Ashot Melikyan also contributed to this article.
In 2008, during the global financial crisis, experts predicted that by 2020, the Chinese yuan (CNY) would comprise 15–20% of the international reserves (The Economist, 2024). Eleven years later, in 2020, in a report published by Morgan Stanley, it was projected that the yuan would become the third largest reserve currency in the world—comprising 5–10% of the global foreign exchange reserves—by 2030 (Cheng, 2020). More detailed forecasts were also made, along the lines of the yuan strengthening relative to the US dollar (USD)—with the exchange rate reaching 6.6 in 2021 from 6.85 in 2020—and increasing deficit in China due to rising imports. However, many analysts remain more pessimistic. They postulate a tradeoff; namely, given that the adoption of the CNY as a reserve currency would lead to exchange rate appreciation and consequent drops in net exports and growth, they assume that the Chinese government will most likely stop the efforts to make the yuan an international reserve currency (Wong, 2020). Despite this, they also claim that the structural deficiencies of China—mainly vis-à-vis the restricted capital flows—will hinder potential investors from adopting the yuan as a reserve currency (Frankel, 2011; McGeever, 2023; Prasad, 2020, 2021; Zhang, 2023). Recently, the arguments following the more pessimistic strand of thought have been more prevalent, especially as the share of the CNY has recently fallen to its lowest level in the last three years. Nevertheless, the question of this essay still remains unanswered. Will the projections of Morgan Stanley to gain traction—for one thing, the USD/CNY exchange rate was around 6.4 on December 31, 2021—or will they remain what they are now: mere speculations? With the continually declining shares of the CNY in global reserve assets and the potential geopolitical risks, this may as well be the case. Perhaps, though, there is another, a third way. These are some of the questions that we will try to grapple with throughout this paper.
While China’s GDP (based on PPP) constitutes about 19.1% of the world GDP, it only accounted for 2.15% of the global foreign exchange reserve assets in the first quarter of 2024, according to the International Monetary Fund’s (IMF) Currency Composition of Official Foreign Exchange Reserves (COFER) database.
Source. World Bank and IMF COFER Databases.
Figure 1 Shares of Chinese GDP in World GDP (%) and of CNY in Global FX Reserve Assets (%)
Figure 1 above shows China’s percentage share in global GDP (in constant 2017 PPP dollars) and the share of the CNY in global foreign exchange reserve assets. As we can see, the CNY is relatively poorly represented in the foreign exchange reserves. This can be attributed to two broader categories of reasons: the (un)willingness of China to further internationalize the Chinese yuan, and the (un)willingness of others to invest in CNY. When it comes to the first category, Clayton et al. (2022) mention that as competition among currencies increases, countries become less willing to exert effort to become a reserve currency in order to avoid higher interest rates. Others add that China is reluctant to fully internationalize the yuan because doing so could weaken economic growth and controls, making the country more vulnerable to imported crises (Mercurio et al., 2021; Wong, 2020; Zeidan, 2024). In the second category, structural reasons play a significant role. Namely, the lack of capital account liberalization and convertibility, the underdeveloped financial markets, and the pegged exchange rate are cited as reasons disinclining financial market participants from investing in CNY-denominated instruments; moreover, these analysts claim that unless these restrictions are lifted, the Chinese yuan will not become a prevalent reserve currency (Frankel, 2011; McGeever, 2023; Prasad, 2020, 2021; Zhang, 2023). Others, however, remain more optimistic: Clayton et al. (2022) and Eichengreen et al. (2024), for example, claim that notwithstanding these bottlenecks, the yuan can become a more widespread reserve currency through its bilateral swap agreements and the offshore renminbi centers. Eichengreen et al. (2024) suggest that the internalization efforts, coupled with geopolitical incidents, may lead to a “multipolar world of key currencies,” where, while the US dollar is not replaced, its dominance as a reserve currency is diminished.
To unearth the intricacies of the subject matter, it is important to briefly consult historical facts and shed a historically informed light upon the topic of this essay. China began efforts to internationalize the yuan around the years 2009 and 2010 (Crawford, 2022; Prasad, 2020; Wong, 2020). During this time—and in the subsequent years—China developed bilateral swap lines with many countries and opened offshore renminbi centers (Choi, 2022). Around the same time, during the aftermath of the global financial crisis, China abandoned its strict fixed exchange rate policy and allowed the yuan to appreciate as a “crawling peg” relative to the USD (Zeidan, 2024).
Source. Bloomberg Terminal.
