The Rise of the Renminbi: China’s Strategic Shift from the U.S. Dollar

Since 2010, the majority of China’s cross-border payments, like those of many countries, have been settled in U.S. dollars (USD). As of the first quarter of 2023, that’s no longer the case.

This graphic below from the Hinrich Foundation provides visual context to the growing use of the Chinese renminbi (RMB) in payments both domestically and globally.

The De-Dollarization of China’s Cross-Border Transactions

This analysis uses Bloomberg data on the share of China’s payments and receipts in RMB, USD, and other currencies from 2010 to 2024.

In the first few months of 2010, settlements in local currency accounted for less than 1.0% of China’s cross-border payments, compared to approximately 83.0% in USD.

China has since closed that gap. In March 2023, the share of the RMB in China’s settlements surpassed the USD for the first time.

Date	Renminbi	U.S. Dollar	Other
March 2010	0.3%	84.3%	15.4%
March 2011	4.8%	81.3%	13.9%
March 2012	11.5%	77.1%	11.5%
March 2013	18.1%	72.7%	9.2%
March 2014	26.6%	64.8%	8.6%
March 2015	29.0%	61.9%	9.0%
March 2016	23.6%	66.7%	9.7%
March 2017	17.6%	72.5%	9.9%
March 2018	23.2%	67.4%	9.4%
March 2019	26.2%	65.1%	8.7%
March 2020	39.3%	54.4%	6.3%
March 2021	41.7%	52.6%	5.6%
March 2022	42.1%	53.3%	4.7%
March 2023	48.4%	46.7%	4.9%
March 2024	52.9%	42.8%	4.3%

Since then, the de-dollarization in Chinese international settlements has continued.

As of March 2024, over half (52.9%) of Chinese payments were settled in RMB while 42.8% were settled in USD. This is double the share from five years previous. According to Goldman Sachs, foreigners’ increased willingness to trade assets denominated in RMB significantly contributed to de-dollarization in favor of China’s currency. Also, early last year, Brazil and Argentina announced that they would begin allowing trade settlements in RMB.

Most Popular Currencies in Foreign Exchange (FX) Transactions

Globally, analysis from the Bank for International Settlements reveals that, in 2022, the USD remained the most-used currency for FX settlements. The euro and the Japanese yen came in second and third, respectively.

Currency	2013	2022	Change (pp)
U.S. Dollar	87.0%	88.5%	+1.5
Euro	33.4%	30.5%	-2.9
Yen	23.0%	16.7%	-6.3
Pound Sterling	11.8%	12.9%	+1.1
Renminbi	2.2%	7.0%	+4.8
Other	42.6%	44.4%	+1.8
Total	200.0%	200.0%

The Chinese renminbi, though accounting for a relatively small share of FX transactions, gained the most ground over the last decade. Meanwhile, the euro and the yen saw decreases in use.

The Future of De-Dollarization

If the RMB’s global rise continues, the stranglehold of the USD on international trade could diminish over time. As more countries and businesses choose to conduct transactions in RMB, the demand for USD in global trade might decrease, potentially leading to a more multipolar currency system. This shift could reduce the USD’s dominance, influencing various aspects of the global economy.

Impacts of Declining Dollar Dominance

1. Underperformance of U.S. Financial Assets:
   • With reduced global reliance on the USD, demand for U.S. treasury bonds and other financial instruments could decline. This might lead to higher interest rates and lower asset prices in the U.S. financial markets.
   • A weaker dollar could increase the cost of imports, contributing to inflationary pressures in the U.S. economy.
2. Diminished Power of Western Sanctions:
   • The U.S. has historically used its currency’s dominance to impose economic sanctions, exerting significant influence over global financial systems. As more transactions are conducted in RMB, the efficacy of these sanctions could be undermined.
   • Countries facing sanctions might find alternative ways to trade, reducing the impact of U.S. and Western financial restrictions.
3. Shift in Global Financial Networks:
   • The growing use of RMB might lead to the development of new financial networks and payment systems centered around Chinese financial institutions.
   • This could potentially decrease the influence of Western financial hubs like New York and London, redistributing financial power more globally.

Challenges to Complete De-Dollarization

However, despite these potential changes, a complete de-dollarization of the world economy in the near- or medium-term remains unlikely. Several factors contribute to this:

1. China’s Strict Capital Controls:
   • China maintains stringent controls on the flow of capital in and out of the country. These measures are aimed at stabilizing the RMB and preventing financial crises but also limit the currency’s global liquidity and appeal.
   • Without greater flexibility in capital movements, the RMB might struggle to become a true global currency on par with the USD.
2. Economic Growth and Stability:
   • China’s recent economic performance has shown signs of slowing, with challenges such as high debt levels, demographic shifts, and geopolitical tensions affecting growth prospects.
   • Sustained economic strength and stability are crucial for a currency to be widely adopted internationally. Persistent economic issues could deter global businesses and countries from fully embracing the RMB.
3. Trust and Reliability:
   • The USD has built a reputation for stability and reliability over decades. Trust in the U.S. financial system and its legal framework underpins the dollar’s global dominance.
   • For the RMB to replace the USD, it would need to earn similar levels of trust and reliability, which could take significant time and structural changes in China’s financial and legal systems.

Conclusion

While the rise of the RMB signals a potential shift towards a more diversified global currency system, several structural and economic challenges limit the likelihood of a near-term complete de-dollarization. The future will likely see an increased role for the RMB in international trade and finance, but the USD’s entrenched position means it will remain a dominant force for the foreseeable future.