RMB Appreciation Potential as Dollar Dominance Erodes: Navigating Currency Competition and Strategic Shifts

The U.S. dollar's share of global foreign exchange reserves has slipped to 57.8% in late 2024, marking its lowest level since 1994, while the Chinese renminbi (RMB) remains stagnant at 2.18%. Despite its modest reserve presence, the RMB's role in global finance is evolving, driven by trade dynamics, geopolitical realignments, and gradual reforms. For investors, the question is clear: Can the RMB appreciate meaningfully against the dollar as its dominance erodes, and what does this mean for portfolios?

The Dollar's Decline: A Broadening Competition

The dollar's gradual retreat from its post-2000 peak of 71% is not a one-to-one gain for any single currency. Instead, it reflects a fragmented shift toward multiple alternatives. The euro's share has plateaued near 20%, constrained by European capital market inefficiencies. Smaller traditional currencies—such as the yen, pound, and Canadian/Australian dollars—and non-traditional currencies like the South Korean won and Indian rupee have absorbed much of the dollar's decline. The RMB, however, faces unique challenges.

Geopolitical tensions, such as Eastern European central banks liquidating RMB reserves post-Ukraine invasion, have hampered its progress. Additionally, China's incomplete capital market liberalization and declining bond yields (now around 2.4%, down from 3.5% in early 2023) deter foreign investors. Yet, the RMB's use in trade is surging: By January 2025, it accounted for 55% of China's outbound payments, surpassing the dollar for the first time. This dichotomy suggests the RMB's value could appreciate even as reserve adoption lags, driven by trade demand.

RMB Appreciation: The Case for Cautioned Optimism

The RMB's near-term appreciation potential hinges on three factors:
1. Trade Dynamics: China's efforts to denominate more trade in RMB, including energy deals with Russia and Middle Eastern partners, could increase demand for the currency.
2. Geopolitical Alliances: Belt and Road Initiative countries may adopt the RMB to reduce reliance on the dollar, though this remains limited.
3. Market Reforms: Relaxing capital controls and deepening bond markets (e.g., opening to foreign investors) could attract portfolio inflows.

However, risks linger. China's zero-sum approach to U.S. debt (holding under $800 billion as of 2024Q4, down from $1.3 trillion in 2014) signals a strategic shift, but abrupt moves could spook markets. Additionally, the RMB's inclusion in the IMF's Special Drawing Rights (SDR) basket since 2016 has yet to translate into reserve accumulation, underscoring structural barriers.

Investment Implications: Positioning for a Gradual Shift

Investors should view RMB appreciation as a long-term theme rather than a near-term certainty. Consider:
- Currency Exposure: Gradually overweight the RMB against the dollar, particularly if U.S. interest rates peak and China's growth stabilizes.
- RMB-Denominated Bonds: While yields are low, diversification benefits exist if the currency strengthens. Monitor Chinese 10-year bond yields ().
- Equities: Selective exposure to Chinese tech and green energy firms could benefit from RMB strength and policy support.

Avoid overexposure to yuan-denominated assets until China credibly addresses capital controls and improves transparency. Geopolitical risks, such as U.S.-China trade disputes, remain a wildcard.

Conclusion: A Two-Decade Play

The dollar's erosion is a slow-motion process, and the RMB's rise is far from assured. Yet, the structural forces—trade dominance, gradual liberalization, and geopolitical realignment—suggest the RMB will claim a larger role over the next decade. For investors, patience and diversification are key. Positioning 5–10% of a portfolio toward RMB assets now could yield asymmetric rewards as reserve dynamics shift, while hedging against dollar volatility. The RMB's path to parity with the dollar is uncertain, but its ascent as a credible alternative is already underway.