Dollar-driven pain drives renminbi internationalization

Rising yuan adoption during sanctions surges and US dollar strength reflects a hunt for economic survival rather than geopolitical realignment  

Introduction

Beijing’s push to internationalize the renminbi (RMB) is often viewed through a geopolitical lens within China’s broader effort to redefine and recreate international architecture for its benefit. This is especially true in western financial press, which has fanned worries that the Chinese currency could challenge US dollar supremacy. However, new data from the Yuan Adoption Tracker reveals that emerging economies’ incentives for “ditching the dollar” (link for hyperbolistic effect) stem from economic survival; a more pragmatic and prolific driver of the yuan’s growing role in global finance than alignment with an abstract Chinese political project.

CEE’s new dataset on global sovereign-level Yuan adoption (insert link) shows that renminbi (RMB) adoption has come in two primary waves during periods of elevated economic vulnerability. Both the 2014 and 2022 waves coincided with periods of acute U.S. dollar strength. During these episodes, emerging markets (EMs) faced severe financial strain, prompting a pragmatic pivot to alternatives, like the yuan as a means of mitigating vulnerabilities. 

Yuan Internationalization History

The internationalization of the renminbi began as an economic initiative under Xi Jinping’s predecessors, aimed at enhancing trade efficiency and reducing China’s dependency on the dollar. Early efforts focused on establishing currency swap agreements and promoting RMB-denominated trade settlements with key partners. Under Xi Jinping’s leadership, yuan internationalization has evolved into a broader geopolitical project. Policies such as the Belt and Road Initiative (BRI) and bilateral trade agreements have integrated the yuan into new markets. As western concern over the BRI rose, so did worries about the potential for the Yuan to overtake the dollar - similar to previous unfounded fears about the Japanese Yen in the 1980s and Euro in the 2000s.

The groundwork for RMB internationalization was laid in the early 2000s under President Hu Jintao and Premier Wen Jiabao. Their focus was largely economic, driven by a desire to reduce reliance on the U.S. dollar in trade settlements and protect Chinese businesses from exchange rate volatility. This phase culminated in 2009 with the launch of a pilot program allowing the RMB to be used in cross-border trade settlements. The offshore RMB bond market, or "dim sum" bonds, further advanced this agenda, providing a channel for foreign investors to access RMB-denominated assets while maintaining strict capital controls.

Under President Xi Jinping and Premier Li Keqiang, the strategy expanded to include financial stability and global influence. The 2008–09 global financial crisis highlighted the risks of overdependence on the dollar-dominated system, spurring Beijing to position the RMB as a hedge against such vulnerabilities. Policies during this period aimed to promote the RMB in foreign reserves and investment portfolios, culminating in its inclusion in the International Monetary Fund’s Special Drawing Rights (SDR) basket in 2016—a major milestone that elevated its status as a global reserve currency.

More recently, China has leveraged RMB internationalization as a geopolitical tool. The Belt and Road Initiative has been instrumental in encouraging partner countries to settle trade and infrastructure financing in RMB, aligning economic integration with strategic influence. Similarly, the development of the Cross-Border Interbank Payment System (CIPS) has been a direct response to concerns about overreliance on SWIFT and potential sanctions risks. The geopolitical dimension became more pronounced following U.S.-led sanctions against Russia in 2014 and 2022, as Beijing positioned the RMB as a viable alternative for nations seeking to bypass the dollar-centric system.

2013/14: Russia Sanctions, Taper Tantrum and the Yuan’s first Peak 

Yet, it was only after the taper tantrum and western sanctions post-Russian invasion of Crimea which saw real traction as the combination of an alternative - and less volatile - currency backed by a less interventionist government. In mid-2013, the Federal Reserve’s decision to taper its quantitative easing program triggered a rise in interest rates and mass capital outflows from emerging economies. By 2014, the ICE U.S. Dollar Index had reached a 10-year high, exerting immense strain on economies heavily reliant on dollar-based trade and debt. Investors, lured by rising U.S. bond yields, abandoned riskier emerging market assets, causing sharp currency depreciations in most EMs. For instance, between May and September 2013, the Indonesian rupiah, Brazilian real, and Indian rupee all depreciated by between 10 and 15%.

