Wall Street has spent nearly two decades operating on a mistaken assumption about China’s financial intentions.
Ultimately, Beijing would like what Washington has: the world’s reserve currency, deeper capital markets, and the tremendous geopolitical advantages that come with financial dominance.
This theory seems increasingly wrong. And if so, investors may be underestimating one of the most important long-term changes taking place in global finance.
At this month’s Lujiazui Forum in Shanghai – seen as China’s equivalent of the World Economic Forum in Davos – the financial writing was on the wall for those who cared to notice.
Senior officials announced a new round of measures designed to expand offshore renminbi markets, strengthen cross-border financing channels, strengthen international participation in Chinese financial markets and promote Shanghai’s role as a global financial center.
Among the measures unveiled were a new renminbi repo facility for foreign central banks and sovereign institutions, expanded offshore renminbi trading arrangements and additional initiatives designed to deepen cross-border liquidity and settlement channels.
Most investors saw at the Forum what they have seen for years: another attempt to internationalize the renminbi. Markets largely treated the announcements as bullish. This may be a mistake.
What they may miss is that China no longer appears to be trying to replace the American financial system. Instead, it seems to be trying to ensure that it no longer depends exclusively on it.
These are fundamentally different objectives. One requires the replacement of the dollar. The other seeks to reduce the strategic costs of operating in a dollar-centric financial world.
The difference could have profound implications not only for geopolitics, but also for markets, capital flows, sanctions risk, reserve diversification and the future pricing of global financial assets.
The conventional debate about China’s financial ambitions has always centered on one question: Can the renminbi replace the dollar?
The numbers suggest the answer remains no, at least for now. The US dollar accounts for about 58% of global foreign exchange reserves. Renminbi accounts for about 2%. The dollar is also involved in nearly 90% of all foreign exchange transactions globally.
US capital markets remain unmatched in terms of size, liquidity, institutional depth and investor confidence. By any conventional measure, the dominance of the dollar remains secure. But Beijing’s recent behavior suggests that replacing the dollar may no longer be the goal.
Instead, China appears to be pursuing something much more achievable and, from an investor’s perspective, potentially more consequential: building a financial ecosystem that can work alongside the dollar-based system rather than entirely within it.
More importantly, that ecosystem does not need to replace the dollar to succeed. The best analogy may not be monetary history. It could be the internet. For years, many Western observers assumed that China’s digital economy would eventually converge with the global Internet.
Instead, Beijing built its own ecosystem – developing its own search engines, payment platforms, social media companies, cloud infrastructure providers, e-commerce champions and regulatory architecture.
China never replaced the global internet. She simply built a system that controlled her. The same logic increasingly appears to be shaping Chinese financial strategy.
Over the past 20 years, China has quietly assembled many of the components required for a parallel financial architecture. Beijing has established dozens of offshore renminbi clearing agreements and more than 40 bilateral currency swap agreements with foreign central banks.
It has developed the Cross-Border Interbank Payment System, or CIPS, which processed more than 175 trillion yuan ($24.5 trillion) in transactions last year, up 43% year-on-year. More than 1,700 direct and indirect participants now access the system in nearly 190 countries and territories.
China has also expanded the cross-border settlement of the renminbi, promoted digital currency initiatives, and gradually opened selected areas of its domestic capital markets to international participation. Meanwhile, China’s banking system, with assets exceeding $60 trillion, is now the largest in the world.
None of these initiatives alone threaten the dominance of the dollar. They don’t even need to. Taken together, however, they achieve something different: they reduce China’s dependence on American-controlled financial infrastructure and create alternative channels for trade, finance, liquidity and investment if geopolitical tensions intensify.
In effect, China is building a parallel financial architecture. But unlike previous challengers to dollar dominance, Beijing does not seem to believe that this architecture must replace the existing system to achieve its strategic objectives.
This objective has become much more important in recent years. Chinese policymakers have been closely watching the sanctions imposed on Iran, the financial restrictions imposed on Russia after Crimea, and — perhaps most importantly — the freezing of hundreds of billions of dollars in Russian sovereign reserves after the invasion of Ukraine.
Regardless of one’s views on those decisions, they demonstrated the extraordinary extent of American and Western financial power. They also demonstrated something else: reserves, payment systems and financial infrastructure are no longer politically neutral.
From Beijing’s perspective, financial dependence increasingly resembles strategic vulnerability. From an investor perspective, it suggests that China is planning for a world in which financial fragmentation, the risk of sanctions and geopolitical competition become structural rather than temporary features of global markets.
This helps explain why China’s financial reforms often seem counterintuitive to Western investors. On the one hand, Beijing wants greater international participation in Chinese markets. On the other hand, China remains reluctant to surrender control over capital flows, exchange rates and critical financial infrastructure.
China may not be pursuing financial liberalization in the traditional sense at all. Rather, it appears to be chasing financial resilience – and for Beijing, resilience may be more important than dominance.
So while investors are wondering whether the renminbi will become the next dollar, Beijing appears to be asking an entirely different question: Can China continue to finance trade, provide liquidity, support its partners and maintain economic stability during a protracted geopolitical confrontation with the US?
These are fundamentally different objectives. China does not need to build the next US financial system to change the geopolitical balance of power, reshape capital allocation decisions, increase the costs of sanctions, and force markets to reevaluate assumptions about financial globalization.
It just needs to build one that works well enough when access to the US system becomes insecure. For decades, investors have priced globalization on the assumption that financial integration will continue to expand. Beijing increasingly seems to be betting on the opposite.
Wall Street continues to debate whether China can replace the dollar. Beijing seems to have concluded that it should not.
Nigel Green is the founder and CEO of the deVere Group.
