Renminbi, Reserve Currencies, and the Political Economy of Monetary Power

Recent reporting in the Financial Times  highlights Chinese President Xi Jinping’s explicit call for the renminbi to attain global reserve currency status, framing this ambition within China’s broader push to reshape the international monetary order.

Under what conditions can a fiat currency become a reserve currency in the first place? The answer to this question lies in the structural requirements identified by international monetary theory and historical experience.

Reserve currency status is not only a policy choice, but also a structural outcome produced by the interaction of financial markets, institutions, and state power.

In classical and modern international monetary theory, a reserve currency is defined not by its use in trade alone, but by its role as a store of value and safe asset for foreign official holders. This distinction is crucial. Trade invoicing can be encouraged administratively. Reserve accumulation cannot.

Historically, reserve currencies have emerged only when three functions converge: medium of exchange, unit of account, and safe store of value. The last function is decisive. As Kindleberger argued, international money is revealed not in normal times but in crises.

The Institutional Preconditions of Reserve Currencies

The literature converges on a set of necessary, though not individually sufficient, conditions.

First, capital account openness. Foreign central banks must be able to liquidate positions freely and immediately. Without this, a currency cannot serve as a reserve asset, regardless of trade volume.

Second, deep and liquid sovereign bond markets. Reserve assets are overwhelmingly government securities, not private claims. Market depth must be sufficient to absorb large flows without destabilisation.

Third, institutional credibility and legal predictability. Rule of law, independent monetary authority, and predictable crisis management frameworks are central. Reserve currencies rely on trust rather than yield.

Fourth, macroeconomic stability over long horizons. Low inflation is necessary but insufficient. What matters is credibility under stress, not performance under normal conditions.

Finally, geopolitical backing. All reserve currencies have been underwritten by state power. But history shows that power without institutional depth does not sustain monetary leadership.

These conditions are cumulative. No historical case satisfies only a subset.

The Dollar’s Dominance

According to data from the International Monetary Fund, the US dollar still accounts for approximately 58–59% of disclosed global foreign exchange reserves. The euro accounts for slightly above 20%. The renminbi remains below 3%.

This dominance reflects not US trade shares, but the structure of US financial markets. The US Treasury market remains the largest pool of safe, liquid assets available to global investors. During the global financial crisis of 2008, the Covid shock of 2020, and the post-2022 geopolitical fragmentation, global demand for dollar liquidity increased rather than declined.

Reserve currency status is thus a balance sheet phenomenon, not a trade phenomenon.

Why China Seeks Renminbi Internationalisation

China’s motivations are best understood through the lens of financial statecraft. The freezing of Russian foreign exchange reserves in 2022 demonstrated that reserves are not neutral instruments. They are embedded in geopolitical power relations. For China, this event underscored the vulnerability inherent in dollar dependence.

A second motivation concerns currency mismatch. As the world’s largest trading nation, China faces significant exposure to dollar-denominated settlement. Expanding renminbi invoicing reduces this asymmetry.

Finally, China seeks a more plural monetary system. Importantly, this does not require replacing the dollar. It requires weakening its exclusivity. From Beijing’s perspective, even partial internationalisation yields strategic benefits.

Why the Renminbi Still Cannot Become a Reserve Currency

Despite these motivations, the structural constraints remain binding. China maintains capital controls as a core element of its macro-financial regime. This is not a transitional anomaly. It reflects a deliberate preference for financial stability and political control. Yet capital controls are fundamentally incompatible with reserve currency status.

China’s financial markets, while large, lack institutional autonomy. Regulatory discretion, opaque intervention, and limited legal recourse deter reserve managers. Liquidity without exit certainty does not constitute safety.

Institutional credibility remains the central constraint. Reserve currencies require rule-based governance. China’s political economy prioritises discretionary authority. This choice is coherent domestically. It is costly internationally.

Geopolitics and the Limits of Monetary Power

The current phase of global fragmentation has revived claims of imminent de-dollarisation. These claims conflate currency diversification with systemic transition.

What is observable is a rise in bilateral settlement in non-dollar currencies, including the renminbi. What is not observable is a shift in reserve behaviour commensurate with this trend.

Geopolitical rivalry can reshape trade patterns. It cannot substitute for institutional convergence in reserve currency formation. History offers no counterexample.

There is growing evidence that the institutional framework of the United States has become less predictable and less reassuring over time. However, it remains impossible to foresee what kind of monetary order could realistically replace a system that has been built around dollar dominance since the Second World War.

For this reason, China’s stated objectives and strategic vision should be interpreted through a long-term lens rather than short-term developments. At the same time, the realisation of this vision requires China to construct, over time, the institutional and financial infrastructure consistent with such ambitions.

In this context, it is also important to note that the US dollar’s share of global foreign exchange reserves has declined from approximately 71% in 2000 to around 58–59% today. This decline does not signal the end of dollar dominance, but rather points to a gradual and cautious diversification within the international monetary system.

Structural Asymmetry, Not Policy Failure

China’s renminbi strategy is rational. It is also constrained. China can expand the international use of its currency at the margins. It can reduce dollar dependence in selected corridors. It cannot, under current institutional arrangements, provide the conditions required for reserve currency dominance.

Unless capital account liberalisation, financial market autonomy, and institutional credibility advance together, the renminbi will remain a regional settlement currency, a geopolitical hedge, and not a systemic reserve anchor.

The international monetary order may fragment. But reserve currencies do not change easily. They reflect structure, not aspiration.