Chinese President Xi Jinping’s ambition to turn the yuan into a global reserve currency, potentially displacing the dollar from its hegemonic position in the international monetary system, has been a hot topic of discussion in recent years.
As The Liberal Globe, we have reported on the questioning of the dollar system both because of its domestic problems – most notably, the rapidly deteriorating US fiscal position – and the geopolitical decline of US hegemony.
In a speech by Xi at a meeting of the Central Economic Work Conference in October 2025, Xi argued that a “great financial power” must have a “strong currency that is widely used in international trade, investment and foreign exchange markets and holds the status of a global reserve currency.”
This suggests that the yuan internationalization strategy is a long-term plan and not a sudden policy change. However, the timing of the publication suggests an acceleration of this strategy, possibly due to Donald Trump’s policies during his second term, which have both reversed economic policy (e.g., with retaliatory tariffs, on 2/4/2025).
The Politburo of the Communist Party of China, within the framework of the 15th Five-Year Plan (2026–2030), envisages strengthening the internationalization of the national currency, opening up capital accounts (i.e., free capital flows) and creating an independent cross-border payment system.
However, the analysis of monetary policy as formulated by the Chinese leadership shows that Beijing sees internationalization mainly as a strategic response to American policy and not as a pursuit of full monetary sovereignty – that is, the substitution of the dollar as the world’s reserve currency.
The driving force is the use of the dollar as a geopolitical weapon
The prevailing view in China is that the strengthening of the yuan is a natural and inevitable response to the growing tensions with the US since Donald Trump’s first term.
Chinese officials often refer to the need to counter Washington’s use of the dollar as a “weapon” through the use of economic sanctions against states such as Russia and Iran.
As he pointed out, “accelerating the internationalization of the yuan is not only an economic necessity, but also a crucial means of strengthening financial security and strategic dominance.”
The 15th Five-Year Plan period is considered by Chinese officials to offer particularly favorable conditions, as confidence in the US as a global leader declines after Trump’s unpredictable trade war.
At the same time, the strengthening of capital markets in China aims to finance innovative technology companies and create wealth for investors, which will boost domestic consumption.
As capital controls are relaxed, international investors will gain more choices in yuan-denominated assets and opportunities to participate in the development of the Chinese technology sector.
At the same time, the rapid expansion of international trade relations through a dense network of agreements, especially with ASEAN and Latin American countries, will enhance the use of the Chinese currency in cross-border transactions, especially in energy goods and raw materials.
Internationalization and financial system reform
The internationalization of the yuan is likely to be a key driver for the maturation of the Chinese financial system and addressing chronic weaknesses. Maintaining the growth path and opening up the financial system remain insufficient.
Internationalization is expected to enhance transparency, improve credit risk assessment systems and upgrade mechanisms for managing “bad loans”.
The impact on the bond market is considered particularly significant, where increased liquidity and the participation of foreign investors could address structural weaknesses, such as the lack of market makers.
Furthermore, internationalization may put pressure on the correction of distortions in the credit rating system, such as the incentives created by the remuneration model of debt issuers and the “tacit guarantees” for state agencies that shaped the “bubble” in the real estate market.
Why is monetary hegemony considered dangerous?
Despite the potential benefits, pursuing full monetary hegemony could have serious negative consequences. Even if the dollar declines, China should not pursue the first place, a monetary hegemony.
Such a development would lead to an overvaluation of the currency, an increase in demand for the yuan and, ultimately, a loss of export competitiveness.
This would hurt the real economy, which remains a priority for Beijing, which learned from the dominance of the financial sector in the United States. Instead of full monetary hegemony, China is more likely to pursue a system of weight sharing between the yuan and the dollar.
In this case, monetary hegemony entails significant costs, and states that assume it end up facing problems similar to those of the United States. In this case, if China follows this path, it will never become a world leader.
China seeks to strengthen the international role of its currency as a means of economic security and strategic autonomy, but without assuming the full burden of monetary hegemony.
This strategy reflects a balance between internationalization and careful avoidance of the structural costs of dominating the global monetary system, in line with Chinese long-term monetary policy.
