Beijing Doesn't Want the Yuan to Beat the Dollar — It Wants Second Place

Foreign investors held just 1.6% of China's bond market in March, versus 27% in the U.S. bond market — and that gap, according to one of America's leading China scholars, is exactly how Beijing likes it.

Zongyuan Zoe Liu, senior fellow for China studies at the Council on Foreign Relations, argues in Foreign Affairs this month that China doesn't want the yuan to dethrone the dollar as the world's dominant currency. It wants something cheaper and, for practitioners in trade finance, potentially just as disruptive: a workable alternative.

Why doesn't China want the top job?

Genuinely replacing the dollar would require open capital markets, Liu wrote. That would threaten the Communist Party's control over who gets capital and how. Many Chinese elites also rely on offshore dollar holdings as insurance against domestic political persecution — a detail that tells you the regime's own insiders hedge against it.

The real driver, she says, is sanctions risk. China watched the U.S. shut Russia out of the dollar system after the 2022 invasion of Ukraine, and it wants an exit ramp. A yuan network that's international enough, even without dominance, could bypass any future dollar-based sanctions Washington tries to impose.

"Placing a respectable second, or even a consequential third, would suffice to break the dollar's effective monopoly and constrain the United States' ability to impose financial sanctions unilaterally, while saving China the effort and cost of sustaining currency supremacy," Liu said.

She put it more colorfully: "From Beijing's perspective, the mission is to establish the renminbi as the Pepsi to the dollar's Coca-Cola: never the market leader, but serviceable in a pinch and more than capable of keeping the dominant incumbent honest."

For context, Pepsi has actually lost ground in the cola wars — KFC recently said it would swap PepsiCo soft drinks for Coca-Cola products across its 3,700 U.S. restaurants. The analogy is about market position, not momentum.

How far along is the infrastructure?

Further than most treasury desks assume. China now facilitates renminbi use among firms in more than a hundred countries and across a growing set of commodity markets. As of June, its Cross-Border Interbank Payment System counted 1,829 participants able to send payments to more than 5,200 banks in 191 countries.

That's still a small fraction of what the U.S.-dominated system processes, Liu notes. A true global currency requires four functions: pricing, financing, risk transfer, and reinvestment.

Progress is uneven across all four:

• Pricing: Chinese exporters still invoice in dollars and convert on the way home, but Beijing is pushing "China prices" — yuan benchmarks on domestic commodity exchanges. It has already succeeded with lithium.
• Financing: Chinese banks more than doubled their yuan lending to overseas borrowers between 2023 and mid-2026. The People's Bank of China has currency swap agreements with 32 foreign central banks and monetary authorities.
• Risk transfer: State firms have begun settling cargo insurance in yuan — modest, but a start.
• Reinvestment: The weakest link. A strong yuan ecosystem requires recipients to hold and reinvest balances rather than convert them, and Beijing's unpredictable capital controls keep foreigners wary.

"Without a far larger pool of renminbi assets that foreigners can freely buy and sell, the renminbi cannot come close to replacing the dollar," Liu said.

Where could a 'green yuan' come from?

Liu's most striking prediction concerns the petrodollar's successor. Just as oil priced in dollars anchored the greenback's role after the 1974 Saudi deal — security guarantees in exchange for dollar recycling — the yuan could dominate trade in an essential good China controls: critical minerals, clean energy equipment, and electrical infrastructure for green technology.

China already holds supremacy across much of the green supply chain and promotes standards built around technologies owned by its firms.

"If China consolidates its dominance over that industrial ecosystem, using its scale and cost advantages to prevent competitors from catching up, it could gain enough leverage to price those essential, hard-to-substitute exports in renminbi, creating the foundation for a 'green yuan' that might eventually replace the petrodollar," she predicted.

The Iran war has sharpened the petrodollar question. Despite 40 days of bombardment and round-the-clock protection of commercial ships, the U.S. hasn't fully restored traffic through the Strait of Hormuz. Iranian missiles and drones have damaged American aircraft, radars and bases, and U.S. air defenses failed to fully protect Gulf allies' energy infrastructure.

"Damage to Gulf economies could encourage an unwind in their foreign asset savings," Deutsche Bank warned in March. "Reports that the passage for ships through the Strait of Hormuz may be granted in exchange for oil payments in yuan should be closely followed. The conflict could be remembered as a key catalyst for erosion in petrodollar dominance, and the beginnings of the petroyuan."

What does this change for anyone invoicing across borders? Watch the pricing benchmarks, not the reserve rankings. If lithium-style yuan benchmarks spread to more commodities and the Strait of Hormuz toll starts clearing in renminbi, second place starts looking a lot more consequential than the label suggests.