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China is seizing the opportunity to challenge American dominance in global finance and exert greater international influence at the expense of the almighty American dollar.
Geopolitical uncertainty fueled largely by President Donald Trump's often chaotic economic policies has gripped markets in recent weeks, with the dollar falling to four-year lows.
Meanwhile, investors are flocking to safe-haven assets, driving gold prices to record levels of more than $5,500 an ounce. This has given China an opportunity to promote its currency as a sustainable alternative.
Over the weekend, the Chinese Communist Party's main ideological magazine published remarks by President Xi Jinping outlining plans to transform the renminbi into a global reserve currency. That's the role currently played by the U.S. dollar — the primary currency for the vast majority of foreign transactions, making it one of the safest investments in the world.
No one expects that to change anytime soon. But the sharp decline in the dollar's value since Trump took office last year has at least opened the door to potential challengers.
According to Qiushi magazine, Xi told government officials that China should aspire to create a strong currency widely used in international trade and foreign exchange, with a powerful central bank and the ability to attract investment and influence global prices.
The Chinese leader's comments were made privately in 2024. The party made them public as China is positioning itself as a more reliable economic and political partner than the US and is starting to see results.
Why do China's plans matter?
China has spent more than a decade trying to integrate the renminbi into international markets and ensure its stability as a global currency. But China has recently begun to reap the benefits of growing concerns about U.S. economic policy and a trend known as "de-dollarization."
Trump's decision to impose several rounds of tariffs on major trading partners has undermined confidence in U.S. economic growth and the value of its currency. A change in leadership at the Federal Reserve - to which Trump nominated Kevin Warsh after repeatedly clashing with current chairman Jerome Powell - has added uncertainty about U.S. monetary policy and interest rates.
Investors have been reducing their exposure to the dollar since last year, and European Central Bank President Christine Lagarde has called for the euro to take a bigger role in global finance. The threat of U.S. tariffs and sanctions has also prompted some countries to try to wean themselves off the greenback.
Why control a global reserve currency?
The dollar has been central to the global economy for more than 80 years, following World War II and the Bretton Woods Agreement that established the dollar as the gold-backed standard and pegged 44 other currencies to it. Strong demand for dollars gives the U.S. more leverage in borrowing money abroad at low interest rates and in imposing sanctions on other nations.
The International Monetary Fund recognizes seven other major reserve currencies, including the euro, renminbi, Japanese yen, Canadian dollars, Australian dollars, pound sterling and Swiss francs. China has sought to strengthen the position of its currency as a way to insulate itself from US hegemony and financial pressures, as well as to increase its political and economic influence in global trade and finance.
What has China done to strengthen the renminbi?
China has taken measures to make the renminbi more attractive to foreign investors, such as increasing access to Chinese securities such as stocks, bonds and commodities, and improving cross-border payments.
Strengthening trade ties with emerging economies has also supported the argument for increasing the use of the renminbi in foreign transactions. The use of the renminbi in trade deals rose to record levels after Western countries imposed sanctions on Russia over its invasion of Ukraine, as China remained one of Russia's main trading partners.
The idea that the dollar could be challenged has certainly rattled Trump. Brazil, Russia, India, China and South Africa, the bloc known as BRICS, have floated the idea of creating a new reserve currency, something Trump has said he would respond to with 100% tariffs if it ever happens.
Can the renminbi really replace the dollar?
A global financial system that relies heavily on the renminbi is still a long way off. According to data from the IMF, the US dollar accounted for about 57% of foreign exchange reserves last year, the euro about 20% and the renminbi about 2%. China has not explicitly stated plans to replace the dollar, but has instead expanded the role of its own currency in comparison.
But while China has portrayed the renminbi as a convenient and safe currency for global trade, experts said that tight controls on the movement of money in and out of the country will discourage investors and financial institutions from relying too heavily on renminbi reserves. China may also prefer to keep the renminbi at a lower value compared to other currencies in order to support its export-dependent economy.
“I can’t imagine a world in which the degree to which the renminbi is embraced as a reserve asset approaches the levels of the dollar or the euro, and I don’t think Beijing is getting anywhere near that either,” McMahon said. “But given the changes in the global financial system and geopolitics, Beijing certainly thinks there’s an opportunity here to gain ground. ”/ Taken from CNN
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