China Pushes Yuan Internationalization Amid Dollar Decline

Chinese authorities are intensifying their efforts to bolster the international standing of the yuan and reduce dependence on the U.S. dollar, particularly as global confidence in the greenback wanes. This strategic move is part of a broader campaign to diversify global currency use, even as the dollar remains the world's predominant currency.

The favorable market conditions are aiding Beijing’s ambition to internationalize the yuan. The U.S. dollar index has declined by more than 9% this year, while the offshore yuan has strengthened by over 2% against the weakening dollar. This shift in currency dynamics presents an opportune moment for China to promote the yuan on the global stage.

China's efforts to enhance the yuan's international status come amid a growing movement by the so-called Global South to de-dollarize. This campaign, championed primarily by Russia following Western sanctions, encourages countries to settle trade using their own currencies. While there has been talk of launching an alternative reserve currency, no concrete steps have been taken towards this goal.

China has traditionally been sympathetic to the de-dollarization cause but has largely avoided openly seeking to replace the dollar with its currency. However, recent developments suggest a change in this stance. People’s Bank of China Governor Pan Gongsheng recently discussed “how to weaken excessive reliance on a single sovereign currency,” indicating a more proactive approach to promoting the yuan.

Gongsheng also revealed plans for a new center dedicated to digital yuan internationalization in Shanghai and a push to promote trading of yuan foreign exchange futures. This initiative builds on China’s existing rollout of a digital yuan designed to replace some physical cash, further solidifying the yuan's role in the global financial system.

China's strategy to expand the yuan's international use includes broadening access to its futures market. Recently, three major Chinese exchanges announced that qualified foreign institutional investors can now trade 16 additional futures and options contracts, including commodities like natural rubber, lead, and tin. This follows dozens of other tradable futures contracts added for foreign investors earlier this year. These expansions broaden hedging options for international institutions and amplify the yuan’s influence within the global commodity pricing system.

In another step to encourage yuan usage, the Shanghai Futures Exchange is exploring a proposal to allow foreign currencies as collateral for yuan-settled trades. Additionally, qualified foreign investors will be permitted to participate in on-exchange exchange-traded fund options trading for hedging purposes starting in October. Earlier this year, authorities reportedly waived a fee for international financial institutions opening local accounts for bond market access.

Despite these efforts, concerns over China’s strict capital outflow controls are believed to have hindered large-scale buying of mainland Chinese assets by global financial institutions. China has systematically built a vast network of offshore yuan clearing banks and championed its cross-border interbank payment system. A recent analysis indicated a growing trend of Chinese banks lending to emerging market economies in yuan rather than U.S. dollars, partly driven by lower lending costs.

Despite these efforts, the yuan saw a slight decline in international use in May, dropping to 2.89% of transactions by value. The U.S. dollar, in contrast, accounted for 48.46% of global payments, followed by the euro at 23.56%.