The renminbi as a reserve currency: obstacles in China's pursuit of global diversification

China persists in its efforts to establish the renminbi as a benchmark currency in the international financial system but faces structural resistance that limits its expansion. Capital movement restrictions represent the main barrier, leading to a projected contraction in reserve holdings from the 2.83% recorded in 2022 to an estimated 1.93% by 2025, according to NS3.AI analysis. This decline underscores the inherent complexities of turning a national currency into a globally trusted instrument.

Capital controls hinder the yuan’s internationalization

Restrictive measures implemented by Chinese authorities on capital flows have significantly inhibited the adoption of the renminbi among global central banks. Although China has invested considerable resources in modernizing its international payment infrastructure—including initiatives like the Cross-Border Interbank Payment System (CIPS) and the digital yuan—these innovations have not addressed the fundamental concern: the lack of full and unrestricted convertibility.

Monetary policymakers in developed and emerging economies continue to favor highly liquid assets with barrier-free access. This preference reflects the need for instruments that can be mobilized quickly without facing regulatory obstacles. The US dollar remains dominant in reserve portfolios precisely because it meets these requirements unambiguously.

Insufficient payment infrastructure amid liquidity preferences

Despite technological advances in cross-border payment systems, the financial architecture of the renminbi still does not fully meet the demands of global reserve managers. Central banks require guarantees that their holdings can be converted into other currencies swiftly and without political interference, a condition that the yuan has not convincingly satisfied.

The rise of cryptographic alternatives in a restrictive landscape

Paradoxically, the rigidity surrounding the renminbi as a reserve currency is accelerating the adoption of decentralized alternatives. Dollar-pegged stablecoins and Bitcoin are gaining ground as settlement tools among financial entities seeking to bypass regulatory limitations. These crypto assets offer a feature that restricted traditional currencies cannot provide: political neutrality and borderless accessibility.

The trend suggests that without substantial reforms to improve convertibility and reduce capital controls, the fragmentation of global reserves could primarily benefit decentralized instruments rather than strengthen the renminbi’s position. In other words, China’s pursuit of creating an alternative reserve currency could paradoxically empower digital competitors operating outside any state control.