At this year’s Lujiazui Forum, China’s central bank governor Pan Gongsheng announced bold new steps to promote the digital yuan, China’s central bank-issued digital currency. The governor pitched the e-CNY as a pillar of a “multipolar” global monetary system, while pledging to open an international operation center for the digital unit in Shanghai.
With real-time cross-border capabilities, programmable payments and a growing network of partner banks, the e‑CNY appears to offer a modern alternative to the dollar-dominated financial architecture – at least its creators say so.
However, beneath its technological polish, the digital yuan remains tethered to the same structural constraints that have long limited the Chinese currency’s global role, namely capital controls, underdeveloped financial markets and legal institutions, and a minuscule amount of assets available for purchase.
Far from disrupting US dollar hegemony, without any broad structural reforms to the Chinese economy, the e-CNY will fare no better than its traditional counterpart, the renminbi (RMB).
To understand the challenges the e-CNY faces in becoming a currency used in international trade, it’s important to revisit the reasons for the US dollar’s hegemony. Dollar hegemony owes to two interrelated roles it plays as the currency of global trade and the world’s reserve currency.
The US dollar is the currency of trade because it is the world’s reserve currency. It is the world’s reserve currency for a few reasons: there is a seemingly endless supply of it due to the US’s large trade and federal budget deficits, an open capital account with plenty of liquid assets denominated in USD, and strong rule of law and transparent institutions.
China is arguably lacking all of these. While the Chinese debt burden has been on the rise, reaching over 300% of GDP in 2023, China still runs the world’s largest trade surplus, hitting almost US$1 trillion in 2024. Even if China demanded to trade solely with the e-CNY and all its trading partners agreed, how would the world pay for its more than 7 trillion e-CNY trade deficit with China?
Where would it be able to get e-CNY, while China sucks in more money (China’s exports) than it supplies to the world (China’s imports)? One option could be central bank currency swaps, yet no serious analysis views this as a viable or sustainable solution.
China’s trade surplus (the difference between domestic savings and domestic investment) is a symptom of its weak domestic demand (the sum of consumption and investment), which in turn is a symptom of its weak domestic consumption.
This is because the wildly successful Chinese development model worked by subsidizing businesses through direct and indirect transfers from the household sector.
This grew savings at the expense of consumption, and chronically pushed domestic production (the sum of consumption and savings) above domestic demand. While the leadership has identified boosting consumption as their number one economic priority for the year, the sheer size of China’s macroeconomic imbalance makes it a long-term problem that might take decades to solve.
However, if it’s able to bring its trade account balance into deficit and start supplying the world with e-CNY, China will run into a different issue blocking the widespread use of the digital yuan: which assets could you buy with the e-CNY? Since it is a one-for-one with the traditional RMB, a good starting point would be to assume that it could purchase any asset you can purchase with the RMB. Outside of China, the RMB cannot buy you much.
Imagine a country that runs a consistent trade surplus with China, exporting raw materials, agricultural products or manufactured goods, and receiving e-CNY (or RMB) in return. What can it actually do with the e-CNY it earns? Beyond using it to buy Chinese goods, the options quickly dwindle.
Access to Chinese equities is tightly controlled, real estate is off-limits to most foreigners and capital controls limit convertibility. The e-CNY is effectively stuck inside the Chinese financial system, with limited access for outsiders.
Holding e-CNY is like collecting tokens for a theme park where most of the rides are off-limits to non-members. Without an open capital account or deeper, more accessible financial markets, the yuan, digital or otherwise, remains of limited use to the world.
Take Saudi Arabia, for instance. It exports far more to China than it imports, meaning it likely ends up with excess RMB after each transaction. However, Riyadh cannot simply recycle that RMB into productive Chinese assets. Most of it likely gets converted into US dollars, the only currency with the global reach and investment ecosystem to absorb large trade surpluses.
This begs the question: if foreign holders cannot reinvest their yuan earnings (either RMB or e-CNY) into profitable Chinese assets, why would they keep accumulating it in the first place?
Even if foreigners could accumulate e-CNY (or RMB) easily and there could be e-CNY-denominated assets available for purchase, another roadblock that prevents widespread use of the e-CNY is the presence of strong rule-of-law safeguards and transparent institutional frameworks.
Global investors and central banks rely heavily on clear, enforceable contracts, independent judicial systems and institutions that consistently disclose their regulatory and monetary policies.
The US dollar benefits from a robust institutional architecture built over decades, including transparent central bank communications, independent auditing of financial systems and a judicial system widely regarded as impartial.
By contrast, China’s legal and regulatory frameworks governing finance remain comparatively opaque, presenting challenges for international investors seeking reliable protections for their assets.
Scholars and international institutions, such as the IMF, consistently highlight transparency and institutional strength as key determinants of global currency adoption.
Without substantial advances toward clearer rules, greater regulatory transparency and stronger institutional guarantees, international acceptance of the e-CNY will likely remain limited, regardless of its technological sophistication.
Heraclitus, the ancient Greek philosopher, is quoted as saying, “The only constant in life is change.” While everything discussed here holds currently, everything is subject to change.
The US is keen on cutting its trade deficit with the world, and is about to pass a new law that allows the President to tax foreign capital inflows (thereby closing its capital account a bit). And international watchdogs have noted the US might be at risk of a democratic and rule-of-law backslide under Donald Trump.
The e-CNY does not truly pose a threat to the dollar, at least in its current form. However, the changes listed previously might diminish dollar hegemony and eventually give way to a “multipolar” global monetary system.
In that future, China’s e-CNY, after reform, may find its place, not as a revolutionary replacement for the dollar, but as one currency among many in a more diversified, multipolar monetary landscape.
Anthony William Donald Anastasi is an associate professor of economics at Wenzhou Business College, Wenzhou China. His writings can be found here.
