Breakthrough points

The renminbi can become a key pillar within a diversified global currency system

From the silver standard to the gold standard, and later to the Bretton Woods system and the post-Bretton Woods system, history has witnessed the rise of several international financial powers — Portugal, Spain, the Netherlands, France, the United Kingdom and the United States. Correspondingly, the evolution of the international monetary system has been marked by repeated transitions among dominant international currencies. When a leading currency is no longer able to simultaneously supply global liquidity and maintain basic value stability, transformation of the international monetary system becomes inevitable. This phenomenon can be called the “incumbent’s curse” of international currencies.

The establishment of the Bretton Woods system firmly consolidated the US dollar’s status as the dominant international currency. In the early years of the system, the US supplied dollars to the world through capital account deficits while absorbing them through current account surpluses, forming a dollar circulation mechanism characterized by capital account deficit plus current account surplus. This mechanism provided global liquidity and settlement support. From the 1970s onward, as US manufacturing gradually relocated overseas and the production capacity of Japan and Europe strengthened, the US began to supply dollar liquidity primarily through trade deficits.

To provide sufficient international liquidity for the rapidly expanding global economy after World War II, the US government was compelled to continuously issue and export dollars. However, as the volume of dollar issuance increased, the US government’s ability to maintain the stability of the dollar’s value weakened. This contradiction is known as the Triffin Dilemma, which represents the manifestation of the “incumbent’s curse” under the Bretton Woods system. To a significant extent, the Triffin Dilemma ultimately contributed to the system’s collapse.

In the post-Bretton Woods era, the constraint imposed by gold reserves on dollar issuance was removed, seemingly resolving the “incumbent’s curse” faced by traditional commodity-based currencies.

Yet under a fiat-currency regime, the “incumbent’s curse” has not disappeared. Instead, it has taken the form of a contradiction between the global economy’s demand for dollar liquidity and the persistent expansion of the US’ “twin deficits” — its current account and fiscal deficits. This reflects the tension between the world’s need for dollar settlement capacity and the erosion of confidence in the dollar caused by the rising domestic and external debt of the US. As US government debt continues to climb, its ability to service interest and principal has weakened. A new version of the “incumbent’s curse” is now imposing increasingly strong constraints on the dollar’s international status.

In recent years, persistently high short-term and long-term US interest rates have further intensified federal debt pressure. At the same time, the increasingly frequent weaponization of the dollar has undermined global confidence in the currency.

On the one hand, elevated inflation expectations in the US have constrained interest rate cuts, forcing the government to issue new debt at relatively high yields. This has led to mounting fiscal interest burdens and rising deficit pressure. On the other hand, the US government has repeatedly leveraged the dollar’s reserve currency status to impose financial sanctions on sovereign states, including freezing foreign exchange reserves and excluding financial institutions from the SWIFT system.

Such actions to weaponize the dollar have weakened confidence in the currency among other economies. As a result, some major developed economies and emerging market countries are making efforts to strengthen the international role of their own currencies, accelerating the process of “de-dollarization”.

The “incumbent’s curse” faced by international currencies demonstrates that no national currency can provide global liquidity indefinitely while simultaneously maintaining stable value for a long time.

However, the decline of the dollar system does not necessarily imply a sharp fall in the dollar’s status in the near term. For a considerable period ahead, the US dollar is still likely to retain its dominant international role. But, the trend toward multipolarization of the international monetary system will continue to strengthen.

In 2009, in the aftermath of the global financial crisis, China recognized the structural deficiencies of the dollar-based system and decided to initiate the internationalization of the renminbi. Over the past years, China has pursued the internationalization of the renminbi through a framework centered on settlement as its core, supported by pricing and reserve functions as two complementary pillars, guided by policy direction and driven by market forces, and has achieved notable progress.

In 2015, China officially launched the Cross-border Interbank Payment System, with the CIPS Phase II fully operational in 2018. In 2016, the renminbi was included in the International Monetary Fund’s Special Drawing Rights basket of currencies with a weight of 10.92 percent, which was further raised to 12.28 percent in 2022, ranking behind only the US dollar and the euro.

By 2025, the renminbi’s global shares in cross-border trade settlement and foreign-exchange transactions reached 2.94 percent and 8.5 percent, respectively, ranking sixth and fifth worldwide.

The internationalization of the renminbi is both the result of China’s growing economic strength and political influence, and a process deeply shaped by geopolitical dynamics. For China, the fundamental task remains to focus on its own development, enhance its economic, military and political strength, and steadily elevate the renminbi’s international role, with the aim of making it a key pillar within a diversified global currency system.

To this end, China should maintain economic development as its central task, adhere to the dual-circulation development paradigm — one that takes the domestic market as the mainstay while allowing domestic and international markets to reinforce each other, and spare no effort in strengthening its overall economic capacity. Economic strength — and the military capability it supports — remains the foundation for any currency aspiring to international status.

China should also steadily improve the institutional frameworks and infrastructure to lay a solid foundation for the internationalization of the renminbi. This entails continuous steps to pursue financial opening-up and to foster deep, liquid financial markets that balance security and efficiency while offering diverse yuan-denominated financial instruments. It is important to advance capital-account liberalization in a prudent and orderly manner to enhance renminbi convertibility under the financial account. Chinese financial institutions should continue to go global to better support Chinese enterprises operating overseas. The construction of independent and controllable cross-border renminbi payment systems can be accelerated, including further development of CIPS and the multilateral central bank digital currency bridge, or mBridge. Meanwhile, the development of the digital renminbi should be advanced, including steps to expand its overseas application scenarios.

China should take renminbi pricing and settlement in bulk commodity trade and across entire industrial chains as key breakthrough points, comprehensively enhancing the currency’s pricing power and gradually achieving a dual-track model of local-currency pricing plus local-currency settlement.

At the current stage, the initial focus can be placed on the Belt and Road partners and RCEP partners. By reinforcing China’s central role within Asian regional industrial chains, the country can steadily expand the renminbi’s pricing and settlement functions.

Zhang Ming is the deputy director and a research fellow at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. Zhang Chong is a lecturer at the School of International Politics and Economics at the University of Chinese Academy of Social Sciences.

The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.