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The Yuan’s Rise and the Dollar’s Staying Power
Why global currency dominance depends on openness, trust, and dynamic markets
Since the 1944 Bretton Woods Agreement, the U.S. dollar has served as the world’s primary reserve currency, supported by the stability of the U.S. economy, deep and liquid financial markets, global trust in U.S. institutions, and the dollar’s central role in energy and commodity trade . Today, the dollar still accounts for around 59 per cent of global foreign‑exchange reserves, compared with the yuan’s 2.7 per cent .
The dollar’s dominance is not simply historical inertia. It is reinforced by:
- Full convertibility of the currency
- Open capital markets
- Independent monetary policy
- Transparent legal and regulatory systems
These features make the dollar uniquely attractive to central banks, investors, and multinational firms.
Alternative trading
China has made significant efforts to promote the yuan internationally, especially since the 2008 financial crisis. Key steps include:
- Signing yuan‑based trade agreements with partner countries
- Securing the yuan’s inclusion in the IMF’s Special Drawing Rights (SDR) basket in 2016
- Creating the CIPS payment system as a partial alternative to SWIFT
- Opening parts of its bond market to foreign investors
- Expanding yuan‑denominated trade through the Belt and Road Initiative
These moves have increased the yuan’s visibility and use, especially among countries seeking to reduce reliance on the dollar.
Structural barriers
The most significant obstacle to yuan dominance is China’s macroeconomic framework. According to the Impossible Trinity, no country can simultaneously maintain:
- Free capital flows
- A fixed or tightly managed exchange rate
- Independent monetary policy
China currently maintains capital controls and a managed exchange rate, which means it cannot offer the openness and predictability required of a global reserve currency. Analysts argue that the yuan is fundamentally unfit for reserve‑currency status without major reforms, including loosening capital controls and increasing financial transparency .
These constraints are not political preferences. They are structural necessities for China’s economic model.
Could the yuan become a reserve currency?
Some economists, such as Kenneth Rogoff, argue that the yuan could become a significant reserve currency within the next five years if China continues opening its government bond markets and developing sophisticated financial instruments. Crucially, Rogoff notes that full capital‑market liberalisation is not strictly required for reserve‑currency status—only a credible, investable sovereign bond market and deeper financial infrastructure .
This suggests the yuan may grow in importance even without matching the dollar’s openness.
De‑dollarisation
A number of countries - Russia, Iran, India, Brazil, Turkey, Argentina - are increasingly using yuan in bilateral trade, often for geopolitical reasons or to avoid U.S. sanctions. This reflects a diversification trend, not a wholesale shift. The yuan’s share of global payments via SWIFT remains around 3.5 per cent, compared with the dollar’s 40 per cent .
De‑dollarisation is real, but limited.
Growing, but not changing
The yuan will continue to expand its global role, especially in Asia and among countries aligned with China. But replacing the dollar requires deep structural reforms - greater transparency, full or near‑full convertibility, and open capital markets. These changes would challenge China’s political and economic model.
For now, the yuan is rising, but the dollar remains irreplaceable.