Capital outflows surged, currencies weakened, and the cost of servicing dollar-denominated debt became unsustainable for many. The outflows left central banks scrambling to stabilize exchange rates, hiking interest rates to stem the tide even as higher borrowing costs threatened domestic growth. In this context, Yuan-denominated trade provided a measure of stability, enabling these economies to manage exchange rate fluctuations and mitigate the costs of imported inflation.

This turbulence served as another stark reminder of the fragility of depending on the dollar-driven capital flows, and U.S. monetary policy in turn. Specifically, countries with weaker economic fundamentals, such as high current account deficits and low foreign exchange reserves (as many emerging markets are facing post-pandemic), experienced more severe market reactions during this period. 

The next year, U.S. sanctions on Russia after Moscow’s annexation of Crimea sent a clear warning to emerging markets about the risks of over-reliance on dollar-based systems. These measures included restrictions on major Russian banks, energy companies, and defense firms, limiting their access to U.S. capital markets and prohibiting certain types of financial transactions. While relatively tame compared to the current sanctions war against Russia, the IMF estimates that the measures shrunk Russia’s GDP by 1 -- 1.5%. For many emerging economies, the episode highlighted how geopolitical conflicts could expose nations to economic penalties and made Beijing’s yuan push more attractive as another level to manage import costs and service dollar-denominated debt by reducing exposure to volatile exchange rate shifts.

2022: Post-COVID Tightening and Geopolitical Necessity

For Russia, the yuan became a lifeline, facilitating energy exports and preserving foreign exchange reserves. Other countries across Asia, the Middle East, and Africa, took note. Yuan adoption grew as these economies sought to hedge against dollar volatility and maintain access to trade financing amid an increasingly fragmented financial system.

EM Yuan Adoption as a Rational Response

Emerging market policymakers increasingly see the yuan as a vital tool to manage the risks posed by the dollar-dominated financial system—an option that was not available in previous decades. Historically, these economies had limited mechanisms to shield themselves from the volatility induced by U.S. monetary policy and the disproportionate influence of the dollar on global trade. The renminbi’s gradual internationalization, however, has offered an alternative for countries struggling under the weight of dollar-driven financial strain.

For many emerging markets, the introduction of yuan-denominated trade and financial mechanisms has allowed them to diversify their currency exposures, reducing reliance on the dollar and providing a buffer against external shocks. China's establishment of currency swap agreements, alongside its promotion of the yuan as a vehicle for international trade, has enabled emerging markets to conduct transactions outside traditional dollar channels. This development has offered a degree of stability to nations facing capital outflows, depreciating currencies, and rising debt-servicing costs triggered by dollar volatility. In this context, the yuan’s utility lies not in supplanting the dollar but in complementing existing financial frameworks to mitigate risk.

The global south’s perspective on unilateral sanctions linked to the dollar system further underscores the importance of this shift. Many developing nations increasingly view these sanctions as an unmitigable threat to their economic sovereignty. For countries such as Niger, recent experiences with the threat of Western sanctions illustrate the vulnerabilities inherent in overdependence on dollar-centric systems. Sanctions often isolate economies from the global financial network, stifling trade and investment, while coercing policy realignments that may run counter to national priorities.

Against this backdrop, the yuan has emerged as a viable alternative. Engaging with China’s financial networks and using the renminbi for trade settlements provides a hedge against the economic disruptions associated with dollar-linked sanctions. For Niger and other nations in similar positions, the yuan offers not only a way to sustain trade flows under restrictive conditions but also a means to preserve a degree of economic sovereignty in a polarized global system.

The broader sentiment in the global south reflects a growing disillusionment with the rigidity of the current international financial architecture. Developing nations are increasingly advocating for systems that better align with their interests and reduce their vulnerabilities to external shocks. In this landscape, the yuan’s adoption represents a pragmatic response to structural challenges, offering a pathway to greater stability and resilience. While the renminbi’s role in global finance remains secondary to that of the dollar, its increasing adoption by emerging markets signals a recognition of the need for alternatives in an uncertain and often adversarial financial environment.

