The Chinese Yuan as a Global Reserve Currency? Challenges and Prospects

1. China's Vision for the Chinese Yuan (CNY)

Xi Jinping, President of the People's Republic of China, made recently a critical statement with complex international implications. The Qiushi magazine of the Communist Party of China, specifically, published (1.2.2026) Xi Jinping's views on the need to establish the Chinese Yuan (CNY) as a strong currency that will be widely used in international trade, investment and foreign exchange markets, with the aim of ultimately achieving global reserve currency status. Apparently, this is a strategic move aimed at reducing China's dependence on the US dollar (USD), avoiding its isolation from possible economic sanctions and strengthening its monetary sovereignty.

Could such a statement in a speech contribute to the rearrangement of the global economic order? This is not a simple economic policy, but a particularly critical strategic priority. China considers that the international situation is opportune to take advantage of certain ambiguous choices of American policy, mainly in the field of international trade. The statement reflects a vision for the future, where the long-term dominance of the US dollar may be limited. This position is linked to a speech by Xi Jinping as early as 2024, although it is being made public at a time when the US dollar index has fallen to 95.5 (the lowest level since February 2022), amid broader international economic uncertainty and geostrategic tensions on various fronts. According to IMF data (Q3 2025), the dollar still represents 57% of global reserves, but with a significant decrease from 71% in 2000. The euro holds 20%, the CNY only around 2%.

2. CNY as a Reserve Currency?

A major milestone for China's currency was the inclusion of the CNY in the International Monetary Fund's Special Drawing Rights (SDR) basket in 2016, a symbolic recognition of its growing importance in the global financial system. Over the past decade, China has implemented a series of measures aimed at expanding the region and scope of international use of its national currency. It began systematically after the 2008 global financial crisis, which exposed the vulnerabilities of a system heavily dependent on a single currency. Assessing the international environment, China has embarked on a gradual process of internationalizing the CNY, initially through trade settlements, with agreements allowing for direct currency exchange with dozens of countries, without the need for conversion through dollars, including neighboring countries but also important partners, such as Russia and Brazil. This was followed by the creation of offshore CNY hubs in centers such as Hong Kong, London and Singapore, allowing greater international access to the currency. These actions not only reduce transaction costs and exchange rate risks for Chinese businesses but also reduce the dominance of the dollar in international trade.

Furthermore, the development of China’s own financial infrastructure is critical. The Cross-Border Interbank Payment System (CIPS) was launched in 2015, as a clearing and settlement pillar for tens of trillions of CNY cross-border transactions annually (instead of the dominant SWIFT messaging system), offering a parallel route for international payments. Daily transaction volume is still dwarfed by the dollar-based system, but it represents a critical piece of the CNY’s strategic future. While around 80% of CIPS transactions still rely on SWIFT messaging (highlighting the interdependence with Western infrastructure), the remaining 20% ​​that operate independently represent a significant component of a rapidly developing alternative system. In a hypothetical scenario where geopolitical tensions could escalate, this significant component becomes critical.

The evolving international situation regarding the currency shift is, to a significant extent, a result of reactions to ambiguous US economic choices, such as tariff policies, which have shaped an international climate of reduced confidence and instability. It is noteworthy that the dollar has fallen by almost 10% by 2025, due to fiscal concerns and political uncertainty. The recent replacement of the head of the US Federal Reserve has increased economic uncertainty about the future direction of monetary policy. At the same time, China is actively encouraging foreign central banks and institutional investors to hold more CNY assets. This is done through targeted initiatives, such as the Qualified Foreign Institutional Investor program and various linkage programs that provide greater access to China’s domestic bond and equity markets. Combined, the initiatives promoted are building an environment that strengthens CNY as a credible and widely accepted alternative to the dollar.

3. Systematic Rebalancing of Global Trade Flows

It is noteworthy that Russia and China have shifted 99.1% of their bilateral trade to rubles and CNY to avoid recent Western sanctions, amid geopolitical realignments. This corresponds to $240 billion in annual trade that no longer touches US dollars. The BRICS group of countries announced plans to increase settlements in local currency from 35% to 50%. Also, ASEAN (Association of Southeast Asian Nations) is moving forward with the creation of a regional payments system by 2027 to reduce dependence on the dollar. For example, Brazil-China bilateral trade records 40% of transactions in local currency, an increase of 10% compared to the previous year.

The eventual gradual erosion of the dollar favors the steady emergence of the CNY as a strategic counterweight that limits US leverage. The systematic strengthening of both the number of countries and the volume of international transactions based on CNY obviously implies that more countries need CNY reserves. More CNY reserves mean deeper markets. And deeper markets attract more users. It is the corresponding ‘virtuous circle’ that shaped the dominance of the dollar and now seems to be working in the opposite direction. It becomes obvious that China does not need to push for the CNY to replace the dollar. As more countries hold higher CNY reserves, the US’s ability to impose economic sanctions unilaterally is inevitably limited. The case of sanctions against Russia is typical, which ultimately accelerated this process. Russia was cut off from SWIFT and dollar clearing, but trade with China continued unhindered because the infrastructure for ruble-CNY clearing had already been set up. After Russia’s invasion of Ukraine in 2022, CNY emerged as the second largest currency for financing international trade. In 2025, China recorded an impressive trade surplus of $1.2 trillion. Every dollar of this surplus could be used strategically, by creating CNY payment infrastructure, signing currency swap agreements, financing Belt and Road projects in CNY instead of dollars, and thus gradually creating an alternative monetary architecture. Looking ahead, it is possible that more countries (especially those facing risks from trade and other sanctions) will adopt CNY trade agreements.

