The Chinese yuan is rapidly closing in on the British pound in the international foreign exchange market, aiming for a spot among the world's four major currencies. The yuan's global transaction share has been steadily rising, fueling talk of a potential reshuffle of the reserve currency system.
According to the triennial foreign exchange market survey released by the Bank for International Settlements (BIS) on the 30th (local time), the yuan's average daily transaction volume this year was $817 billion, accounting for 8.5% of global foreign exchange transactions. That is up from 7.0% in 2022 and reflects the yuan's 10-year streak of expanding its transaction share. The yuan is currently the fifth most-traded currency after the dollar, euro, yen, and pound, but it has significantly narrowed the gap with the pound. Over the same period, the pound's share fell from 12.9% to 10.2%.
According to Bloomberg News, China has for years pursued yuan internationalization through steps such as partially opening its capital markets, expanding yuan settlement systems, and nurturing the offshore yuan bond market. The latest survey results show these policy efforts are yielding some results. Some say the increased use of the yuan in international trade and financial transactions is a natural development given the size of China's economy and its trade dependence.
Still, the yuan's status as a currency for international settlement remains limited. Data compiled by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) show the yuan's global settlement share stood at 2.9% in August this year. That is down from 4.7% in the same month a year earlier, indicating its use in international settlement has actually decreased. Experts note that the yuan's low level of international credibility and capital liberalization acts as a constraint.
By contrast, the dollar still holds a dominant position in the international foreign exchange market. The dollar is involved in 88% of all transactions, followed by the euro (31%), the yen (17%), and the pound (10%). The yuan is increasing its share but still shows a wide gap with the major reserve currencies.
The rise of the yuan is not just a currency issue but is also seen as an extension of the U.S.-China power rivalry. As the United States steps up financial sanctions and trade pressure on the back of dollar hegemony, China is promoting the yuan as a "stable alternative currency" that is not weaponized, expanding cooperation with emerging economies. In this process, in tandem with BRICS countries' discussions on diversifying settlement, some suggest yuan demand could gradually increase.
Global financial markets believe the yuan's future standing will depend on China's economic growth trajectory and the degree of capital market opening. Chinese authorities seek to keep the dollar-centric system in check through yuan internationalization, but some say it will take time to dismantle the barriers of foreign exchange controls and financial regulations. Even so, with the pound remaining weak, projections are emerging that the yuan could secure a place as one of the world's four major currencies sooner than expected.
Paul Mackel, HSBC's head of Asia currency strategy, said, "The yuan is already increasing its settlement share in emerging markets, and the gap with the pound could narrow soon," but added, "To replace the dollar as a global reserve currency, opening financial markets and securing institutional credibility must come first."
Meanwhile, the BIS survey also confirmed the rise of other currencies. The Swiss franc's daily transaction volume increased to $612 billion, overtaking the Australian dollar and the Canadian dollar to rank sixth in the world. The Hong Kong dollar also expanded its share from 2.6% to 3.8%, raising its profile.