Strong Dollar Distress

Both the 2014 ‘taper tantrum’ and 2022 post-covid tightening cycle led to rising borrowing costs, balance of payments problems, and imported inflation.  Rising U.S. interest rates and the accompanying strength in the dollar exert a dual pressure on emerging markets by reshaping capital flows and amplifying financial vulnerabilities. Higher U.S. rates attract investors to American assets, triggering capital outflows from emerging economies. This weakens local currencies, making it costlier to service dollar-denominated debts and exacerbating fiscal strains. At the same time, currency depreciation fuels imported inflation, raising the price of essential goods like food and energy, further eroding consumer purchasing power.

Rising U.S. interest rates and the accompanying strength in the dollar exert a dual pressure on emerging markets by reshaping capital flows and amplifying financial vulnerabilities. Higher U.S. rates attract investors to American assets, triggering capital outflows from emerging economies. This weakens local currencies, making it costlier to service dollar-denominated debts and exacerbating fiscal strains. At the same time, currency depreciation fuels imported inflation, raising the price of essential goods like food and energy, further eroding consumer purchasing power.

The resulting macroeconomic pressures force policymakers into tough decisions. To stabilize currencies and control inflation, many emerging markets raise domestic interest rates. However, these measures risk stifling economic growth by increasing borrowing costs for businesses and households. Meanwhile, the stronger dollar may boost export competitiveness by lowering relative prices, but these gains are often offset by higher costs for imported inputs and diminished global demand. Together, these dynamics create a cycle of financial stress that challenges the stability and resilience of emerging market economies

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• Capital Outflows: When U.S. interest rates rise, American assets become more attractive to global investors, drawing capital away from emerging markets. This capital flight puts downward pressure on local currencies, depreciating their value relative to the dollar. Depreciation destabilizes financial markets in these countries, making foreign investment less appealing and further fueling outflows. This self-reinforcing loop depletes foreign exchange reserves as central banks attempt to stabilize their currencies through market interventions, leaving these economies vulnerable to external shocks.

• Debt Servicing Costs: A strengthening dollar amplifies the burden of dollar-denominated debt in emerging markets. As local currencies lose value, the cost of repaying loans in dollar terms increases, straining fiscal budgets and potentially triggering debt crises. This problem is particularly acute for countries with high levels of external debt, where even small currency devaluations significantly escalate repayment obligations. Governments often redirect resources from critical domestic spending to service debt, exacerbating social and economic challenges.

• Balance of Payments Problems: The interplay of weaker currencies and higher external debt often creates balance of payments issues. Currency depreciation raises the cost of imports, especially energy and food, widening trade deficits. Simultaneously, outflows of foreign capital and diminished foreign exchange reserves reduce the capacity of these countries to finance imports or stabilize their currencies. This dynamic places pressure on current account balances, forcing many nations to seek external assistance from institutions like the International Monetary Fund, often at the cost of imposing austerity measures.

• Inflation: Currency depreciation also drives inflation by increasing the cost of imported goods and services. For many emerging markets reliant on food and energy imports, the impact is severe, eroding household purchasing power and triggering higher living costs. Inflationary pressures can quickly spiral, particularly in economies with weak monetary frameworks or limited central bank credibility. The resulting stagflation—a combination of stagnant growth and rising inflation—undermines consumer and business confidence, deepening economic challenges.

• Political Pressures and Responses: Politicians in emerging markets face mounting pressure as these economic challenges manifest in rising living costs, social discontent, and declining investor confidence. To stabilize their economies, governments often resort to raising interest rates, cutting subsidies, or implementing fiscal austerity—measures that may appease foreign investors and creditors but risk domestic backlash. Political leaders frequently face accusations of mismanagement or capitulating to external forces, leading to heightened social unrest or even political instability. The need to balance economic stabilization with public sentiment creates a precarious environment for policymakers, who must navigate a volatile mix of economic imperatives and political survival.

Sanctions Risks

Yet, both periods correspond to rising fear of a declining world order and geopolitical revisionism, with 2014 Russian sanctions which are much more often cited as drivers.

• Capital Flight and Financial Isolation: Sanctions targeting financial systems can lead to capital outflows as investors withdraw funds to avoid exposure to sanctioned economies. Restrictions on accessing international banking networks, such as SWIFT, exacerbate financial isolation, cutting off countries from global liquidity and investment flows. This forces central banks to deplete foreign exchange reserves to stabilize currencies, often with limited success, leaving economies vulnerable to external shocks.

