China’s Conflicting Monetary Policies
Udumbara
The Chinese Communist Party (CCP) and Xi Jinping’s push to make the yuan a global currency is undermined by their policies, tight capital controls, suppressed exchange rates, and a strategy that prioritizes exports over monetary credibility.
Since assuming power over a decade ago, Xi has consistently promoted the internationalization of the yuan, aiming to elevate it as a global exchange and reserve currency. However, his monetary policy has been marked by internal contradictions. He is pursuing three goals that are fundamentally at odds with one another: he wants the yuan to be internationalized, which requires a market-determined exchange rate and capital account openness; he wants to prevent capital flight, which requires strict capital controls; and he wants to maintain export competitiveness.
This third objective has become increasingly obvious since the escalation of the trade war with the United States, which has led China to weaken the yuan in order to keep exports affordable.
Similarly, whereas Chinese banks once borrowed dollars in the offshore swaps market to defend the yuan from depreciation, they are now lending dollars instead. This has caused China’s real, effective exchange rate to fall by roughly 20 percent over the past three years.
At the same time, the CCP is pushing the yuan as a trade and settlement currency. In March, cross-border yuan payments hit a record high, and the central bank expanded currency swap lines with foreign central banks to 4.3 trillion yuan ($591 billion). Countries like Argentina and Pakistan are deepening yuan-based financial cooperation, and UnionPay is expanding QR-code payment systems in Southeast Asia to reduce dollar reliance in tourism and small business transactions.
China is also promoting the digital yuan for commodity trading and pricing key goods like oil and gold in yuan. The PBOC is strengthening Shanghai’s financial services, expanding CIPS (China’s cross-border yuan settlement system), and investing in blockchain-based infrastructure. While the yuan still accounts for only about 4 percent of global payments, compared to more than 50 percent for the U.S. dollar, Chinese officials see rising geopolitical tensions and declining confidence in U.S. assets as an opportunity to expand the yuan’s international role, especially among emerging markets.
However, the CCP’s ambition to position the yuan as a powerful currency in global trade is facing renewed pressure. The yuan’s limited convertibility and weak long-term performance continue to make it unattractive to investors. This challenge has been compounded by the onset of the Trump administration’s second trade war, which has triggered investor pessimism.
Analysts now forecast that the yuan could fall by as much as 10 percent against the U.S. dollar in 2025, potentially breaking a 17-year low. Compared to the previous trade war, the yuan is more vulnerable today due to weaker foreign investment, falling bond yields, and a slowing domestic economy.
While the PBOC is expected to resist rapid depreciation in the short term, it may still allow a gradual weakening of the yuan to preserve export competitiveness. However, a consistently weakening currency is essentially at odds with the CCP’s goal of establishing the yuan as a global reserve currency.
One fundamental issue is the store-of-value problem: reserve currencies must maintain purchasing power over time. A currency that is deliberately weakened is not a suitable reserve asset, as falling value is precisely what foreign governments and investors seek to avoid.
There is also a confidence issue. International currency status depends on trust that the issuing country will not manipulate exchange rates for short-term gains. Beijing’s repeated interventions to suppress yuan appreciation signal a willingness to sacrifice currency stability for trade advantage. As a result, international investors are exposed to politically driven currency risk.
China is stuck in its “yuan trap”: the economy needs a weaker currency for competitiveness, but Beijing is unable to act due to Xi’s ambitions for the yuan and concerns about trading partner reactions.
These mixed signals, tight capital controls, efforts to internationalize the yuan, and covert intervention to suppress the value raise serious questions about the coherence and sustainability of the CCP’s currency strategy under Xi. At the very least, these conflicting policies are likely to further delay the yuan’s acceptance as a global currency. In the short term, they may help soften the blow to Chinese exports, but only to a limited extent. With U.S. tariffs now ranging from 15 percent to 145 percent, a 10 percent currency discount will not be enough to compensate buyers who are already seeking alternative sources of goods.
