Neat rows of Chinese banknotes sit behind glass in the center of the National Security Gallery inside the Hong Kong History Museum, alongside model fighter jets, attack helicopters and vials of rare earth metals.
Featuring instruments of war and commerce, the exhibition highlights a central idea: the internationalization of its currency, the renminbi, is considered a pillar of China’s national security.
Despite its rise as an economic superpower, China remains dependent on a global financial system anchored by the dollar. Making the renminbi a globally accepted currency would allow Beijing to conduct more trade on its own terms and blunt a long-standing source of U.S. leverage.
This trend has accelerated with the wars in Ukraine and Iran, as sanctions push U.S. adversaries toward the renminbi to circumvent the Western financial system. Indeed, China’s 20-year project to establish international financial ties and technological infrastructure for a globally accepted currency is paying off, even as others shun the dollar.
China’s financial position “satisfies the demand for dedollarization” from countries seeking trade with restricted countries like Iran, said Alisha Chhangani, associate director at the Atlantic Council, a Washington think tank.
Since the end of World War II, when 44 countries agreed to make the dollar the world’s reserve currency, most of world trade has been based on it. This dominance has given the United States powerful leverage, allowing it to impose sanctions that can virtually guarantee financial ruin.
Recent conflicts have shown to what extent a Chinese alternative can offer a solution to circumvent the system. At least two ships paid Iran in renminbi to ensure safe transit through the Strait of Hormuz, according to Lloyd’s List Intelligence, a maritime information service.
Payments using China’s network increased by almost 50% last month as countries bought Iranian oil, according to Atlantic Council data. Russia, cut off from the dollar after invading Ukraine, now settles most of its trade with China in renminbi.
In March, Qiushi, the ideological newspaper of the Chinese Communist Party, resurfaced a 2024 speech by Xi Jinping, China’s leader, calling for the renminbi to be “widely used in international trade” and to “achieve reserve currency status.”
The dollar remains the primary currency of choice in international trade, valued for its liquidity and ease of use. The euro, yen and pound sterling are far behind. Even transactions that do not involve the United States are often conducted in dollars, including most of China’s trade. The renminbi accounts for only 3% of global transactions, about the same as the Canadian dollar.
China’s strict financial controls have long dampened the renminbi’s use globally, making it less attractive to hold. Capital flows are tightly managed. Citizens can only move limited amounts abroad each year, and foreign investors are subject to strict quotas and must obtain approvals to buy Chinese stocks and bonds.
But China does not need to replace the dollar to escape U.S. financial grip, said Edward Fishman, a fellow at the Council on Foreign Relations. Simply having an alternative system in case of emergency is enough to weaken Washington’s grip on global finance.
Beijing has gone to extraordinary lengths to protect itself from geopolitical shocks, building up stockpiles of oil, gas and critical materials. It even maintains a strategic reserve of pork, a staple of the national diet. Along the same lines, China has spent decades developing a parallel financial infrastructure operating outside of the dollar system.
Starting in the 2000s, China signed currency swap agreements with dozens of central banks, allowing its trading partners to access the renminbi without going through the dollar-based system. These so-called swap lines, totaling around $600 billion, provide emergency liquidity and could increase China’s influence in the event of a financial crisis.
In 2015, China launched the Cross-Border Interbank Payment System, or CIPS, allowing banks around the world to settle payments in renminbi. The system offers an alternative to SWIFT, the Belgium-based messaging network that underpins most global transactions. Russian and Iranian banks were excluded from SWIFT under American pressure.
Since Russian banks were removed from SWIFT after the full-scale invasion of Ukraine in 2022, the number of institutions directly participating in CIPS has almost tripled, from 75 to nearly 200, according to Chinese government data.
Money flowing through Chinese financial pipelines has increased since the war in Iran forced the closure of the Strait of Hormuz, a vital shipping channel through which about 20 percent of the world’s oil flows, according to the Atlantic Council’s Geoeconomic Center. Countries desperate for oil are increasingly using China’s network to pay for internationally restricted crude outside the dollar system.
From February to March, average daily payments increased from $86 billion to more than $131 billion, while the average transaction size increased by more than 8%, according to data from the Atlantic Council’s Geoeconomic Center. Shanghai Securities News, a state-owned newspaper, attributed the growth in usage to “continuing uncertainty in the Middle East.”
“The rise has to come from other countries in Asia that are turning to usage right now” to buy restricted oil, said Josh Lipsky, director of the Atlantic Council’s Center for Geoeconomics.
Major obstacles remain for the renminbi to challenge the dollar’s dominance, said Eswar Prasad, an economics professor at Cornell University.
For the currency to play a larger global role, it must be easier to use outside China, requiring a relaxation of Beijing’s strict controls on capital flows. The government is reluctant to take this step, for fear of losing control of its exchange rate. Without this opening, there will not be enough renminbi in circulation overseas for trading partners to do anything other than buy Chinese goods, Prasad said.
When countries like Saudi Arabia sell their oil for dollars, they can easily recycle those proceeds into liquid assets such as U.S. Treasuries. With the renminbi, there is no equivalent yet.
So far, China has taken small but significant steps to strengthen its cross-border payment system. It remains unclear whether China is truly on a “sustainable path” to becoming a major global payments currency, Mr. Prasad said. But one thing is clear: “There is a desperate desire in the world to escape the clutches of the dollar-denominated system. »
Berry Wang contributed reporting from Hong Kong.
