China's State Banks Pivotal Shift in Dollar-Swap Strategy Amid Yuan's Strengthening

In 2025, China's state banks have executed a strategic recalibration of their dollar-swap agreements, amplifying their role in global financial stability while navigating the yuan's gradual appreciation. The People's Bank of China (PBOC) has expanded bilateral currency swap lines with over 40 countries, totaling approximately $586 billion, to mitigate exchange rate risks and bolster trade. This shift, coupled with the yuan's 2.1% strengthening against the U.S. dollar since April 2025, has profound implications for foreign exchange reserve management and global capital flows.

Strategic Expansion of Swap Agreements and Yuan Internationalization

China's currency swap strategy has evolved into a cornerstone of its de-dollarization efforts. By September 2025, the PBOC had renewed or expanded agreements with key partners, including a $5 billion (35 billion yuan) swap with Argentina for an additional year and a $7.3 billion (50 billion yuan) agreement with Saudi Arabia to facilitate yuan-based oil settlements Argentina renews US$5 billion currency swap with China^[1]. These agreements not only provide liquidity during balance-of-payments crises but also incentivize trade partners to adopt the yuan for cross-border transactions. For instance, Argentina's renewed swap line has enabled it to meet IMF debt obligations without relying on Western financial systems, while Saudi Arabia's agreement aligns with Beijing's broader goal of reducing the dollar's dominance in commodity markets China Accelerates Yuan Internationalization with New Bilateral Currency Swap Agreements^[2].

The PBOC's emphasis on these swaps is part of a larger strategy to internationalize the yuan. By June 2025, yuan settlements accounted for 32% of China's total trade, up from 28% in 2024, driven by Belt and Road Initiative (BRI) projects and infrastructure financing The impact of China's currency swap lines on bilateral trade^[3]. The Cross-Border Interbank Payment System (CIPS) further supports this effort, processing over $21.9 trillion in transactions in 2024 and cementing the yuan's role in global payments The impact of China's currency swap lines on bilateral trade^[3].

Yuan's Appreciation and Reserve Diversification Dynamics

The yuan's strengthening against the dollar—peaking at 0.1408 USD in September 2025—has influenced reserve diversification strategies among swap-partner countries. While the yuan's share of global foreign exchange reserves declined to 2.29% by late 2023 China yuan's global FX reserve footprint smallest in 3 years^[4], nations with direct swap access to RMB liquidity are increasingly allocating reserves to yuan-denominated assets. For example, Argentina and Pakistan have leveraged swap lines to bypass traditional dollar-based systems, with the latter using RMB liquidity to stabilize trade with China under the China-Pakistan Economic Corridor (CPEC) The Long-Term Dangers of China’s Expanding Swap Line Strategy: Financial Dependence and Geopolitical Influence^[5].

However, this shift is not without risks. Critics argue that China's swap agreements often lack transparency and impose conditionalities, creating dependencies that could be exploited for geopolitical leverage. A 2025 report by Fair Observer highlights how countries like Argentina and Pakistan face “financial dependence” due to limited RMB convertibility and the conditional nature of swap agreements The Long-Term Dangers of China’s Expanding Swap Line Strategy: Financial Dependence and Geopolitical Influence^[5]. This dynamic contrasts with the IMF's approach, which typically mandates structural reforms in exchange for liquidity support.

Capital Flow Management and Geopolitical Implications

China's management of capital flows has become a critical tool in maintaining yuan stability. The PBOC has employed indirect interventions, such as adjusting dollar deposit rates and directing state-owned banks to absorb currency volatility, to prevent sharp appreciation China’s New Currency Playbook - Council on Foreign Relations^[6]. Additionally, the PBOC revised the CFETS yuan basket in January 2025, reducing the weight of the U.S. dollar, euro, and yen while adding Macau's pataca, signaling a strategic diversification of currency exposure China's Strategic Shift in Currency Weightings for 2025^[7].

These measures have geopolitical ramifications. By offering an alternative to dollar-based liquidity, China's swap lines empower emerging markets facing Western sanctions or financial instability. For instance, Russia's growing reliance on RMB settlements post-Ukraine invasion underscores the yuan's role as a geopolitical tool The Long-Term Dangers of China’s Expanding Swap Line Strategy: Financial Dependence and Geopolitical Influence^[5]. Yet, this also raises concerns about China's ability to exert influence through financial channels, particularly in countries with limited economic autonomy.

Challenges and the Road Ahead

Despite these advancements, the yuan's path to becoming a major reserve currency remains fraught with challenges. Capital controls, limited convertibility, and geopolitical tensions continue to hinder its adoption. As of August 2025, China's foreign exchange reserves stood at $3.322 trillion, but the yuan's share in global reserves remains modest compared to the dollar and euro China Foreign Exchange Reserves - TRADING ...^[8].

Looking ahead, the PBOC's success in internationalizing the yuan will depend on addressing structural barriers. Governor Pan Gongsheng has emphasized the need for “transparency and trust in financial institutions” to attract global investors IMF official: RMB internationalization to grow as China's global ...^[9]. Meanwhile, the expansion of swap agreements into Africa and Southeast Asia could further accelerate the yuan's global footprint, though the long-term sustainability of these partnerships will hinge on balancing economic cooperation with political independence.

Conclusion

China's dollar-swap strategy and the yuan's strengthening reflect a calculated effort to reshape global financial dynamics. While these initiatives offer short-term liquidity and trade facilitation for partner nations, they also underscore the delicate balance between economic empowerment and dependency. For investors, the yuan's role in reserve diversification and capital flows presents both opportunities and risks, necessitating a nuanced understanding of China's evolving financial playbook.