.

But analysts emphasize that replacing or seriously challenging the dollar is a long-term and difficult task, partly due to China’s capital controls, limited convertibility of the renminbi, and smaller, less liquid financial markets relative to the U.S. financial system.

At the same time, some countries are diversifying away from the dollar somewhat, including using the renminbi more for trade or reserves, especially in trade with China. However, most economists see the world moving toward a more multipolar currency system with several important currencies rather than the renminbi replacing the dollar outright in the near to medium term.

Chinese President Xi Jinping wants the renminbi to become a powerful currency that ultimately replaces the dollar as the global reserve currency. The remarks, shared in the Communist Party’s flagship journal, were originally part of a speech Xi delivered privately to regional officials in 2024. The new release may have something to do with the dollar weakening since Trump returned to office. But, given that the renminbi accounts for less than 2% of global currency reserves, is this remotely realistic? There is an ongoing debate over whether the dollar’s status as the global currency is under threat. On the one hand, the value of the dollar has declined by roughly 12% since Trump returned to office last year. The share of USD in central bank reserves is at a two-decade low. And some countries are turning away from the dollar in commodity trading, buying sanctioned Russian oil with their local currency.

The dollar has lost some of its strength due to the U.S. president’s tariffs and his foreign policy, as well as mounting polarization in the U.S., all of which have created uncertainty around the dollar. The ramifications stretch beyond currencies as gold prices have shot up as investors seek a safe haven elsewhere. Yet the dollar remains the behemoth of the currency world. It accounts for 57% of global currency reserves. It remains essential to foreign-exchange trading and foreign currency debt issuance. Emerging market economies, China aside, rely heavily on it, lending them security in times of stress.

But suppose that the greenback’s slide continues, creating space in the long run for the renminbi to become the new global reserve currency. What would China have to do to make this happen? Firstly, Beijing would have to open its capital account, meaning it would end limits on foreign investment and allow Chinese households to move money abroad. China would also have to make the renminbi easily convertible into gold or other currencies. Right now, the People’s Bank of China manages the currency, rather than letting it float freely. The country would also need to let the renminbi appreciate, something that it has stymied for fear of its exports dropping. Xi won’t be willing to give up such control and will be reluctant to undermine its export-heavy economy.

The main problem is that China’s is a centrally controlled economy and as long that is the case, they can get some leverage and more trade using renminbi, but predominantly from other rogue countries. To significantly grow it would require freedom of capital movements, liquidity and no capital restrictions. That is not going to happen in a Communist run economy. They will likely grow their market share to some extent as the world is getting more polarized, but it will be gradual and it will not really be impactful. Should China eventually choice to have an open free economy, then things can change quickly, but for now, they will keep getting small pieces of the currency market and is an unlikely candidate as a foreign-reserve currency alternative to the dollar.