EU economic experts point out that the dollar reserve status could be challenged due to funding shortages, geopolitical shocks and unclear or contradictory economic policies. Reserve currency status is associated with significant advantages, such as lower borrowing costs because everyone needs the currency, more effective management of trade deficits and soft power through control of the international financial infrastructure. The US currently benefits from an ‘exorbitant privilege’, the ability to print dollars that traders must hold to conduct their trade. This privilege allows the US to finance deficits by selling government bonds to foreign governments that need dollars for their reserves. But when demand weakens, borrowing costs rise and deficits become harder to sustain. As central banks begin to reassess their exposure to dollar-denominated assets, this privilege is beginning to erode. China offers an alternative at a time when the credibility of the US seems questionable.

4. The e-CNY Digital Alternative

Perhaps the most futuristic and potentially disruptive element of China’s monetary strategy is the promotion of the digital CNY, or e-CNY. Obviously, this is not a cryptocurrency (like Bitcoin), but a Central Bank Digital Currency (CBDC) that is the direct responsibility of the People’s Bank of China (PBoC). The development of e-CNY began in 2014 and after years of research and pilot programs in major cities, it is now being integrated into various sectors of the Chinese economy, from retail transactions to public services. The domestic goals of e-CNY are clear: to improve payment efficiency, strengthen the implementation of monetary policy, and reduce reliance on private payment platforms (such as Alipay, WeChat Pay, etc.).

On the international front, the PBoC is actively exploring the use of e-CNY for cross-border payments, which could significantly reduce transaction times and costs compared to the current equivalent banking system. A dedicated e-CNY operation center has been launched in Shanghai to focus on cross-border payments and blockchain services, with the clear goal of promoting connectivity with foreign financial systems. By creating a more efficient and cost-effective system for international transactions, China is expected to encourage other countries to adopt e-CNY for trade and investment. e-CNY is not just a technological upgrade, but a strategic tool that will help bypass the incumbent dollar-based financial architecture. If successful, it could give China a significant competitive advantage as a frontrunner in shaping the future of digital financial options and accelerating the internationalization of the CNY in ways that traditional methods could not achieve.

5. Critical Institutional Pillars: Aiming for the Future

The acquisition of international status for a currency is based on the achievement of critical conditions that characterize the country’s credibility in the global financial system and the ability to execute various transactions in its national currency. These include: i) economic conditions, and ii) institutional and organizational conditions and are linked to three critical institutional pillars: a) a strong Central Bank capable of attracting global capital, b) deeply liquid financial markets, where investors can easily transact, and c) widespread use of the currency in international transactions. China is methodically developing all three pillars. Almost one-third of China’s foreign trade is now transacted in CNY, a fraction of what it was a decade ago.

Regarding the international status of the CNY as a global currency (along with the US dollar, the euro, the pound sterling and the Japanese yen), China has not yet created all the necessary conditions for the CNY to be a reserve currency and ‘freely usable’. Achieving the status of the CNY as a global currency is only possible if it ensures full convertibility, deepens the equity and debt sectors of the PRC’s financial market, and reorients the choice of non-Chinese residents in favor of the CNY as a measure of value, as a means of payment and as a reserve currency. Although China does not necessarily promote concerted action to persuade Central Banks to maintain the CNY, this is necessary given the significant integration of the CNY into trade. Since companies will need the CNY to purchase Chinese products, Central Banks need to hold the CNY to facilitate the underlying trade.

Despite systematic strategic initiatives, CNY’s path to becoming a global reserve currency is fraught with significant obstacles. The most intractable is the deeply entrenched dominance of the US dollar. For over 70 years, the dollar has been the bedrock of the global financial system, and its position is supported by a vast and liquid market for US Treasury bonds, the world’s most trusted safe haven. The sheer scale of the dollar-based financial system with its deep and open capital markets is something that China cannot replicate in the short term. Another major obstacle is China’s own strict capital controls. The government is reluctant to fully open its capital account, fearing that the free flow of capital could lead to economic instability and speculative attacks. This creates a fundamental paradox. For the CNY to be a credible reserve currency, foreign Central Banks and investors must be confident that they can buy and sell CNY assets freely and without restrictions. The lack of a fully convertible currency and the opacity of China’s financial system are major deterrents for international investors.

Certainly, China is making strides in promoting the CNY for trade settlement transactions, but its use as a store of value remains limited. Until the government is willing to embrace greater economic liberalization and transparency, the CNY will struggle to gain the trust needed to challenge the established dollar. The geopolitical landscape is another critical factor that will shape the future of CNY. The ongoing ‘de-dollarization’ efforts by countries such as Russia, Iran and other BRICS and Shanghai Cooperation Organization (SCO) members have created an opening for the CNY. The US economic sanctions policy has accelerated the search for alternatives in the monetary field (against the dollar), a development that favors China. However, many countries, especially in Europe and Asia, have strong ties (economic and security) with the US and it is unlikely that they will completely abandon the dollar-based system.
In conclusion, the global landscape is emerging as extremely complex, fragmented and under reorganization, elements that make reliable predictions difficult but clearly shape particularly interesting dynamic conditions for the future.