China’s Push to Dethrone the U.S. Dollar – How and Why?

For decades, the U.S. dollar has reigned supreme as the world’s dominant reserve currency, underpinning global trade and financial systems. However, China, through its ambitious economic and geopolitical strategies, is making calculated moves to challenge the dollar’s dominance with its own currency, the yuan (also known as the renminbi). While China’s plan is bold and multifaceted, it faces significant obstacles. This article explores China’s motivations, its strategic approach, the role of BRICS, and the barriers that stand in the way of dethroning the dollar.

Motivations Behind China’s Currency Ambitions

China’s push to elevate the yuan is driven by both economic and strategic motivations. At its core, Beijing seeks financial independence from the U.S.-controlled global financial system, which has proven vulnerable to geopolitical tensions. The sweeping sanctions imposed on Russia in 2022, which froze hundreds of billions of dollars in reserves, served as a wake-up call for China. Chinese policymakers realized that their economy is similarly exposed to U.S. financial power, with more than half of their foreign reserves denominated in dollars.

Yu Yongding, a former member of China’s central bank’s monetary policy committee, warned, “Chinese dollar assets are increasingly becoming ‘hostages.'” This statement highlights a fundamental fear in Beijing—that the U.S. could one day leverage its control of the dollar to cripple China’s economy, just as it did with Russia.

Additionally, the dollar’s dominance allows the U.S. to impose financial sanctions on adversaries and fund its deficits at relatively low borrowing costs. For China, reducing reliance on the dollar isn’t just an economic goal—it’s a matter of national security and long-term strategic survival.

How China Plans to Challenge the Dollar

China is employing a multi-pronged strategy to increase the yuan’s international standing:

1. Diversifying Foreign Reserves: China has been gradually reducing its holdings of U.S. Treasury securities and increasing its gold reserves. Between November 2022 and April 2024, China decreased its U.S. Treasury holdings by 11%, while increasing its gold reserves from 3.4% to 4.9% of total reserves. However, diversifying its $3.2 trillion in foreign reserves away from the dollar is a herculean task.
2. Bilateral Trade Agreements: China is promoting the yuan in trade agreements, particularly with nations in Africa, Latin America, and Southeast Asia. Countries like Argentina and Bangladesh have started using the yuan in international transactions. For example, Argentina repaid a $2.7 billion debt to the IMF using yuan instead of dollars, a move once considered unthinkable.
3. Cross-Border Payment Systems: The Cross-Border Interbank Payment System (CIPS) is China’s alternative to SWIFT. While still dependent on SWIFT for many transactions, CIPS represents a growing effort to bypass U.S. financial oversight. As one analyst noted, “Though CIPS relies on SWIFT, its expansion indicates Beijing’s determination to carve out financial independence.”
4. Commodity Markets: China is attempting to price essential commodities, like oil and rare earth metals, in yuan instead of dollars. Success in this area would significantly enhance the yuan’s global appeal. By leveraging its dominance in rare earth minerals, Beijing hopes to push global commodity traders to accept the yuan in major deals.
5. Digital Yuan: The launch of China’s digital currency (e-yuan) is another tool aimed at promoting financial independence and providing a currency that can bypass U.S.-controlled systems. The e-yuan also adds an element of secrecy to international transactions, limiting U.S. oversight.

The Role of BRICS in China’s Strategy

The BRICS alliance—comprising Brazil, Russia, India, China, and South Africa—is central to China’s de-dollarization agenda. BRICS nations collectively represent a significant portion of global GDP and population, and they are increasingly vocal about reducing reliance on the dollar.

Under China’s leadership, BRICS is promoting local currency settlements in trade and investment. Russia, in particular, has become a major advocate for yuan-based transactions following Western sanctions. Additionally, newly invited BRICS members, including oil-rich nations like Saudi Arabia, could play a key role in shifting oil trade away from dollar dominance.

Iran, for example, views its inclusion in BRICS and the Shanghai Cooperation Organization (SCO) as a way to bypass American sanctions. This growing coalition is part of China’s larger strategy to create an economic bloc less dependent on the dollar.

Obstacles in China’s Path

Despite its strategic efforts, China faces substantial challenges in dethroning the dollar:

1. Capital Controls: China maintains strict controls on capital flows to prevent large-scale financial instability. These controls reduce global confidence in the yuan as a reliable reserve currency.
2. Lack of Trust and Transparency: International investors remain wary of the Chinese financial system, which is heavily influenced by the government. As one expert noted, “Transparency remains a key issue for China, and without trust, global investors will hesitate to adopt the yuan.”
3. Limited Financial Market Depth: The global demand for safe assets remains overwhelmingly tilted toward U.S. Treasury bonds, which are highly liquid and perceived as stable.
4. Allied Resistance: Major U.S. allies, such as Japan and the European Union, are unlikely to align with China’s efforts, given their economic and security ties with the U.S.
5. Network Effects: The dollar’s dominance is reinforced by its entrenched role in global trade and finance. Replacing it would require decades of consistent effort and structural reform.

While China’s push to internationalize the yuan and reduce reliance on the dollar is making progress, the road ahead remains long and uncertain. The dollar’s dominance is deeply embedded in global systems, and overcoming these entrenched advantages will require far-reaching economic reforms and sustained geopolitical alliances.

“If you look at the Chinese yuan reserves as a share of total reserves, it’s only about 2.5%. And China still has current account restrictions. That means it’s going to take a long time for any single currency to usurp the U.S. dollar,” said Cedric Chehab of Fitch Solutions.

The rise of the yuan may not immediately dethrone the dollar, but it signals an ongoing shift toward a multipolar financial world. For policymakers, investors, and global businesses, understanding these dynamics is critical to navigating an increasingly fragmented global economy.

NP Editor:  Having the U.S. Dollar as the world’s dominant reserve currency is a huge advantage for us, not only strategically, but also in a practical sense in that is waters down inflation as that occurs. When we “print” more money, it affects a much broader audience than just U.S. citizens.

China would like to take this away from us – which, if done quickly, would do tremendous damage to our economy. But nobody trusts China for a simple reason: They have proven themselves untrustworthy over and over again, by manipulating their currency to their advantage.  If they gain traction it will be slow, but the effort is worrisome.