Chinese Currency Internationalization: A step towards a multi-polar world I
Dr. Syed Mehboob
Senior Business and Political Analyst
http//: www.thenewslark.com
Email:[email protected]
Unfortunately, a small country, Israel, has the greatest influence over the policies and decisions of the United States of America, and Israel’s genocide against Palestinians, killing 50,000 children, 18,000 women, destroying all hospitals, mosques, and churches, has raised the conscience of the world and underscored the importance of a multipolar world. International Court of Justice, International Court of Criminals, and the UNO have given a verdict against Israel, but the USA always came to the rescue and supported Israel. This has jeopardized global peace and harmony. The world became like a jungle where there is no rule of law. The international order is undergoing profound change. Across both the globe and ideological boundaries, “multipolarity” has become a central point of reference in debates about geopolitics and the emerging new world order. While Western capitals tend to view the rules-based international order as being in decline, many countries in the Global South emphasize the need for an end to Western dominance and the creation of a fairer, multipolar world. For more than two decades now.
One important step towards multipolarism is to break the monopoly and dominance of the US dollar. Internationalization of the renminbi (RMB) is China’s long-term strategy aimed at creating a stable international monetary environment for its own economic development as well as other countries, which are feeling uneasy due to a unipolar world and Western countries’ dominance. Its goal is for Chinese and non-Chinese alike to use the RMB for trade, lending, borrowing, and investing internationally. One consequence of this is that Chinese citizens can use the RMB to buy and sell goods and services, and to borrow and lend internationally. Developing countries, which usually cannot borrow in their own currency, are vulnerable to such crises, which have been termed “original sin” by Barry Eichengreen. The Asian Financial Crisis of 1998 is a good example of such a crisis, with China unaffected mainly because of its capital controls.
The use of RMB for international transactions is an important measure to resolve the “original sin” issue. Additional benefits of RMB internationalization to China are enhanced political influence, the ability to extract seigniorage (issuing RMB to foreigners in exchange for real goods), and the ability to borrow large amounts from abroad cheaply in China’s own currency.
Under the current international monetary system (IMS), the USD is the dominant invoicing, investment, and reserve currency in the world. The system is highly asymmetric in the sense that most countries want to maintain a stable exchange rate with the USD by intervening in the foreign exchange market, while the US does not need to worry about the value of its own currency relative to others. For this reason, like many developing countries, China’s RMB was pegged to the USD in the 1980s, 1990s, and 2000s, and nowadays is still closely tracking the USD (though the peg is a “crawling” one). As a result of such pegging, Chinese foreign reserves in 2026 are US$ 4,174 billion.
In order to escape from the abovementioned “dollar trap”, China advocates using a super-sovereign currency (Special Drawing Rights, or SDR) as the global reserve currency, with the currencies of major economies (including the RMB) being the constituent currencies, each weighted by its GDP share. In the long run, China wants the currencies of its main trading partners to be pegged to the RMB, while the RMB itself is pegged to this super-sovereign reserve currency. Whether or not the SDR will become a widely accepted reserve currency, China wants the RMB to be one of the major reserve currencies of foreign central banks. To China, although this is going to be a long process, now is a good time to push for reforming the IMF, given that people still have a fresh memory of the 2008 global financial crisis, during which the world suffered from a shortage of USD due to the credit crunch, followed by a large depreciation of the USD due to quantitative easing.
However, the RMB is not convertible in the capital account. Thus, establishing offshore RMB markets with the help of government policy is crucial in encouraging the international use of the RMB. In this vein, the Chinese government has taken the following steps: allowing and facilitating RMB to be used to settle trade and denominate offshore financial instruments (e.g. RMB bank deposits, issuing RMB-denominated bonds); supplying foreign countries with RMB liquidity (e.g. signing currency swap agreements with more than twenty foreign central banks); gradually relaxing capital controls; and making the RMB more convertible in the capital account.
The results have been dramatic. They include the increase in RMB bank deposits in overseas centers such as Hong Kong, Singapore, and Taiwan; a surge of RMB-denominated bonds issued and loans extended in various offshore centers, notably Hong Kong (dim sum bonds); a rapid increase in China’s trade settled in RMB and finally a rapid increase in the foreign exchange turnover of RMB.
An international currency is one widely used to invoice international trade in goods and services (a unit of account); to settle payments in trade and financial transactions (a medium of exchange); and to denominate financial assets and serve as reserves for foreign central banks (a store of value). These functions are strongly interrelated. Thus, the extent of the use of a currency for any of the above functions would be a good indicator of its use in other functions. Our research attempted to estimate the gap between the potential and actual use of the RMB outside China. Because data about invoicing currencies in trade is readily available, we focus on estimating the gap between the potential and actual use of RMB for trade invoicing. Moreover, as there is a lack of data on RMB invoicing, we analyze the determinants of invoicing shares for some major foreign currencies to predict the potential invoicing shares of the RMB.
Tthe determinants of the potential extent of RMB invoicing in a country’s trade with China are: China’s GDP as a percentage of world GDP; trade with China as a percentage of the total trade of a given country; the extent to which a given country’s exchange rate tracks the RMB; the “market thickness” of the RMB, which depends on the degree of convertibility of the RMB; the degree of Chinese capital controls; and the maturity and stability of the Chinese financial system.
In 2026, the RMB’s global role is expanding through increased adoption in trade settlement and investment, driven by China’s 15th Five-Year Plan focusing on capital account openness and strengthening offshore markets. The currency is strengthening due to a large trade surplus
Chinese Exports US$ billion Chinese Imports US$ Billion Trade Volume US$ billion Trade Balance US$ billion Year
4,753 4,476 9,229 277 2025
( to be continued)
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