Last weekend, while the world was distracted by crashing metals markets, an intriguing article broke news that could fracture the global economic order. Qiushi, the Chinese Communist Party’s ideological journal, published extracts from a ‘private’ speech by President Xi Jinping in 2024 to senior regional officials. In that speech, President Xi declares that the internationalisation of the Renminbi is now official policy. He did so in six bullet points, the most significant of which was this: ‘China needs to build a powerful currency that can be widely used in international trade, investment and foreign exchange markets, and attain reserve currency status.’ With that brief statement, the struggle between the Communist Party conservative elite and the modernist technocrats is laid to rest.

What is at stake here and why was this old article released now?

China already roars like a mighty lion on the global stage; it squeaks like a mouse when it comes to the global financial system. That is because the Renminbi is not a globalised currency (it accounts for less than three per cent of global international reserves). The Renminbi’s lack of internationalisation stems from Chinese economic policy, which has always sought to control its currency domestically. The conservatives fear that making the Renminbi freely tradaeable could lead to destabilisation of the domestic economy because of the volatility of global capital flows. At heart, this reflects a very traditional dilemma in ex-communist economies: the struggle between the Party’s aim to control everything and the reformers’ vision of liberalisation.

China’s traditional dependence on the US dollar for trade and as a safe asset for investing its reserves is out of kilter with Beijing’s ambitious geopolitical goals. China is engaged in a Cold War with the US, which requires it to mobilise its political, military and economic weapons to achieve global dominance or at least put paid to the US-dominated, western-oriented world order. To win that crusade, China needs to dethrone the US dollar, at least partially, to reduce the risks of US weaponisation of China’s dollar dependence.

The dangers of China’s dependence on the dollar are significant. Only 25-27 per cent of China’s international trade is conducted in Renminbi. Nearly all of the rest is invoiced in dollars or in the currencies of countries where the currency trade passes through dollars to get to their final destination. As soon as a trade touches a dollar, it passes through a US bank or a bank whose dollar business is subject to US regulation. Thus, trade-related dollar flows are a huge risk to China. As in the case of Russia, the US owns the killer switch that can put a sudden stop to any dollar trade with China.

Internationalisation of the Renminbi would not only reduce these risks, but open up benefits for China. Any country whose currency becomes a global reserve asset gains a great deal: seigniorage, the ‘exorbitant privilege’ of a country being able to print its own money to pay for its debts, imports and foreign investments; it can lower international trade costs for domestic corporations; gains geopolitical leverage, cheaper hard and soft power projection; acquires greater monetary policy autonomy and safe-haven status; and stronger domestic banks and deeper capital markets.

These benefits apply in spades to China given its massive global economic footprint and the scale of its geopolitical network. In a sense, the internationalisation of the Renminbi would simply synchronise the international economic standing of China (e.g. 14 per cent of global trade) and its international financial standing (two per cent of international reserves and 4.5 per cent of global payments).

Internationalisation of the Renminbi would present major challenges. China lacks some of the characteristics of the dollar or the euro as global reserve currencies. China does not have an open capital account, deep financial markets or the protection afforded by the rule of law. However, many of these disadvantages can be offset by creating an offshore Renminbi (like the old Euro-dollar) and by endowing it with legal characteristics that provide similar protection. A greater difficulty is the risk of economic volatility as the capital account is opened up – but all developed countries have to deal with that.

It is probable that China will use its world–beating payments systems to internationalise the Renminbi for international trade. In the future, China’s trade flows will be increasingly denominated in an offshore version of the Renminbi.

The timing of the release of the new doctrine is probably based on Beijing’s belief that the dollar is structurally vulnerable. There are five reasons that justify that view. US trade policy and reshoring of industry will reduce the footprint of the US in international trade and diminish the amount of US dollar in the global liquidity pool. But demand for a global transaction and reserve currency will rise. This will be due to faster growth in trade between non-US countries. The Renminbi can help fill that gap.

US international burden shedding, rather than burden sharing, will reduce the level of US dollar held by global alliances and the proportion of trade done by former allies with the US. Risks associated with holding dollars have risen. Within the US political system, holders of dollar reserves are widely seen as a cause of US dollar overvaluation and, thus, of de-industrialisation of the US economy. Such holdings are now seen by foreign investors as vulnerable to US financial coercion. The rise of gold as a proportion of international reserves points to increasing mistrust of fiat currencies as reserve assets, and particularly of the US dollar.

There will be three overarching conclusions from the internationalisation of the Renminbi and the accelerated reduction in the global standing of the dollar. First, US global power projection falls and China’s rises. Second, as America’s exorbitant privilege declines, the cost of capital in the US will rise and the ability of the US to run chronic current account deficits will be impaired. Third, not all Renminbi surpluses will stay in Renminbi or in other fiat currencies. Increasing holdings of alternative assets, like gold, in international reserves seems inevitable.