The unpredictability of the United States’ economic policies, its mounting national debt, the softening market for US Treasuries, reports that gold has, for the first time in the post-World War II era, overtaken the dollar in the foreign exchange reserves held by central banks, and Donald Trump’s wholesale weaponisation of trade and financial markets are prompting a search for less risky alternatives. China is signalling its willingness to step into the breach.
The Chinese option is beginning to command serious attention.
William White, a former chief economist of the Bank of International Settlement, foresees a “stagflationary world marked by the formation of two blocs, one dollar-based, the other renminbi-based, with Chinese currency backed increasingly by gold.” (Financial Times June 6)
It was the Global Financial Crisis of 2007-08 that led China to seek to diversify away from a dollar-centric international currency and financial system. In 2009, China initiated a policy of progressively enhancing the cross-border use of the RMB, leveraging China’s emergence as the world’s largest trading nation, accounting for 15 per cent of global trade. The use of RMB in cross-border trade settlement now accounts for about 35 per cent, compared to 10 per cent in 2017. China and Russia now settle 90 per cent of their $245 billion trade in their national currencies. China and Brazil settle 41 per cent of their trade in RMB.
In 2015, China sought and obtained approval for the inclusion of the RMB in the International Monetary Fund basket of reserve currencies despite not being a convertible currency like the US dollar, the euro, and the British pound. This was more a symbolic move than a substantive one. Nevertheless, the RMB is now 2.3 per cent of global foreign exchange reserves, up from virtually zero in 2015.
In 2010, China forayed into the international debt market by launching offshore RMB-denominated dim-sum bonds in Hong Kong and subsequently, the onshore RMB-denominated panda bonds in mainland China. The outstanding volume of dim-sum bonds is now $179 billion, and these can now be listed and traded in London and Luxembourg. The total outstanding volume of panda bonds stands at $55 billion. Both these instruments are showing strong growth and rising popularity as China continues to maintain relatively low interest rates, which makes RMB-denominated debt significantly cheaper than loans in the US dollar. China has a large and growing inter-bank bond market, which is now $21 trillion, second only to the US market of $58 trillion. It is now open to international investors, though the off-take is currently modest at $430 billion. The Hong Kong-Mainland Bond Connect, set up in 2017, has also made it easier for foreigners to invest in Chinese bonds through Hong Kong’s more highly developed international financial market. This reached a peak of $180 billion in monthly turnover in March 2026. As the dollar begins to carry more risk, Chinese bonds will attract more foreign interest.
China’s securities market is also progressively being opened to foreign investors. It is a large and liquid market, with a market capitalisation of $17 trillion, still far behind the US ($70 trillion) but steadily gaining in volume. This has also been promoted by the Hong Kong-Shanghai Stock Connect and the Hong Kong-Shenzhen Stock Connect. This allows mainland residents to invest in securities listed in Hong Kong and for foreigners to invest in Chinese securities listed in Shanghai. Foreign holdings are 5 per cent but rising. This reverses the trend of the past five years, when there was growing pessimism about the prospects of the Chinese economy, beset, as it has been, with a persistent property crisis and low consumption.
While integrating itself more extensively in the international financial market, China has pursued a parallel international payments system. This has accelerated with the weaponisation of the dollar by the US, in particular the freezing of nearly
$300 billion of Russian assets in foreign banks since the Russian invasion of Ukraine in 2022. The China International Payment System (CIPS) was set up in 2015 and worked closely with the dominant SWIFT system. Its messaging system conforms to international standards and works seamlessly with SWIFT. It has witnessed rapid progress with 193 direct participants and 1,514 indirect participants registered with it, comprising 4,900 banking institutions in 189 countries. In 2024-25, CIPS handled 8.2 million transactions worth $25 trillion. The Iran war and the sweeping sanctions imposed by the US have led to a major spike in the use of CIPS, whose average daily transaction value reached $135.7 billion in March.
China is a pioneer in establishing a Central Bank Digital Currency (CBDC) and this is at the core of the mBridge project, which allows central banks of participating countries virtually instant and direct cross-border currency settlements. Currently, the central banks of China, the UAE, Thailand, South Africa and the Hong Kong Monetary Authority are participating and the current volume of transactions handled is $55 billion, mostly involving the RMB.
The mBridge arrangement allows China to avoid the full convertibility of its currency and yet participate in an efficient cross-border currency exchange. China is promoting mBridge among Brics-plus countries.
The final component of China’s pursuit of RMB internationalisation is the Shanghai International Energy Exchange and the associated Shanghai Gold Exchange. The so-called petro-yuan market based in Shanghai offers RMB-denominated oil futures. Yuan holdings can be converted into gold at the Gold Exchange, thereby reducing currency risk. The Shanghai oil index is already ranked third after Brent and West Texas Index. Estimates suggest that oil trade settled in RMB remains low at about 5 per cent but is steadily rising in volume.
What do these developments add up to?
One, China’s strategy has been to pursue deeper integration into the global economy and its financial markets before considering the full convertibility of its currency, with its attendant risk of volatility.
Two, it has offered RMB-based transactions not as a substitute for the dollar but as a means of reducing risk in a global economy roiled by unpredictability and the eroding credibility of the US currency.
And three, this shift will have geopolitical consequences including the possible emergence of an RMB-dominated Asian economy.
The writer is a former foreign secretary
