Analysis:Dollar’sPainIsYuan’sGain

China’s push to internationalize the yuan is entering a more difficult phase, where expanding the currency’s global use will require more than simply settling trade in yuan.

For more than a decade, the yuan’s international use has expanded mainly through cross-border trade settlement. But settlement alone has been seen as insufficient: unless yuan liquidity can circulate more freely through global investment and financing channels, the currency’s broader international role is likely to remain limited.

Geopolitical fragmentation and weakening confidence in dollar assets are creating new momentum for the yuan to evolve beyond a settlement currency into a financing, pricing and reserve currency.

Yuan’s growing appeal

Former People’s Bank of China Governor Zhou Xiaochuan said the current transformation of the international monetary system is being driven largely by the U.S., citing tariffs, sanctions and geopolitical conflicts that have eroded global trust in the dollar.

The shift is visible in capital flows and investor sentiment. A recent survey by the Association of German Chambers of Commerce and Industry found German companies’ willingness to invest in the U.S. had weakened due to tariff uncertainty, while attention shifted toward China and other Asian economies.

At the same time, experts see a growing opportunity to position the yuan as a low-cost financing currency, as China’s interest rates remain comparatively low among major currencies.

That advantage is visible in cross-border financing markets. The yuan has become one of the world’s top three trade financing currencies, while issuance of yuan-denominated bonds by foreign entities has accelerated sharply. In the first four months of 2026 alone, issuance of panda bonds on the Chinese mainland exceeded 100 billion yuan ($14.7 billion), while Hong Kong dim sum bond issuance topped 310 billion yuan.

Beyond funding costs, investors are increasingly treating yuan assets as a diversification tool. Chinese assets’ historically low correlation with U.S. markets has been attractive for global portfolio allocation.

The yuan’s exchange-rate stability has reinforced that appeal. After falling to 7.35 per dollar following a new round of U.S. tariffs in April 2025, the yuan rebounded as China’s trade surplus remained resilient, appreciating nearly 7.5% by April 2026. Even during the recent U.S.-Israel war with Iran, the currency weakened only marginally against the dollar.

Yuan StrengthensNote: The official closing rate at 4:30 p.m. Beijing timeSources: China Foreign Exchange Trade System, CEIC, CaixinOnshore yuan spot closing rate against the U.S. dollar.

Yuan Strengthens

Boosting circulation

Beijing has rolled out measures aimed at supporting wider yuan circulation. Regulators have expanded cross-border lending quotas, updated rules for overseas yuan financing and opened China’s government bond futures market to qualified foreign institutional investors for hedging purposes.

Allowing foreign investors to trade government bond futures gives them an additional tool to manage risk in yuan bond holdings, reducing the need to cut positions during periods of volatility.

Still, important gaps remain. Andrew Batchelor, head of ForexClear at London Stock Exchange Group, noted that the yuan is not yet a payment-versus-payment settlement currency within the global Continuous Linked Settlement system, increasing settlement risk and limiting the scale of yuan business some banks are willing to conduct.

Pricing power

Another challenge is pricing power. Chinese economists argue that China’s role as one of the world’s largest commodity importers and a dominant manufacturing power should eventually translate into greater yuan use in trade pricing, not just settlement.

The idea of a future “petroyuan” has gained renewed attention following the U.S.-Israel-Iran conflict. Deutsche Bank AG said in a recent report that geopolitical tensions could deepen cracks in the petrodollar system and encourage greater use of the yuan in energy trade.

Yet economists caution that pricing power is far harder to build than settlement infrastructure. Miao Yanliang, chief strategist at China International Capital Corp. Ltd., said that dominant pricing currencies have become “vehicle currencies” used even between third countries — a role still overwhelmingly occupied by the dollar.

That helps explain why Beijing’s ambitions remain constrained by structural realities. While the yuan’s share of global foreign-exchange reserves has risen modestly in recent years, it remains below 2%, far behind the dollar.

The core constraint is whether global investors are prepared to hold and recycle yuan assets at scale, which depends on the depth, liquidity and credibility of China’s financial markets.

Contact editors Jonathan Breen (jonathanbreen@caixin.com) and Lin Jinbing (jinbinglin@caixin.com)