Is China building an alternative monetary system

ASIA MACRO INSIGHTS WRITTEN BY Is China building an alternative Alicia GARCIA HERRERO Tel. monetary system?

Haoxin MU Tel. China has decided that it cannot be a hegemonic power without an international currency. However, what is far less With contribution from: understood is the route it has chosen, because it bears little Jeremy JI resemblance to how the dollar, the pound or the euro became international currencies.

Jiayu HUANG The standard route runs through the capital account. The issuer opens its financial markets, supplies its currency to the world through external deficits, and lets non-residents accumulate claims on it. China’s starting conditions rule that out as it is, by now, a net creditor, thanks to a persistent and large current account surplus. Its currency is also not fully convertible, so it cannot supply renminbi (RMB) to the world by either current, or an open capital account.

So it is doing something else, pushing the RMB abroad through trade settlement and cross-border funding extended by its own banks. It is also building the payment, custody and trading infrastructure to carry those flows outside the dollar system. The result looks less like the internationalization of a currency but more like the construction of an alternative monetary system for the renminbi’s cross-border use: one in which Chinese banks supply, Chinese corporates absorb, and Chinese infrastructure clears.

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The conventional scoreboard remains unflattering The RMB is not yet a relevant reserve currency especially when you consider the huge size of the Chinese economy. With a 19% share of global GDP and more than 12% of world trade, the RMB accounts for about 2% of official foreign exchange reserves and somewhere between 2% and 3% of payment value on SWIFT (Chart 1). As of the first quarter of 2026 the renminbi’s share of SWIFT payments hovered around 3%, well behind the US dollar (close to half of total) and the euro (around a fifth of total). When it comes to official reserves only 2.1-2.3% of total are allocated in RMB, according to IMF’s COFER data (Chart 2). Most importantly, this very tiny share has barely moved since the currency entered the SDR basket in October 2016. There is, however, a specific area where the RMB has made great strides, namely on trade finance. On some measures the renminbi had by 2024-2025 overtaken the euro as the second most-used currency in global trade finance. The divergence between trade finance and that of an investment currency captures the lopsided nature of the RMB rise.

Chart 1 Chart 2 Share of Payments via SWIFT (%) Share of Global Allocated Reserves (%) USD EUR JPY CNY Other USD EUR CNY JPY GBP Others 100% 100

0% Source: Natixis, SWIFT. Sources: Natixis, IMF, PBoC

The lack of convertibility is very much behind the limited appetite for the RMB as investment currency. Monetary authorities and asset managers do not judge a currency by the size of the economy behind it but whether they can get in and, more importantly, out, as well as how liquid its financial markets are. This is why the international use of the RMB is particularly weak as an investment currency.

Against such backdrop, China has focused on alternative routes to foster the use of the RMB, particularly in trade and funding.

Trade-driven Traction The first leg of the alternative route is trade. After having fully liberalized its current account, China has been pushing for its own trade to be invoiced and settled in RMB since 2010 onwards, when China launched its strategic plan to liberalize the RMB. The push began with the 2009 pilot scheme for cross-border renminbi trade settlement, but it suffered a severe setback in 2015: after the reform of the RMB exchange rate regime on 11 August 2015, capital outflows surged and the People’s Bank of China (PBoC) lost USD 800 billion of its reserves, which fell from a peak of about USD 3.8…