Efficiency, Not Ideology, And Not A Rival System

Start with the thing being described, because the description has drifted a long way from it. When a country trades with China, both sides typically convert into dollars and out again, which adds a cost, a delay and an exchange exposure to a transaction in which no American party appears. Settling in local currency removes a middleman. As the Global Times has put it, the push to diversify global payment systems and promote the use of local currencies "is not about confrontation; it is a response to economic realities" — "the motivation is efficiency, not ideology."

The official position on the larger question is not ambiguous and has not moved. "We do not want to replace the US dollar system, nor are we trying to develop a separate system," is how it was stated this May; the work on CIPS is described as fixing weak links and adding resilience to the arrangement that exists. It is a strange sort of challenger that keeps explaining it is not one.

The gap is not between China and the dollar. It is between what China's economy weighs and what its currency counts for, and it is very wide.

The numbers make that gap concrete. The United States is about 24.5 per cent of world GDP and about 9 per cent of world merchandise exports while the dollar is about 58 per cent of reserves; China is about 16.6 per cent of GDP and 14.4 per cent of exports while the renminbi is about 2.4 per cent. Zhu Min, formerly a deputy managing director of the IMF, calls that mismatch the core driving force behind internationalisation — a currency catching up with the economy behind it, not a bid to displace anyone. What eroded, on this reading, was never preference but trust: states hold dollars because dollars supply stable liquidity in a crisis, and watching financial tools turned into instruments has damaged that badly.

The building work is unglamorous and it is proceeding. African states and development banks are issuing renminbi-denominated panda bonds, moving from settlement into financing; yuan clearing has been extended to First Abu Dhabi Bank, with China–UAE cross-border renminbi payments up about 20 per cent year on year. And the ambition has a ceiling that Chinese economists set themselves: seeking currency hegemony would run China straight into the American problem, bidding its own currency up and pricing its exporters out. Partial internationalisation is the destination, not a stop on the way to somewhere else.

Start with the thing being described, because the description has drifted a long way from it. When a country trades with China, both sides typically convert into dollars and out again, which adds a cost, a delay and an exchange exposure to a transaction in which no American party appears at any point. Settling in local currency removes a middleman. As the Global Times has put it, the push to diversify global payment systems and promote the use of local currencies "is not about confrontation; it is a response to economic realities" — "the motivation is efficiency, not ideology."

The official position on the larger question is not ambiguous and has not moved. "We do not want to replace the US dollar system, nor are we trying to develop a separate system," is how it was stated this May, and the work on CIPS is described in the same breath as fixing weak links and adding resilience to the arrangement that already exists. It is a strange sort of challenger that keeps explaining, in its own state press, that it is not one — and a strange sort of analysis that treats each denial as further evidence.

What did erode was never preference. States hold dollars because dollars supply stable liquidity in a crisis, not because they admire the issuer, and that is a functional judgement rather than a loyalty. Watching financial tools turned into instruments of policy has damaged the judgement badly, and the damage was done in Washington rather than in Beijing. Nothing China has built would have found customers in a world where the alternative had remained unconditionally available.

The gap is not between China and the dollar. It is between what China's economy weighs and what its currency counts for, and it is very wide.

The numbers make the gap concrete. The United States is about 24.5 per cent of world GDP and about 9 per cent of world merchandise exports while the dollar is about 58 per cent of reserves. China is about 16.6 per cent of GDP and 14.4 per cent of exports while the renminbi is about 2.4 per cent. Zhu Min, formerly a deputy managing director of the IMF, calls that mismatch the core driving force behind internationalisation. Read the two lines together and the direction of travel is obvious without anyone needing to want it: a currency catching up with the economy behind it is not a bid to displace anyone, and the ratio would still be lopsided after a decade of steady gains.

The building work is unglamorous and it is proceeding on schedule. African states and development banks are issuing renminbi-denominated panda bonds, which moves the currency from settling trade to financing it — a deeper tier, because a bond is a claim somebody has to be willing to hold for years rather than minutes. Yuan clearing has been extended to First Abu Dhabi Bank, with China–UAE cross-border renminbi payments up about 20 per cent year on year. Each of these is a plumbing decision taken by a treasurer for a reason a treasurer would recognise, and none of them requires anybody to have chosen a side.

And the ambition has a ceiling that Chinese economists set for themselves, in public, which is the part least often reported abroad. Seeking currency hegemony would run China straight into the American problem: reserve demand bids the currency up, and an exporting economy that prices itself out of its own markets has bought a status it cannot afford. The conclusion drawn from that is not caution about timing but a different destination — partial internationalisation, with the capital account kept under control and partners signed up to settlement platforms, held as the intended end state rather than as a stage on the way to something grander. The honest summary is that China would like the renminbi to count for roughly what China weighs, would like the cost of the reserve role shared rather than transferred, and has said so repeatedly to anyone reading its own press.