China has deliberately kept the yuan stable in recent years, prioritizing currency credibility and controlled internationalization over export-driven devaluation, as a weaker currency now risks trade tensions, regional instability, and undermining long-term strategic goals. Rather than challenging the dollar outright, Beijing is pursuing a state-led, sanctions-resilient financial system and gradually re-anchoring its exchange rate away from a tight dollar peg toward a more multipolar framework.
For much of the past two decades, China has not hesitated to let the yuan weaken when needed. Such was the surprise 2015 devaluation to help offset a slowing economy, or the 8% slide between 2018 and 2020 to cushion tariff shocks during the first U.S.-China trade. But in Trump’s second term, the yuan has held steady. The 7.3 yuan-per-dollar mark, untouched for 17 years, has become an unofficial psychological threshold for policymakers.
Devaluation no longer serves Beijing’s strategic goals. Key trading partners, particularly the EU and major emerging markets, were already uneasy about Chinese industrial overcapacity and export surges. A weaker yuan risks triggering regional competitive devaluations reminiscent of the 1997 Asian financial crisis. Over the years, China’s currency strategy has shifted toward maintaining currency stability while pushing steadily for yuan internationalization.
Authorities now display greater tolerance of appreciation. The internationalization drive requires embracing higher demand and increased exchange rate volatility. Stability has become a deliberate choice, even at the cost of less export stimulus. As such, China’s exchange rate policy is increasingly geared toward global trust and wider use of the yuan, not short-term competitive advantage in price.
Not globalizing in the western sense
China is not globalizing the yuan in the Western, market-driven sense. Instead, yuan assets remain illiquid with strong capital controls. In times of crisis, dollar assets can be liquidated quickly but yuan assets cannot. This limits the yuan’s appeal as a reserve currency and reinforces China’s focus on positioning the RMB as a settlement currency for trade rather than a global capital investment vehicle.
The geopolitical rationale behind this approach is compelling. The 2022 sanctions on Russia, including the freezing of dollar reserves, amplified Beijing’s long-standing concern about vulnerability of any economy to U.S. financial leverage and dollar weaponization. In response, China has rapidly expanded its contingency financial architecture: the Cross-Border Interbank Payment System (CIPS), digital yuan (e-CNY), and a growing network of currency swaps provide redundancy and alternatives to SWIFT. Policy experimentation is evident in Hong Kong’s stablecoin pilots, in the expansion of the CNH offshore market, and in the Southbound Connect program, which jointly create tightly controlled yet diversified channels for cross-border capital flows.
Internationalization efforts remain technocratic and state-led, not dependent on liberal financial reforms. Progress is anchored in trade settlement, bilateral financing, and Belt and Road-linked infrastructure investment. State-owned enterprises (SOEs) play a central role by accepting CNH-denominated loans for overseas projects, further supporting yuan usage abroad. The intent is not to challenge the dollar, but to ensure that China’s financial system, and by extension, its economy, can function independently if relations with the West further deteriorate.
Financial decoupling is no longer a distant threat
Beijing is unlikely to weaponize its vast holdings of U.S. Treasuries through a sudden sell-off, as they remain central to its portfolio for liquidity. The risk lies in gradual erosion by a deliberate effort to reduce reliance on dollar funding and diversifying reserve assets to other currencies. Recent months saw China’s holdings of U.S. Treasuries fall to their lowest levels since 2008, now under $731 billion, marking a sustained pattern of diversification away from the dollar and into gold and other sovereign assets.
The adjustment comes at a cost as gold delivers little yield and less liquidity than U.S. debt. Yet PBoC has continued to build its reserves for nearly a year, openly signaling a strategic hedge against Western sanctions.
Trade negotiations have revealed how hard it is for Washington to meaningfully weaken China’s core trade or technology base, but financial sanctions remain a potent tool for the U.S. Should a major flashpoint arise, be it over Taiwan or the South China Sea, China will almost certainly face coordinated Western sanctions. While the possibility of such incidents seems low, the risk profile is shifting upward as time goes by.
In any prospective “grand bargain,” Washington may press for significant yuan appreciation in exchange for sanctions reprieve. Such a move would reverberate beyond China’s export sector. Economies that depend on Chinese intermediate industrial goods, such as Japan, South Korea, and ASEAN states, could face margin squeezes or be pushed into their own unwanted revaluations. Low-margin industries would struggle to survive in China, accelerating industrial relocation to other regions.
Re-valuation and Re-anchoring
For years, China’s informal dollar peg offered credibility and stability. But this arrangement imposes costs, mostly notably the increasing divergence between China’s and America’s economic cycles. After the 2008 global financial crisis, Beijing pursued aggressive stimulus as the U.S. battled recession. Post-COVID, the dynamic flipped: the U.S. economy soared on fiscal expansion, while China tightened policy and entered a housing downturn. Today China faces persistent deflation while the U.S. is still fighting inflation.
Despite China’s rising power in commodity negotiations, including oil and iron ore, the majority of global pricing and settlements remain dollar-denominated, even for strategic sectors like rare earths. While de-dollarization is unlikely, China’s evolving trade needs no longer require a tightly maintained dollar peg for the yuan.
China’s commercial ties are shifting away from the U.S., and toward Europe, Asia, and the Global South. Anchoring the yuan to a broader currency basket, such as the CFETS index, or one more heavily weighted toward the euro, would grant Beijing greater monetary flexibility and reduce its exposure to U.S. policy swings. It would also better reflect the geography of China’s trade.
Politically, breaking the dollar peg would signal a major strategic pivot. It would be a clear signal that China is accelerating financial decoupling from the U.S. and reorienting toward a more multipolar trade order. Recent revisions to the CFETS basket have steadily lowered the dollar’s weight while boosting the role of emerging-market currencies. The question is no longer whether the yuan should be re-anchored, but how quickly Beijing is prepared to move.
