Karthik Sankaran is a senior research fellow, geoeconomics in the Global South program at the Quincy Institute for Responsible Statecraft.

China has precious little of the exorbitant privilege/ burden (delete according to your priors) conferred on reserve currency issuers. Despite China’s economy being the world’s second largest, the renminbi ranks a lowly seventh place in the IMF’s COFER league table of official foreign exchange reserves. But MainFT reported recently that Xi Jinping plans to change this.

What even are the requisites for a currency to be truly international? And how does this affect the mechanics of the international monetary system and the global economy more generally? Alphaville has your back.

One widely held idea to be dismissed off the bat is that in order to field a currency that acts as a global reserve asset, a country needs to run trade deficits. This is not true. The UK during the classic gold standard, the US from 1945 to roughly 1980, and the euro today (even if only in a secondary role) all achieved that status despite running trade surpluses.

The simplest way to put this is that a country can internationalise its currency by using it to acquire either goods or assets from the rest of the world (and surplus countries have taken the latter path).

In one small regard, the renminbi already has “reserve status” — it was admitted in 2016 to be one of the components of the IMF’s “currency” — Special Drawing Rights. This in turn allows countries to count it as a component of their official reserves under IMF reporting rules. But it accounts for a small portion of global reported official foreign exchange reserves, coming in at 1.9 per cent in the third quarter of 2025. The dollar’s weight was 57 per cent, the euro’s 20 per cent, and even the Australian dollar eclipsed China’s lowly share.

However, “reserve asset” puts too much weight on an aspect of internationalisation — a currency’s attraction to central banks, seemingly endowing it with an aura of desirability. But the reality of reserve assets in this century has been far less flattering. 

Rather than being a sign of the prestige of a currency, reserve accumulation is more likely to happen when (and precisely because) the private sector does not want to hold it. At these moments, central banks step up purchases of a less desirable asset to protect their own industries from an overly rapid appreciation of their own currencies that might hurt exports. This led to the People’s Bank of China buying dollars in the early 2000s and the Swiss National Bank buying euros and dollars in the 2010s.

So it might make more sense to look at the most important function that an international currency actually fulfils — serving as a vehicle for cross-border borrowing and lending. Here too, the dollar dominates, accounting for roughly half ($23tn) of all cross-border debt and 55 per cent ($14bn) of all cross-border debt in the form of tradeable debt securities.

There are two points to note here. The first is that global cross-border borrowing is roughly triple the amount of global reserve assets. The second is that the dollar’s reserve share roughly corresponds to its share of cross-border borrowing. 

The correspondence of the dollar’s share of borrowing and reserves suggests that countries like to match their financial assets and liabilities. The problem is that even if an economy is successfully matching at a financial level, it might not be matching its financial exposures with the real economic impulses that can spill over from one economy to the other. 

America is the world’s largest economy but it is also a relatively closed one, particularly when compared to China and the Eurozone. And while the Federal Reserve does pay attention to events outside the US, its formal mandate (and consequent interest rate policies) are based on conditions within the US. Conversely, as the world’s second-largest economy and as its largest importer of commodities and largest exporter of industrial goods, China has an outsize influence on prices and activities in global goods markets. 

So, for the world’s producers of commodities and manufactures, what happens in China is a big determinant of the prices of goods, while what happens in the US is a big determinant of the costs of borrowing and servicing debt. And when these two forces are out of phase with each other, many countries around the world (and particularly commodity exporters in the global south) face booms, busts, or both in succession. 

Countries might be better off borrowing more in renminbi, but the currency has long been a distant also-ran in terms of cross-border lending. Even the trillion-dollar Belt and Road Initiative of the 2010s lent far more in dollars than in renminbi. According to a recent paper by Sebastian Horn, Carmen Reinhart and Christoph Trebesch, roughly three-quarter of all BRI lending was denominated in dollars.

This has begun changing more recently, with a growing portion of Chinese bank lending overseas being denominated in renminbi rather than dollars. Recent figures show dollar loans at $375bn through the end of November, 2025, down from $587bn in 2022, while the value of yuan lending was almost as high at $357bn. Chinese institutions are also offering distressed BRI borrowers in Kenya (and perhaps in Ethiopia) the opportunity to convert dollar debt into renminbi.

Along similar lines, Chinese mining companies in Zambia can now make their royalty payments to the government in renminbi. Such a step closes the loop of invoice, asset and liability currency, from the point of view of both the Zambian government and Chinese entities, thus potentially reducing the risk of both cyclical and financial mismatches.  

These are interesting and important steps but the scale at which they are happening suggests how far the renminbi is from being a major global currency, above all in bond markets.

China has enormous debt markets but these are used almost entirely by local entities. Of more than $9tn of global cross-border securities issued in 2025, $25bn came from foreign entities issuing in China’s onshore renminbi markets, with another $125bn of issuance by all entities issuing in China’s offshore markets in Hong Kong. 

For now at least, China will find it far easier to use the renminbi for cross-border bank loans but far harder to do so at scale for cross-border bonds or other securities, an arena that features not just debt issuance but also trading in relatively liquid secondary markets.

The existence of capital controls is a real problem for the growth of cross-border bond issuance. Though it is possible that a gradual loosening of controls on inflows and outflows by selected institutions could help broaden the renminbi’s appeal to a limited degree.

But market structure is another issue. While Chinese debt markets are enormous (at $25tn), the issuer base is full of opaque private and local government entities. The real obstacle to the internationalisation of renminbi debt markets may be less the absence of the rule of law and more the absence of the rule of accounting. But accounting probity is precisely what the renminbi needs to even come close to the euro’s level of internationalisation.

The idea that it is liability denomination rather than reserve status that is a key determinant of international currency status also has implications for the role of China’s central bank, the PBoC. Controlling inflation is one of the jobs of a central bank, and if anything, China is an overachiever here. The economy has both suffered and exported persistent deflationary pressures for years. 

But another job, and a far more important one for a central bank shepherding a global currency, is to act as a lender of last resort in international debt markets struggling with a panic. The Fed has played this role in repeated crises, most importantly in 2008 and again in 2020 (albeit selectively by excluding virtually all emerging market central banks). 

Thus the PBoC will have to rise to the occasion for a successful internationalisation of the renminbi. This may not be too hard, given the training, professional linkages, and shared perspectives on spillovers that unite the world’s most important central bankers. But the PBoC can only go so far if Chinese debt capital markets still have such a long way to go.