Tsinghua University

BEIJING – The People’s Bank of China (PBOC) signaled a significant push to internationalize the yuan, announcing at its mid-year work conference a commitment to accelerate its use in global trade and finance. This marks the first dedicated focus on yuan internationalization in the PBOC’s mid-year readout since 2021.

According to a statement released following the meeting, the PBOC will prioritize expanding the yuan’s role in trade settlement, bolstering its financing capabilities, and refining policies related to funding pools and overseas listings for Chinese companies. Specific measures include strengthening the offshore yuan market and establishing reliable liquidity channels across various maturities.

The central bank also intends to expedite the progress of overseas clearing banks utilizing the Cross-border Interbank Payment System (CIPS), a Beijing-backed alternative to the SWIFT international payment network. CIPS currently has direct participation from over 1,300 financial institutions in 33 countries and regions as of December 2023, according to PBOC data.

This renewed emphasis on yuan internationalization aligns with China’s broader strategic objectives to increase the currency’s global influence. This push is occurring against a backdrop of growing concerns regarding U.S. debt levels and escalating geopolitical tensions, wich are prompting a reassessment of the dollar’s long-held dominance in international finance.

Recent commentary from prominent investors, such as Ray Dalio, founder of Bridgewater Associates, has highlighted vulnerabilities in the U.S. economy. Dalio warned in June 2024 that the U.S. could face a severe economic downturn if its government does not address its growing budget deficit, suggesting a target of 3% of GDP. His concerns echo those of other economists who point to the U.S. national debt, which exceeded $34.6 trillion in January 2024 according to the U.S.Treasury Department.

Context: The Yuan’s Internationalization Journey

China has been steadily promoting the international use of the yuan (also known as the renminbi) for over two decades. Initial efforts focused on trade settlements with countries along the Belt and Road Initiative, a massive infrastructure development project spanning Asia, Africa, and Europe. In 2015,the International Monetary Fund (IMF) added the yuan to its Special Drawing Rights (SDR) basket,a move seen as a significant milestone in its internationalization.

However,the yuan still faces challenges to widespread adoption. Thes include capital controls imposed by the Chinese government,limited convertibility,and a lack of deep and liquid offshore markets compared to the U.S.dollar. The PBOC’s latest initiatives aim to address these hurdles by fostering a more open and accessible financial system.

The development of CIPS is a key component of this strategy, providing an alternative to the dollar-dominated SWIFT system. While CIPS has grown rapidly, it