Wearing my hat of geofinancial consultant to ODI.org, and together with colleagues Elena Kiryakova and Rebecca Nadin we have just published a long paper assessing China’s ambitions for the global financial architecture, and find some disturbing tendencies towards fragmentation. There follows a summary, and the full paper can be downloaded here:
As the world’s second-largest economy, China has become both a participant in and a critic of the dollar-dominated global order. Its policy agenda includes expanding the global use of the renminbi, establishing currency swap lines with over 40 countries, and promoting platforms like the Cross-Border Interbank Payment System (CIPS) as alternatives to Western-led systems.
Despite these efforts, China’s progress has been mixed. The renminbi still accounts for only a small share of global foreign exchange reserves and cross-border transactions, and structural barriers, such as capital account restrictions, limit its international appeal. Nevertheless, China’s growing economic weight, strategic investments, and political positioning are reshaping debates about the future of the international financial system.
This paper overall explores the motivations behind China’s approach to global finance, the mixed results of implementation so far, and the broader implications for global liquidity, financial stability, and the West’s capacity for economic leverage. It situates China’s strategy within the wider debate on international financial architecture reform and the emergence of a more multipolar financial order.
Key Messages
China’s ambitions for global finance have evolved from ideologically-driven imperatives to a strategy of managing systemic risk to its national development goals.
China is pursuing a dual strategy to achieve a bigger voice in global financial governance: advocating for incremental reform within existing Bretton Woods institutions while simultaneously creating alternative institutions and structures such as the NDB and AIIB.
China’s desire to reduce its systemic reliance on the US dollar and US monetary policy, and enhance its resilience against potential f inancial sanctions is driving a strategy of renminbi internationalisation and cross-border payment system innovation, such as the launch of CIPS in 2015.
China has successfully promoted the renminbi in its own trade – 55% of its cross-border payments now use the RMB, double the share from a decade ago. Yet globally the currency handles just 7% of international trade settlement and represents only around 2% of countries’ foreign reserve holdings – well below China’s relative economic size.
Despite some ambitious rhetoric, China has so far failed to create a viable alternative financial architecture that is better able to allocate cross-border flows. Instead, it has been relying on repackaging existing systems, compromising efficiency in cross-border capital allocation, and chiefly supporting its own international credibility. The trajectory of current efforts is likely to undermine the future effectiveness of Western-led economic statecraft and lead to fragmentation in cross-border capital flows and payment systems.