• Restricted Trade and Economic Contraction: Trade sanctions disrupt exports and imports by blocking access to key markets or critical supplies. Emerging markets reliant on commodity exports face significant revenue losses when sanctions limit their ability to sell goods internationally. At the same time, restrictions on importing essential goods—such as technology, machinery, or food—hamper domestic production and exacerbate supply chain disruptions, leading to economic contraction.

• Increased Inflation and Cost of Living: Sanctions often lead to shortages of imported goods, driving up prices and causing inflation. For emerging markets, where a significant portion of consumer goods and raw materials are imported, these price increases can severely erode household purchasing power. The resulting inflationary pressures disproportionately affect lower-income populations, deepening poverty and inequality.

• Debt Crises and Loss of Access to Financing: Sanctions targeting financial institutions or sovereign entities reduce access to international credit markets, making it difficult for emerging markets to refinance debt or raise capital. The loss of foreign funding increases reliance on domestic resources, which may be insufficient, leading to higher borrowing costs and potential debt defaults. This creates a cycle of fiscal strain that further undermines economic stability.

• Currency Devaluation and Market Volatility: Sanctions often trigger rapid currency devaluation as confidence in the sanctioned economy diminishes. This increases the cost of imports and exacerbates inflation, while also raising the burden of dollar-denominated debt. Volatile currency markets deter foreign investment and destabilize financial systems, compounding economic uncertainty.

• Disruption to Critical Sectors: Sanctions that target specific industries, such as energy, technology, or finance, can cripple key economic sectors. For example, restrictions on energy exports reduce vital revenue streams for oil- and gas-dependent economies, while bans on technology imports stall industrial development and innovation. This stifles growth and diminishes long-term economic prospects.

• Social and Humanitarian Impacts: Sanctions often have unintended consequences on the general population, including job losses, rising poverty, and reduced access to essential services like healthcare and education. Prolonged economic hardship can lead to deteriorating living standards and increased social unrest, further destabilizing the economy and political environment.

• Political Instability and Governance Challenges: The economic and social pressures created by sanctions can destabilize governments, particularly in emerging markets with fragile political systems. Leaders may face mounting public discontent, protests, or even regime changes as citizens blame authorities for economic hardship. Sanctions can also create opportunities for corruption and black-market activities, further undermining governance and the rule of law.

• Diversion of Resources to Mitigation Efforts: Governments in sanctioned economies often divert resources away from development priorities to mitigate the immediate impacts of sanctions. This includes funding for subsidies, emergency import programs, or currency interventions. Such measures, while necessary, reduce long-term investment in infrastructure, education, and healthcare, hampering future growth.

While unqualified opponents of sanctions stress that all emerging economies need to do is comply, the uneven nature of application - especially towards undemocratic regimes with marginal geopolitical relevance - makes forms of diversification and resilience a logical conclusion more akin to buying insurance than shouting for a lawyer implying guilt before a crime has been accused.

Even for countries like Zimbabwe which wrap their Yuan adoption in geopolitical rhetoric, the reality is less a brotherhood of resistance than a necessity-driven play for an economy out of options that’s trying to please Beijing. Another country with perennial economic crisis - Argentina - demonstrated after Javier Milei’s election in 2023, how non geopolitical Yuan adoption actually is after he quickly walked about comments about replacing China as a trade partner and ending financial dependence on tools like its Yuan currency swap - which has helped stave off default.

Conclusions and Implications

• Yuan adoption doesn't have to move the needle on reserves or flow demonetizations to be relevant.

• The dollar system has crushed EMs for decades, assessing the length and depth of collateral damage, we were surprised that there have not been efforts to find a solution sooner

• For all the rhetoric, the yuan offers relatively limited support outside of bi-trade cost reduction and targeted currency swaps, especially given capital controls

• China is also actively but more quietly pushing for other non-US currencies, with gold and crypo being more successful for government reserves and payments, respectivley.

• A critical mass of countries can create a parallel system of funding which would de-fang currently dominant forms of US sanctions.