US President Donald Trump is doing his worst to undermine the dollar with tariffs, attacks on the Federal Reserve and pushing the national debt higher toward US$38 trillion.
But the real threat to the dollar’s reserve currency status is happening behind the scenes in Beijing. There, officials are quietly and meticulously seizing the moment for a Chinese currency ready to fill the void.
To be sure, the dollar is still very much on top. It represents more than 58% of central bank reserves compared with the euro’s 20% and the yuan’s roughly 2%. Yet President Xi Jinping’s team is quietly building a vast and multi-layered yuan infrastructure in preparation for a dollar reckoning that Trump appears to welcome.
At the core of the Beijing’s yuan ecosystem is the Cross-border Interbank Payment System (CIPS), offering clearing and settlement services for its yuan-denominated payments and trade.
Last year alone, CIPS saw a 43% year-on-year increase in transactions totaling $24.5 trillion. That marks the third consecutive year during which transaction volumes increased more than 30%.
The People’s Bank of China, the central bank, has drafted new rules to expand participation in CIPS globally. China is also working steadily to grow its currency-swap network.
Over the last 17 years — since the 2008 Lehman crisis — Beijing has minted at least 32 yuan-centric swap arrangements totaling about $632 billion. New Zealand, for example, just inked a new five-year yuan exchange arrangement.
Increasingly, though, yuan internationalization is getting a boost from offshore institutions authorized to settle Chinese currency transactions locally. Of the 35 yuan-clearing banks operating in 33 jurisdictions — which connect Asia’s biggest economy with its trading partners — Bank of China (Hong Kong) Ltd is the largest.
BOC’s growth tells the story. So far, BOC alone has handled nearly $530 billion in settlements via Hong Kong’s Real-Time Gross Settlement system.
As of now, JPMorgan Chase and Japan’s Mitsubishi UFJ are the foreign institutions greenlit to clear yuan transactions. Their scale and global reach are helping to provide liquidity and open direct transmission lines between Beijing’s financial system and offshore markets.
Of China’s clearing banks, BOC operates 16, including the three nations in commodities-rich Africa. It’s been instrumental, too, in the construction of the CIPS. At the start of 2025, 44 BOC entities participated in the system directly and serve as agents for approximately 700 financial institutions worldwide.
BOC has been widening its reach in Southeast Asia. It serves as a clearing bank in Cambodia, Laos, Malaysia and the Philippines. Naturally, BOC plays a key role in highlighting the development of the Hong Kong economy. In 2024 alone, BOC saw a 40% year-on-year increase in the number of cross-border yuan clearing transactions.
The same goes for promoting yuan internationalization. BOC plays a direct role in increasing the yuan’s role in commodity settlement, foreign trade invoicing and investment, and financing activities around the globe.
These are just some of the behind-the-scenes efforts to seize the moment as Trump’s actions damage the “exorbitant privilege” the dollar enjoys.
This enables Washington to pay a logic-defying yield of 4% on 10-year bonds even as the national debt tops $37 trillion and Trump pushes for new tax cuts and undermines the Fed’s independence.
As Caixin Global reports, many investors think that in the first half of 2025, the dollar had the “worst six months in modern history.” It’s down more than 13% versus the euro and more than 6% versus the yen.
Along with surging US debt and Trump’s effort to fire Fed officials — including Chair Jerome Powell — policy chaos surrounding the president’s tariffs is creating a crisis of confidence in the dollar.
This has presented China Inc with a significant opportunity. BOC and China Construction Bank are among the state-owned behemoths promoting yuan-denominated services.
Along with doing roadshows around Asia, banking giants are working to become more integrated in regional economies.
In June, six new foreign banks officially joined CIPS, China’s fast-growing alternative to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, the globe’s main messaging network through which international payments are initiated.
The six include Singapore’s United Overseas Bank; the African Export-Import Bank; First Abu Dhabi Bank; South Africa’s Standard Bank; Kyrgyzstan’s Eldik Bank; and Macau’s Chongwa Financial Asset Exchange.
Increasing the yuan’s use in trade and finance might be Xi’s biggest reform success over the last dozen years. In 2016, China won a place for the yuan in the International Monetary Fund’s “special drawing rights” basket joining the dollar, yen, euro and pound. Since then, the currency’s use in trade and finance has soared.
This explains in part why the PBOC remains reluctant to cut rates even as China grapples with deflation. Excessive easing now might dent trust in the yuan, slowing its progression to reserve-currency status.
It also might trigger a broader Asian currency war that’s in no one’s best interest. Tokyo might go all-in on an even weaker yen, pulling it and South Korea into a beggar they neighbor downward swirl.
Memories of 2015 are clearly entering into Beijing’s equation. China’s move to devalue the yuan by nearly 3% a decade ago triggered a destabilizing capital flight that likely still haunts Communist Party bigwigs. Over the next year, Xi’s team had to draw down Beijing’s foreign exchange reserves by $1 trillion to restore calm.
For now, the “PBOC is signaling that it wants a stable RMB, probably dashing the hopes of those betting that the RMB will continue to devalue meaningfully against the US dollar,” says longtime China watcher Bill Bishop, who writes the Sinocism newsletter.
Brookings Institution economist Robin Brooks says that in the “medium-term, this does raise the risk of capital flight out of China, especially if the US imposes tariffs.” Generally speaking, Brooks believes a falling yuan won’t necessarily shake up the global economy because “the yuan is heavily manipulated and isn’t moving.”
Still, risks abound. A weaker yuan could make China an even bigger target with Trump’s uniquely anti-China administration. Team Xi might want to avoid drawing Trump’s ire with a weaker yuan, particularly while the two sides settle into a trade war truce.
Of course, only Xi and PBOC Governor Pan Gongsheng know for sure what’s in store for the yuan. How Beijing responds to both global and domestic risks with yuan policy will keep Asia markets on edge for the rest of the year.
The irony of Trump’s push for ever bigger tax cuts, while rising taxes on imports, is that it would increase America’s reliance on the savings of Japan, China and Global South developing nations. His tariffs and trade barriers will inevitably boost US inflation and thus curb consumption.
That could mean slower US growth and less demand for Chinese goods at a moment when Beijing faces weak retail sales and deflation at home. Chinese households might thus have even less wherewithal to buy US goods. It also might increase the odds that China weakens the yuan, kicking off a mega-currency war.
Takatoshi Ito, a Columbia University economist who served as Japan’s deputy vice minister of finance, notes that beyond alienating friends and partners, “Trump’s tariffs will probably fail to advance his apparent goal of reducing the US trade deficit.”
High US tariffs, he notes, will fuel domestic inflation, forcing the Fed to raise (not lower) interest rates, which would likely cause the US dollar to appreciate, leading to a decline in exports and an increase in imports.
Trump, Ito warns, is also set to increase America’s fiscal deficit, as he has promised even bigger tax cuts, without identifying spending cuts that would make up for the lost revenue.
As fiscal deficits undermine national savings and investment, the trade deficit, too, will grow. “In other words,” he notes, “like President Ronald Reagan in the 1980s, Trump is likely to preside over twin deficits.”
Far worse US deficits lie ahead, of course. So does the fallout from Trump’s trade war and his determination to kneecap the Fed’s autonomy.
Yet posterity may show that it was China’s readiness for global currency domination – and savvy behind-the-scenes preparation – that sealed the deal for yuan’s ascent amid the dollar’s Trump-orchestrated demise.
Follow William Pesek on X at @WilliamPesek