The Weakening of the US Dollar and the Internationalization of the RMB

Smoke from the US-initiated tariff war has not yet settled, but the battle for global currency hegemony has quietly moved on. China’s currency, the renminbi, soared in value earlier this year, as the US blew hot and cold over trade. The RMB-dollar exchange rate hit a record high on May 5. Global capital players are increasingly seeking out the RMB as a safe haven for its “low volatility and high returns.” The resilience of the Chinese economy adds support to their case.

Has China’s currency demonstrated sufficient weight to challenge the hegemony of the US dollar as the world’s anchor currency?

Li Wei, CKGSB professor of Economics, wrote in Caixin of the deep logic of the rise and fall of US dollar hegemony and analyzed three bars to internationalization that the RMB must cross. The US dollar trust crisis caused by President Trump’s economic policies has provided a strategic window for the rise of the RMB, but can China seize the opportunity, or will monetary power remain in the hands of the current class of powermongers?

Donald Trump’s economic policies have taken another victim – the world status of the US dollar.

The US gains from its dollar being the world’s main currency, as it can collect seigniorage. But more importantly, the status of its currency reduces the country’s financing costs, as it buoys demand for US assets. Foreign investors hold about 30% of US treasury bonds, which means they can be financed at a low cost. Thirdly, financial weaponization. The US gains enormous power in the international financial market and can sanction other countries at any time. Just look at the examples of Russia, Iran and North Korea.

As of March 2025, China has about $3.2 trillion in foreign exchange reserves, of which U.S. Treasury bonds comprise at least $784.3 billion (as of February 2025). In other words, the U.S. dollar has already lost its “anchor” status, but it is still widely recognized by all parties. The role of the US dollar as an international currency is the result of long-term historical evolution and recognition by all parties. The stability of US policies is an important part of that recognition.

US President Trump’s tariff policy and erratic attitude towards international economic machinations have left traders and investors at a loss. Trump is now questioning the independence of the Federal Reserve, adding yet more uncertainty. The ensuing selloff of the US dollar has sent the currency into a continuous fall.

Ironically, in attempting to lure manufacturing jobs back to the US and reduce the dollar trade deficit, Trump’s tariff plan is attempting to address issues that are in part a byproduct of the US dollar being the world’s anchor currency. The dollar’s status has resulted in an inflated dollar exchange rate, adding to US manufacturing woes by driving down competitiveness.

The history of how the dollar became the world’s currency informs the current situation. The US dollar did not become world currency on the back of a strong American economy alone. In 1880, US GDP per capita exceeded that of the UK. However, the UK had colonies the world over, and London was the financial capital of the world. The US dollar was in no way ready to take over from the British pound, as becoming a world currency required both a powerful economy and support from the rest of the world. It took until after World War II for the US dollar to finally displace the British pound.

So, in the short-term, prospects of the RMB replacing the US dollar are unlikely. The US dollar remains the chief global currency because there is no serious alternative. Are the euro, yen, or pound strong enough to replace it? The sharp depreciation of the yen last year is still fresh in investors’ minds. Long term, the case for the currency of the world’s second biggest economy has improved, as the US’s reputation takes a hit from Trump’s unpredictable policies.

The RMB has demonstrated its potential to step up. With the rise of the Chinese economy, the RMB breached its shores years ago. Now its scope of use is expanding, but it is still far from the status of international currency. As long as China’s economy does not stagnate, China’s industries continue to upgrade, and reforms do not come to a complete halt, the RMB will continue to strengthen, and world currency status will only get closer. But for the RMB to truly become an international currency, China must do three things.

1. Abolish capital controls

It is difficult to imagine a currency becoming an international reserve currency without free convertibility and circulation. To earn global confidence and widespread adoption, others must be able to trade freely with that currency. Removing capital controls requires tax reform. Currently, corporate income tax remains a significant source of government revenue, accounting for as much as 19% of the budget. Tax brought in as much as RMB 4 trillion to the public purse last year. Once capital controls are lifted, tax will be an arena of contention as companies seek to relocate to low tax jurisdictions. Therefore, China needs to reform its tax system by reducing reliance on corporate income tax and upping the share of value-added tax and personal income tax—similar to the fiscal structure used by many European countries.

2. Develop financial markets and strengthen effective supervision

When the RMB becomes an international central currency, other countries will have strong demand for RMB assets, and an open and dynamic financial market will be particularly important. Imagine, if there is no developed US financial market, what should people who hold US dollars do?

But it is easier said than done. Financial products are one of the most complex products invented by humans, and behind each financial product is a large number of contracts. Various rights and obligations are intertwined on those pages of documents. Investors, especially small and medium-sized investors, generally have neither the ability nor the energy to understand the details of these products, which means that there is serious information asymmetry in the financial market.
Given the financial market’s involvement with large sums of money and potential for misconduct, effective regulation is essential to prevent it from becoming a “sewage pond” of undesirable practices. The key is to enhance supervisory measures to protect investors’ interests, allowing them to participate confidently and share in economic growth.

A suggested approach is to adopt a dual-track supervisory system, inspired by the US experience. For small and medium investors, regulators should enforce strict controls—focusing on cracking down on insider trading, stock price manipulation, and other illegal activities, and maintaining a cautious stance on financial innovations. Conversely, for well-capitalized institutional investors, regulators can adopt a more relaxed approach, encouraging bargaining and financial innovation through greater market freedom.

3. Turn China from a trade surplus to a trade deficit country

At the current stage of economic development, China’s best choice is to become a trade deficit country rather than a trade surplus country. At the same time, from the perspective of the balance of payments, China needs to use the trade deficit method to provide RMB to global investors.

In order to achieve the goal of turning into a trade deficit country, China needs to take measures to accelerate the transformation of local governments. The reason for this is that under the current system, local governments are keen on economic construction and neglect public services, which increases output and suppresses consumption. In the end, they have to use external demand to absorb excess capacity, which drives the expansion of trade surplus. Although the behavior of local governments is not the only reason for the trade surplus, its role in this process cannot be ignored.

If local governments still act according to the current rules and do not shift the focus of their work to the provision of public services, it will be difficult for China to become a country with a trade deficit, let alone a consumer power like the United States.

The RMB is the strongest candidate to challenge US dollar dominance in the future. China should embrace this potential gradually and take measured steps toward RMB internationalization. Historically, the US led a post-World War II globalization enterprise that elevated the dollar’s role; however, recent US political shifts, especially under Trump’s administration, present China with a rare opportunity to advance RMB internationalization, transforming crises into opportunities—and reshaping the future international order.

The article was originally published in Chinese on Caixin.