China is progressively using the yuan—both physical and digital—as a strategic tool to weaken the dollar’s grip on global trade, significantly altering economic dynamics and escalating risks in international markets.
At a Glance
- China is expanding use of the digital yuan and Cross-Border Interbank Payment System to challenge dollar dominance
- The yuan is now the world’s second-largest trade-finance currency and third-largest payment currency
- China may intervene to devalue the yuan—evidenced by fixing it at an 18-month low—to offset U.S. tariffs
- Beijing holds over $760 billion in U.S. Treasuries, a potential tool to influence U.S. interest rates
- Other major economies are joining moves toward “dedollarisation,” pressuring U.S. monetary hegemony
Digital Yuan and CIPS: China’s Quiet Offensive
Chinese central bank governor Pan Gongsheng, speaking at Shanghai’s Lujiazui Forum, emphasized broadening the use of the digital yuan (e-CNY) and the Cross-Border Interbank Payment System (CIPS) to reduce reliance on the dollar and US-controlled financial infrastructure. Already, six foreign banks—including Standard Bank and First Abu Dhabi Bank—have signed on to CIPS, a strategic move toward yuan-based cross-border settlements. According to the Financial Times, the yuan has now become the world’s second-largest trade-finance currency and third-largest payment currency.
Tactical Yuan Devaluation and Treasury Leverage
China has hinted at yuan depreciation as a lever against rising U.S. tariffs, recently fixing the currency near its weakest level in 18 months at around ¥7.2 per dollar. The Financial Times reports this move signals Beijing’s intent to use currency policy to counter external pressures.
Simultaneously, China’s holdings of over $760 billion in U.S. Treasuries remain a powerful financial lever. Analysts warn that any major shift in Treasury sales could affect U.S. interest rates and financial stability.
A Growing Dedollarisation Trend
China isn’t acting alone. Other major economies—including Russia, Brazil, and Argentina—are increasing yuan use in bilateral trade, spurred in part by geopolitical shocks like the Ukraine war. As Le Monde reports, this dedollarisation movement is reshaping global currency alignments and challenging the dollar’s dominance.
Why It Matters
This economic realignment represents a strategic challenge to U.S. influence. As both Pan Gongsheng and IMF Managing Director Christine Lagarde assert, global reliance on a single reserve currency is unsustainable. With China pushing the digital yuan and expanding yuan settlements, the West may see an erosion of dollar hegemony.
U.S. officials—including Treasury Secretary Janet Yellen—are evaluating the risks, while the Federal Reserve explores the potential impacts of central bank digital currencies. Europe is also weighing its own digital euro strategy. Without decisive action, U.S. markets may face growing volatility as investors diversify away from the dollar.
China’s multi-pronged currency strategy—from digital renminbi to strategic Treasury holdings—marks a significant shift in global finance. The question is no longer whether Beijing will challenge dollar dominance, but how the U.S. and its allies will respond to what is rapidly shaping up as a currency cold war.
