The Ting Empire: how the Chinese currency can become global
Chinese President Xi Jinping has announced plans to make the yuan the world's reserve currency for the first time. In an article for the Communist Party's ideological magazine Qiushi, he stressed the need to create a currency that would be widely used in international trade and gold and foreign exchange reserves. What needs to be done for the full internationalization of the yuan and what China will benefit from it is in the Izvestia article.
Big economy, small currency
Xi Jinping's statement on the yuan was actually made back in 2024 in a speech to regional leaders, but it has only been published now, and this is no less important. Just a month ago, Pan Gongsheng, governor of the People's Bank of China, predicted the advent of a "new global monetary order" in which the yuan would compete with other major currencies.
The idea of turning the yuan into an international reserve currency has been raised for many years. Since the second half of the 2000s, China has become the second economy in the world and since then has significantly narrowed the gap from the first-ranked United States (and surpassed it in purchasing power parity). Of course, the question arose: why does such a powerful economy not have a currency that would be popular at the level of the dollar and the euro, while the international use of the yuan is somewhere near the pound sterling and the yen?
In fact, it's not entirely correct to put the question that way. Use in cross—border settlements is an inertial thing, and although it correlates with the level of economic development and its size, it is not 100%. Everyone knows examples when the role of a country's currency was disproportionate to its weight in the global economy. The dollar, for example, gained a leading position in the world only after World War II, although the American economy became the largest in the world at the turn of the 19th and 20th centuries. On the contrary, the pound remained significant for decades after the British Empire lost its dominant position in global trade.
Ways of internationalization
Reputation, habit, convenience of work — all this is no less important than just the size of the issuer's national economy. Therefore, China still has many steps to take to internationalize its currency before it can compete on equal terms with the dollar. The very first of them is the liberalization of the capital account. Currently, the yuan is partially convertible. In order for it to become a reserve fund, investors must be able to freely deposit and, more importantly, withdraw huge amounts without regulatory approval. Currently, any citizen of China has the right to exchange and withdraw no more than $50,000 per year.
"Currently, the yuan is converted as part of current operations (trade and transfers), but the movement of capital is strictly controlled by the state," says Olga Ponomareva, an expert at the Economic Policy Foundation. — Liberalization in this area is proceeding cautiously and gradually (QFII, Stock Connect programs). In general, a high level of development of the financial system, stock markets, corporate and government bonds is required for greater flexibility and attractiveness for foreign corporate and institutional investors.
Secondly, we need a deep and liquid bond market. Central banks hold the currency in national debt securities. China needs its debt market to be transparent, accessible to foreigners, and large enough to absorb trillions of yuan.
Thirdly, flexible exchange rate formation is necessary — the transition from "controlled floating" to a market rate. Global players should be sure that the yuan's exchange rate is determined by supply and demand, and not by a directive from the People's Bank of China (PBOC). Now it is divided into "domestic" and "offshore" yuan (the latter is more free, but the NBK also influences it through the withdrawal of liquidity) The exchange rate remains tightly regulated. In principle, in the past decades (before the Jamaican monetary System) it was possible to have a global currency even with a fixed exchange rate, but now this is hardly realistic.
In addition, the payment infrastructure should be developed, creating an alternative to the SWIFT system. Steps have been taken here for several years: the successes of CIPS are well known. In 2026, the mBridge project (a multicurrency digital currency platform of the Central Bank) becomes critically important for bypassing the Western financial infrastructure.
Finally, the last and perhaps most difficult condition to formulate is institutional trust. We need transparency of statistics, predictability of the regulator and the rule of law. Investors should trust that their assets will not be frozen for political reasons (a mirror response to Beijing's concerns about the dollar). This is not the only one, but it is a very important component. On the other hand, nowadays no currency can be described as absolutely reliable, taking into account recent geopolitical events.
As Anton Tabakh, chief economist of the Expert RA rating agency, told Izvestia in an interview, in order to progress in internationalization, it is necessary to "specifically increase the role of yuan debt as a reserve asset and the transparency of the entire financial system."
— For example, it is necessary to unify credit ratings. So far, the Chinese market is very closed and very far from the level required for the "reserve" of the yuan, he stressed.
What is the benefit of China
What does China gain by turning the yuan into a global reserve currency? To begin with, Chinese companies will be able to trade without looking back at dollar fluctuations. Next, seigniorage: China will be able to print currency that other countries will be required to keep, which is a de facto interest-free loan to the world. It is equally important to increase geopolitical stability. If the world depends on the yuan, Beijing is protected from disconnection from the dollar system, thereby receiving a kind of "sanctions immunity."
Finally, China will make its own borrowing cheaper: the reserve currency status creates a constant demand for Chinese government bonds, which reduces their profitability (and the cost of debt servicing).
However, it's easier said than done. The process of internationalization entails quite significant risks. To begin with, China will lose full control over monetary policy. It is impossible to have free movement of capital, independent monetary policy and a fixed exchange rate at the same time. One thing should be sacrificed, in our case, this will be the course. However, an uncontrolled exchange rate is a dangerous phenomenon for a country dependent on international trade. In addition, in order to provide the world with liquidity, China must have a trade deficit, which is contrary to China's modern development philosophy. Beijing will have to revalue the yuan, which will cause huge damage to national producers and, above all, exporters.
In general, the transformation of the yuan into a global currency has been going on for almost a decade. Is it possible to speed it up dramatically? Hardly — the barriers on this path are not being removed quickly, and the risks to the national economy are enormous. Another issue is that the process may accelerate on its own due to global shocks, both financial and purely geopolitical in nature.
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