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.<\/p>\n
But the real threat to the dollar\u2019s reserve currency status is happening behind the scenes in Beijing<\/a>. There, officials are quietly and meticulously seizing the moment for a Chinese currency ready to fill the void.<\/p>\n To be sure, the dollar is still very much on top. It represents more than 58% of central bank reserves compared with the euro\u2019s 20% and the yuan\u2019s roughly 2%. Yet President Xi Jinping\u2019s team is quietly building a vast and multi-layered yuan infrastructure in preparation for a dollar reckoning that Trump appears to welcome.<\/p>\n At the core of the Beijing\u2019s yuan ecosystem is the Cross-border Interbank Payment System<\/a> (CIPS), offering clearing and settlement services for its yuan-denominated payments and trade.<\/p>\n 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%.<\/p>\n The People\u2019s 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.<\/p>\n Over the last 17 years \u2014 since the 2008 Lehman crisis \u2014 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.<\/p>\n 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 \u2014 which connect Asia\u2019s biggest economy<\/a> with its trading partners \u2014 Bank of China (Hong Kong) Ltd is the largest.<\/p>\n BOC\u2019s growth tells the story. So far, BOC alone has handled nearly $530 billion in settlements via Hong Kong\u2019s Real-Time Gross Settlement system.<\/p>\n As of now, JPMorgan Chase and Japan\u2019s 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\u2019s financial system and offshore markets.<\/p>\n Of China\u2019s clearing banks, BOC operates 16, including the three nations in commodities-rich Africa. It\u2019s 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.<\/p>\n BOC has been widening its reach in Southeast Asia<\/a>. 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.<\/p>\n The same goes for promoting yuan internationalization. BOC plays a direct role in increasing the yuan\u2019s role in commodity settlement, foreign trade invoicing and investment, and financing activities around the globe.<\/p>\n These are just some of the behind-the-scenes efforts to seize the moment as Trump\u2019s actions damage the \u201cexorbitant privilege\u201d the dollar enjoys.<\/p>\n 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\u2019s independence.<\/p>\n As Caixin Global<\/a> reports, many investors think that in the first half of 2025, the dollar had the \u201cworst six months in modern history.\u201d It\u2019s down more than 13%<\/a> versus the euro and more than 6% versus the yen<\/a>.<\/p>\n Along with surging US debt and Trump\u2019s effort to fire Fed officials \u2014 including Chair Jerome Powell \u2014 policy chaos surrounding the president\u2019s tariffs is creating a crisis of confidence in the dollar.<\/p>\n This has presented China Inc with a significant opportunity. BOC and China Construction Bank are among the state-owned behemoths promoting yuan-denominated services.<\/p>\n Along with doing roadshows around Asia, banking giants are working to become more integrated in regional economies.<\/p>\n In June, six new foreign banks\u00a0officially joined<\/a>\u00a0CIPS, China\u2019s fast-growing alternative to the Society for Worldwide\u00a0Interbank\u00a0Financial Telecommunication (SWIFT)\u00a0system, the globe\u2019s main messaging network through which international payments are initiated.<\/p>\n The six include Singapore\u2019s United Overseas Bank; the African Export-Import Bank; First Abu Dhabi Bank; South Africa\u2019s Standard Bank; Kyrgyzstan\u2019s Eldik Bank; and Macau\u2019s Chongwa Financial Asset Exchange.<\/p>\n Increasing the yuan\u2019s use in trade and finance might be Xi\u2019s biggest reform success over the last dozen years. In 2016, China won a place for the yuan in the International Monetary Fund\u2019s \u201cspecial drawing rights\u201d basket joining the dollar, yen, euro and pound. Since then, the currency\u2019s use in trade and finance has soared.<\/p>\n 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.<\/p>\n It also might trigger a broader\u00a0Asian currency war<\/a>\u00a0that\u2019s in no one\u2019s best interest. Tokyo might go all-in on an even weaker yen, pulling it and South Korea into a beggar they neighbor downward swirl.<\/p>\n Memories of 2015 are clearly entering into Beijing\u2019s equation. China\u2019s 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\u2019s team had to draw down Beijing\u2019s foreign exchange reserves by\u00a0$1 trillion<\/a>\u00a0to restore calm.<\/p>\n For now, the \u201cPBOC 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,\u201d says longtime China watcher\u00a0Bill\u00a0Bishop, who writes the Sinocism newsletter.\u00a0<\/p>\n Brookings Institution economist Robin Brooks says that in the \u201cmedium-term, this does raise the risk of capital flight out of China, especially if the US imposes tariffs.\u201d Generally speaking, Brooks believes a falling yuan won\u2019t necessarily shake up the global economy because \u201cthe yuan is heavily manipulated and isn\u2019t moving.\u201d<\/p>\n Still, risks abound. A weaker yuan could make China an even bigger target with Trump\u2019s uniquely anti-China administration. Team Xi might want to avoid drawing Trump\u2019s ire with a weaker yuan, particularly while the two sides settle into a trade war truce.<\/p>\n Of course, only Xi and PBOC Governor Pan Gongsheng know for sure what\u2019s 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.<\/p>\n The irony of Trump\u2019s push for ever bigger tax cuts, while rising taxes on imports, is that it would increase America\u2019s reliance on the savings\u00a0of Japan,\u00a0China<\/a>\u00a0and Global South developing nations. His tariffs and trade barriers will inevitably boost US inflation and thus curb consumption.<\/p>\n 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\u00a0China<\/a>\u00a0weakens the yuan, kicking off a mega-currency war.<\/p>\n Takatoshi Ito, a Columbia University economist who served as Japan\u2019s deputy vice minister of finance, notes that beyond alienating friends and partners, \u201cTrump\u2019s tariffs will probably fail to advance his apparent goal of reducing the US trade deficit.\u201d<\/p>\n