Dreams of Yuan Dominance Remain Just That—Dreams
Success for the yuan would require significant financial changes that China is clearly not ready for.
Beijing makes no secret that it wants China’s yuan to replace the dollar as the world’s premier reserve currency. During his recent trip to the Middle East, President Xi Jinping tried to advance that objective. In promoting trade relations with oil-rich nations, especially Saudi Arabia, he went out of his way to announce that oil contracts would settle in yuan and not, as usual, in dollars. Much of China’s Belt and Road scheme also aims to elevate the yuan to international status. Someday Beijing might succeed. The yuan might overtake the dollar. Stranger things have happened. If it does, it will take a very long time, and will require a lot of change in China. For now, though, China’s yuan lacks all the attributes required of a global reserve.
At the top of the list is widespread acceptance. The dollar may not have the dominance it once enjoyed in the late 1940s and the 1950s, but it is accepted for transactions much more widely than the yuan. Many other currencies are also accepted more widely than the yuan. According to the non-partisan Congressional Research Service, China’s yuan features in some 2 percent of global import and export contracts. That is well up for five or ten years ago, but still well short of the dollar, which accounts for some 75 percent of world trade contracts and settlements, whether an American is involved or not. Euros, Japan’s yen, and Britain’s pound sterling fall far short of the dollar’s use but still play a greater role than the yuan.
Nor does the yuan fare much better as a vehicle for currency trading. In 2022, according to the Bank for International Settlements, some 7 percent of global currency trading occurred in yuan. China’s currency has received an extra fillip recently because Western sanctions against Russia have made Chinese links valuable to anyone who wanted to buy or sell in Russia. At the present, elevated level, the yuan has surpassed both the Canadian and the Australian dollar in this regard, as well as the Swiss franc. But even with this year’s special jump, the yuan falls far short of the amount of currency trading done in the euro, the yen, or sterling. And it is well behind the dollar, which dominates some 90 percent of all global currency trading.
Preferences by central banks to hold each currency in reserve approach this matter from a different perspective. The yuan clearly is not preferred. Some 70 central banks do hold yuan in reserve, a much greater number than a few years ago, but still, according to the International Monetary Fund, these holdings amount to only a bit over 2 percent of the global total. That figure falls short of the euro, for instance, which amounts to some 20.6 percent of global central bank reserves, or even the yen, which amounts to 5.8 percent. The yuan’s role certainly falls far short of the dollar, which amounts to about 59 percent of these reserves. As should be apparent from these trading proportions, the dollar, on strictly practical grounds, should have a higher proportion of central bank reserves than it does. Diplomacy and politics explain this difference.
Perhaps the greatest of the yuan’s inadequacies concerns China’s own financial system. For a currency to serve as the global reserve, it must have liquid, active financial markets denominated in it. These markets must offer all who must hold the global reserve currency—importers, exporters, currency traders, international banks, and central banks—a wide range of investment options for their holdings: liquid short-term deposits, for instance, longer-term bonds, stocks, options, futures, forward contracts, and the like. Those financial markets must offer people the ability to trade in and out of such investments quickly and easily. Dollar-based markets—in the United States and elsewhere—offer an abundance of such support. China does not.
A sense of this difference emerges from a comparison of the relative size of financial markets in the United States and China. U.S. equity markets amount to about 33 percent of all global stocks, whereas China’s stock market equals slightly less than 8 percent of the global total. In bonds, the figures are respectively 39 percent and 17 percent. Vast as these differences are, they do not capture the still wider difference in the sorts of investment and trading vehicles that are offered in dollar-based markets but are limited or non-existent in yuan-based markets. Far from offering liquid, easily accessed markets for yuan-based investments, China still distinguishes between domestic and foreign uses of its currency. It controls flows of money into and out of the country. It has limited trading in futures and forward contracts, including those directly concerned with currency.
Some yuan enthusiasts have pointed to the advent of a digital yuan as the key to that currency’s future dominance. It will, these enthusiasts claim, enable the yuan to acquire a global reach denied to the dollar until it, too, acquires a digital version. While it is true that the People’s Bank of China issues a digital version of its currency, and that the Federal Reserve does not issue a digital dollar, that in no way limits the dollar’s digital global reach. On the contrary, well-established networks of wire transfers, credit cards, debit cards, and ATMs, along with payment services such as Venmo, PayPal, and Zelle, have long enabled exchanges across the globe, twenty-four hours a day, seven days a week. A tourist from Omaha, Nebraska, can use an ATM card from a local Omaha bank just about anywhere on Earth to digitally authorize an instantaneous currency transaction between his or her local bank account and the currency of the nation he or she is visiting. The digital yuan lacks any such support, or any other similar financial support.
As China’s economy grows, the yuan will gain traction as a portion of global trade, currency trading, and even reserves held by the world’s central banks. It will, however, take a long time to challenge the dollar, especially now that China’s economy and trade will likely grow at a slower pace than they did previously. What is more, the undeniable affection for control exhibited by the country’s leadership makes it doubtful that China will ever permit the open, flexible financial markets needed to support a global reserve currency. Unless China changes dramatically, it is more likely that some other currency or system will replace the dollar before the yuan has a chance, though nothing is presently on the horizon. Far from making the required changes, it is not even apparent that Xi or the Chinese Communist Party is aware of what is needed.
Milton Ezrati is a contributing editor at The National Interest, an affiliate of the Center for the Study of Human Capital at the University at Buffalo (SUNY), and chief economist for Vested, the New York-based communications firm. His latest books are Thirty Tomorrows: The Next Three Decades of Globalization, Demographics, and How We Will Live and Bite-Sized Investing.