Andy Mukherjee: China’s dream of currency supremacy—Has the war in West Asia helped its cause?

I argued in early February that those looking for evidence of the challenge to the US currency in payment flows were searching in the wrong place. For years to come, de-dollarization will remain hidden in additions and alterations to financial plumbing.

But that was before the conflict in the Middle East. A lot has changed in the past six weeks. China is the largest buyer of Iran’s seaborne oil. The price its refineries pay stays in “controlled accounts” at small Chinese banks cut off from dollar trade.

According to the Atlantic Council, these funds are used to pay Chinese contractors or cover imports: an “oil-for-goods” swap. And now Tehran says that it will accept toll payments from ships crossing the Strait of Hormuz in cryptocurrencies or the yuan.

It’s a rebellion against America’s financial hegemony on three fronts simultaneously: the payment currency, the messaging system, and the settlement mechanism. Were a peace plan to remove US sanctions against Iran, the greenback might regain some of the trust it has lost. But China’s currency won’t go away. It will simply lie in wait for the next geopolitical crisis.

At nearly 50% of all international payments, the dollar’s dominance is stark. The yuan’s share, according to the Society for Worldwide Interbank Financial Telecommunication, or Swift, is just 2.7%, lower than in 2024.

Yet China is serious about pitching its currency as an alternative. The digital version, e-yuan, moves over the blockchain. The technology integrates messaging, reconciliation and asset transfer into a single, seamless operation, bypassing Swift, the panopticon through which the US surveils global financial flows.

Project mBridge, a digital platform shared by the central banks of China, Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia, has already processed over $55 billion in trade, with the e-yuan accounting for 95% of the volume.

But the blockchain is still a small part of how claims get disposed of. Most international transfers gravitate to a New York private institution, known as the Clearing House Interbank Payments System, or Chips. Its participants liquidate obligations using pre-funded accounts at the Federal Reserve. They all maintain US offices and are subject to US law.

Beijing’s discomfort is precisely on that point. The US Department of Justice built its bank-fraud and wire-fraud case against Huawei’s finance chief Meng Wanzhou by finding dollar transactions routed through Chips in New York. In US law, the moment a digit representing a dollar touches a server on American soil—even for a millisecond—it grants the US government jurisdiction.

To bypass Chips, China has developed its own Cross-Border Interbank Payment System, or Cips, which clears payments in yuan. In March, when the Iran war flared up, Cips handled a record 921 billion yuan ($135 billion) in average daily volumes, a near-50% jump from the previous month.

Although that’s a fraction of the $2.2 trillion that passes through New York, the growth of the alternative network is worth noting. The data reveals a remarkable transformation, galvanized by structural and geopolitical shifts. In 2021, Cips was a quiet utility, averaging roughly 350 billion yuan in daily turnover. By early 2024, it had breached the 600 billion-yuan ceiling.

The trigger was Washington’s December 2023 executive order authorizing secondary sanctions on foreign banks facilitating trade for Russia. Fearing a total disconnect from the dollar, banks in the UAE, Turkey and Central Asia scrambled to migrate their settlement to the yuan.

The mainland’s weak domestic economy also helped. Disinflation led to lower onshore interest rates just when the cost of borrowing dollars was rising. That boosted the attractiveness of the Chinese currency in trade financing.

Hong Kong banks recently doubled their permissioned access to onshore Chinese liquidity amid strong client demand for yuan-denominated loans. Last year, DBS’s Singapore unit became an overseas direct participant of Cips. Banks connecting directly to Cips using its internal messaging protocol—bypassing Swift entirely—have grown by nearly 40% since 2024, reaching 193 institutions. With just 42 members, Chips, the New York club, is a lot more elitist.

As analysts Benn Steil and Yuma Schuster noted in a Council on Foreign Relations report last month, the decline in the yuan’s share in Swift payments data is misleading: It doesn’t mean less usage; it means that trade messages have gone private and become less visible.

Back in 2020, Syracuse University professor Daniel McDowell argued that the more the US wields its unmatched financial power, the less it may have left. Subsequent events have proved him right. After all, if payments accompanying 20% of the world’s oil and gas can move through a digital pipe that the US Treasury cannot see, then America’s dominance of global finance has effectively been handed an expiry date. ©Bloomberg

The author is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.