Figure 2 Chinese Yuan to US Dollar Spot Exchange Rate
As we can see in Figure 2, around the global financial crisis, the Chinese yuan appreciated relative to the US dollar. This further shows that during the years following the 2007–2008 crisis, China “liberalized” its economy, paving the way for the internationalization of the renminbi (RMB). In 2013, China launched the Belt and Road Initiative, additionally increasing the demand for the yuan (Zeidan, 2024). In 2015, China developed its Cross-Border Interbank Payment System (Eichengreen, 2022; Hinote, 2023). The trend of RMB internationalization gained further momentum when, in November of the same year, IMF’s Executive Board made the decision to add the currency to the Special Drawing Rights (SDR) basket; in 2016, this decision entered into force (IMF News, 2016). In 2017, China broadened its framework of potential investors, letting in private entities such as exchange-traded funds, mutual funds, and hedge funds through the Bond Connect program (Crawford, 2022). In 2018, the Chinese government launched yuan-denominated crude oil futures contracts, allowing exporters to sell oil in yuan through the Shanghai International Energy Exchange (Chuluun, 2023; Zhang, 2023).
While the progress seems positive on average, there have also been moments of upheavals. For example, in 2015, the People’s Republic of China (PRC) suffered a speculative attack leading to an outflow of assets amounting to 1 trillion dollars in worth; after this, China tightened some of its capital controls (Zeidan, 2024). However, some scholars view this event in a positive light, claiming that it manifested the largely unconfined nature of capital flows (Crawford, 2022). Things started changing in a more peculiar fashion in 2022. Two events are especially important to mention. First, on January 1, 2022, the Regional Comprehensive Economic Partnership (RCEP)—a free-trade agreement between 15 Asia-Pacific countries—became effective. RCEP is one of the three pillars that China uses to internationalize its currency, the other two being the oil sales in yuan (as we have already mentioned) and the RMB trade settlements with Latin America (Choi, 2022). The second important event is Russia-Ukraine conflict, which led to an “unprecedented” capital outflow from China, resulting in the lowest share of yuan in the global foreign exchange reserve assets in the last three years (McGeever, 2024). However, on the other hand, the yuan gained more significance in the Russian market, with transactions in yuan increasing from 0.4 to 14% (Prokopenko, 2023; Zhang, 2023).
The changes that happened in 2022 show that the situation is far more nuanced and that perhaps the USD–CNY rivalry for becoming the dominant reserve currency is based on a false dichotomy. It is much more plausible that instead of having one overrepresented, dominant currency, the global foreign exchange reserves will move in another direction. Two main possibilities—not mutually exclusive—are worth singling out. Echoing Eichengreen et al. (2024), it is possible that the international foreign reserves will come to constitute a “multipolar world of key currencies,” where while the US dollar will retain its dominance, its magnitude will be shrunk, and a more diverse portfolio will be the case. Figure 3 exhibits this trend: as we can see, the share of the “big four” currencies exhibits, on average, a declining trend, while nontraditional currencies are now relatively more represented (Arslanalp et al., 2024). As for the Chinese yuan, we can see that its share has been decreasing since 2022. However, this has not been compensated by the US dollar; instead, reserve managers preferred other currencies, such as the Canadian dollar (CAD) and the Australian dollar (AUD). This further shows that de-dollarization and yuanization do not follow an “either-or” logic.
The second possibility, which the events of 2022 showed to be likely to occur, is that there will be a regional differentiation whereby the shares of the reserve currencies will be different in different regions. This shows that the topic of reserve currencies should not be treated in a way where only two alternative scenarios exist in which either the US dollar or the Chinese yuan gains dominance. Such “either-or” dichotomies are rather logical flaws, which make our judgments insular and myopic, magnifying our occult desire for the status quo. In the field of economics, every prophecy can become a reality—by the sole virtue of self-fulfillment.
Source. IMF COFER Database.
Figure 3 Currency Composition of Foreign Exchange Reserves (Shares in %)
【This article is AFCA Working Paper No. 2024-23/186】
Expert Biography
Arman Potikyan, Fellow of Asian Financial Cooperation Association Think Tankers Committee, is the Director of the Financial Markets Directorate at the Central Bank of Armenia and a member of the Executive Committee. With over two decades of experience in financial markets, policy development, and risk management, Arman leads initiatives that enhance financial stability, oversee digital transformation, and foster regional economic integration. Previously, Arman served as Chief Investment Officer at the National Foundation for Servicemen, driving strategic investment initiatives. He hold an Executive Management certification from Columbia Business School and a degree in Microeconomics from the Armenian State University of Economics. Arman actively contributes to international financial organizations and think tanks, offering expertise in monetary policy operations and market developments.
Ashot Melikyan is a Risk Manager at the Financial Markets Directorate of the Central Bank of Armenia. He earned his degree in Business and Economics from the American University of Armenia, where he also served as a research assistant and teaching associate. In addition to his role at the Central Bank, Ashot teaches Economics in the IB Diploma program at Anania Shirakatsy Lyceum in Yerevan, Armenia.
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