In China – a 21st Century Industrial Revolution, published last week, I showed how China's central government industrial priorities boosted manufacturing robotization in crowded industry segments, resulting in massive overproduction
In electrical vehicles, 129 brands are active (and 400 are said to have collapsed since 2018)
Losses of solar panel manufacturers, estimated at $5.6 billion in 2025 and $60 billion overall, still leave 600 firms in operation (one third of listed solar panel firms are loss-making)
This happens when every firm jostles to be first in line, boosted by massive government-subsidized expansion …
With heavy losses in brutal price wars, the Chinese manufacturers undertook a massive export push on (hopefully) profitable foreign markets
Whether exports growth really was the true goal of this industrial drive is disputable
The magnitude of the industrial tidal wave of manufactured goods might actually have taken China's leadership off-guard
It probably was not in China's interest to set global supply chains on fire ...
At $1.2 trillion for 2025, the gapping surplus between exports (way up) and imports (stable at best) is the predictable consequence of China’s insistence on self-sufficiency and ‘national security’
With trends pointing to structural worsening of trade imbalance between China and the developed Western economies, a tipping point has been reached
Fragmentation of the global supply chains is the probable outcome of hardened economic protectionism
As I will argue in this note, the currency strategy of the Chinese central government informs on the country's anticipation of this trend
International trade relying on the yuan marks out a geography supporting a degree of monetary integration
Belt and Road (BRI) countries and the near-abroad of China (South-East Asia) are the prize of this strategy combining trade with settlement in yuan
In the world's populous high-growth regions, boosted by trade, the yuan could gain a growing following and international recognition
However, if trade will be the Chinese currency's strength, it will also be its weakness
This is because to stretch beyond trade - and their related financing opportunities - the yuan would require transparency and convertibility and loosening the State's tight grip will be hard
Still, the material advantages in yuan trades, by way of China's financial infrastructure, could outweigh the implicit risk of a opaque exchange rate
China's options to further the currency's international ambitions may remain constrained by capital controls, but in a round-about way, the credibility and trust of China's partners in yuan trade might require more than a litte flexibility in monetary policy
Both the Chinese Yuan and the U.S. dollar have pivotal importance in world finance and in global trade
The central position of the U.S. dollar in the global monetary system, the convertibility of the currency, and the size and liquidity of American asset markets (bonds and equities) are the defining features of an international currency
The Chinese currency is different
Ticking none of the boxes of currency convertibility, the yuan's importance seems counterintuitive and easy to exaggerate
I will argue that, whatever the currency's regulatory limitations and financial volatility, it is as facilitator of international trade that the yuan may thrive
The yuan, a work-in-progress
The yuan is being introduced stepwise, without much fanfare
In global payment data, the yuan grades well below its economic weight, between 2.5% and 3.5% of international transactions, below the U.S. dollar (50%) and the euro (21%)
In trade finance (letters of credit and documentary collections), the yuan climbs the rankings - a distant second behind the dollar - to 6% to 8% of the global finance market
Narrowing the scope to direct bilateral trade settlement, the Chinese currency is aligned with expanding export networks
The BRI (Belt and Road) countries and ASEAN countries generate the lion's share of China's trade, with respectively $3.39 trillion and more than $1 trillion
The yuan accounts for the equivalent of $1.9 trillion in 2025 trade (30% of its $6.2 trillion global trade in goods and services)
It can be implied that close to 40% of the trade with preferred partners of the 'near-abroad' relies on the yuan
Rather than a charge displacing the U.S. dollar, the yuan prepares for a 'long march', mirroring the tidal waves of China's millenia-long history,
Close monetary association on a regional basis is a step forward towards more lofty ambitions for the yuan
In the Western news cycle, history fades as unconsequential reminder of times long gone
In China, history distills goverment policy decisions to their fundamental parts, providing the time line of a build-up in decades...
Edging towards completion, Chinese currency strategy is primed as foundational 'building block' of the country's Asian regional dominance
With the yuan as cornerstone of an alternative Asian financial architecture, China restates a geoeconomic framework reminiscent of the tributary system grounding the country's preeminence in Asia
Because of a poor track record of volatility in yuan trade settlements, this trend, though spectacular, may not be conclusive yet...and trade with Russia has undoubtedly become a key contributing factor
In 2014, Yuan trades, peaking at 37% of total as the currency’s strengthening made the holdings attractive, duly fell back (to 10%) under stress
Today, Chinese shadow banking and the looming provincial bond market are still unknown but very sizable factors of uncertainty, impacted by the domestic real estate crisis
An international curency in name...
My review of the financial framework in 'Yuan - Taking the long view' highlighted how the yuan established international currency credentials by facilitating trade transactions
To advance financial market liberalization without relinquishing control over the currency, Yuan-denominated financial instruments offer attractive options to advance bilateral trade
- Chinese banks increased lending in yuan to other emerging market economies (EMEs), to the detriment of the U.S. dolar, according to a May 2025 Federal Reserve study
- "Dim Song" bonds, denominated in yuan, designed mainly for international and institutional investors, issued outside mainland China and settled in offshore yuans, establish a reference yield curve contributing to internationalize the currency
- Yuan swap lines with more than 30 central banks securing their access to the currency
- A Chinese Cross-border Interbank Payment System (CIPS), combining settlement with a financial messaging system, is intended as an alternative to SWIFT, processing an equivalent $26 trillion in total transaction volume in 2025, with a daily processing capacity of around 30,000 to 32,000 transactions
- A digital-currency network, mBridge, has been built by China with other central banks to handle high-volume deals - with transactions of $55.5 billion in 2025
Financial infrastructure supports a virtuous circle linked to China's banking system to facilitate speed of settlements, lower intermediary costs and access trade finance on favorable terms
Regionalization of the currency in fact...
With regionalization of the yuan toward the Global South, China has been using the levers of trade with pragmatism
- With the fall-out of the Ukrainian war, Russia's energy and commodity exports, and 'dual-use' manufactured imports from China will increasingly be settled in yuan
- Foreign commodity suppliers will be required to settle for a growing ratio of their trade in yuan
- Overseas lending to BRI countries in yuan embeds the currency in emerging market debt structures - to close to 50% of China's international lending estimated at $1 trillion
Lending strategies are gaining further momentum
In October 2025, Kenya took up an offer to swap part of their dollar-listed debt to China in yuan, announcing a saving of more than a third on interest payments ($167 million)
Potential revaluation of the yuan reversing gains in dollar terms is a factor of risk which may be discounted by ever closer yuan-trades with China
In Indonesia, a landmark agreement (April 2026) went further in advancing the yuan's inclusion in the debt structures of emerging markets
China will be allowed to issue sovereign bonds in Indonesia’s domestic market on a reciprocal basis
This push for regional monetary integration weighs in with financial implications and in geopolitical terms
- By investing in Chinese debt, Indonesian pension funds, insurers and banks will support a yuan ecosystem (including hedging instruments and custody services)
- With access to a broad range of non-Chinese investors (hopefully expanded across South-East Asia), overconcentration of Chinese debt in troubling segments (provincial entities, real estate) should be alleviated
- Incremental shifts away from U.S. Treasuries open a pathway, reflecting new arbitrage opportunities for debt investors
In summary
At a watershed, the U.S. dollar and the yuan compete across very different frameworks
Monetary integration is embedding the yuan at the center of trade and debt structures of the Global South
The U.S. dollar is asserting its strength as core of global trade and finance, transparent and convertible as the yuan will (probably) never be
America would be unwise to ignore or downplay the attraction of the yuan
The game may just be in the firts innings, as I will discuss shortly in "The Global South"