Before we ask whether the Chinese yuan can become the world’s next reserve currency, it’s worth remembering how the U.S. dollar rose to dominance in the first place. Until the mid-20th century, the British pound held that prestigious status, benefiting from the United Kingdom's early lead in the Industrial Revolution. At the height of British global influence, more than 60% of international trade was conducted in pounds, even though Britain accounted for less than 15% of global exports. Around the early 1900s, 1 pound was worth $1. By the end of World War II, it had fallen to just $3.
The real turning point came with the devastation of World War II. Despite being on the winning side, Britain emerged economically weakened and deeply in debt. In contrast, the U.S. had become the world’s strongest economy and largest holder of gold. Under the 1944 Bretton Woods agreement, global currencies were pegged to the U.S. dollar, which itself was backed by gold. This arrangement cemented the dollar’s role as the world's primary reserve currency.
Britain tried to preserve the pound's global standing, including reintroducing convertibility in 1947, but a rapid loss of confidence led to capital flight and forced a reversal within weeks. Over the following decades, repeated devaluations and balance-of-payments crises eroded the pound’s influence and the dollar’s dominance became unchallenged.
Fast-forward to today, and the U.S. finds itself in a similarly vulnerable position. The U.S. carries over $30 trillion in public debt – more than the combined public debts of all other nations. It also runs persistent twin deficits (budget and current account) and is no longer the world’s largest economy. Nor is it the undisputed leader in technology or innovation.
In this context, it's fair to ask: Are the rivals at the gate for the U.S. dollar? Many believe the dollar’s decline is no longer a matter of if, but when and to whom it will cede its throne. Gold has re-emerged as one potential successor. The surge in demand during the Trump administration, driven by erratic fiscal and geopolitical policies, signaled a flight to safety by both central banks and households around the world. For many, gold remains the ultimate hedge against uncertainty.
But another contender looms larger: the Chinese yuan. Measured by purchasing power parity (PPP), China is now the world’s largest economy, with a GDP exceeding $40 trillion – over 30% larger than that of the U.S. Beyond economic size, China has taken global leadership in key technological sectors, from advanced nuclear reactors and solar power to electric vehicles, AI and space technologies. Militarily and economically, China is no longer rising; it has arrived.
But what does that mean for the U.S. dollar? Many economists argue that the writing is already on the wall. The dollar's dominance is beginning to wane, particularly in the face of a rising yuan. Yet despite China’s economic might, the yuan is not yet ready to take over as the world's reserve currency.
There are two major obstacles. First, the yuan is not fully convertible, meaning it cannot be freely exchanged for other currencies or gold without restrictions. Full currency convertibility allows both residents and non-residents to buy or sell a currency for trade and travel freely. Second, China’s capital account remains tightly controlled, limiting the ability of foreign investors to move money in and out of the country for investment purposes. These controls create uncertainty and limit the yuan’s global usability.
However, China is actively addressing these limitations. The government has been steadily opening its financial markets to foreign institutional investors, including expanding access to derivatives trading on domestic exchanges. It has also strengthened its global economic infrastructure, notably through the Cross-Border Interbank Payment System (CIPS – Beijing’s alternative to SWIFT) and the rollout of a worldwide operations hub for its digital currency, the e-CNY, in Shanghai.
In parallel, Chinese authorities are pushing state-owned enterprises to settle more trade in yuan and urging banks to increase the share of cross-border transactions conducted in the currency. Regulatory reforms by the State Administration of Foreign Exchange (SAFE) are also streamlining foreign investment procedures, making capital flows more efficient while retaining safeguards against financial instability.
All in all, the race to dethrone the dollar is intensifying. Whether it’s gold or the yuan – but almost certainly not the euro – one of these challengers will likely take over the dollar’s role in the coming decades.
When will the world be de-dollarized? That remains uncertain. But the tide is undeniably turning and the age of unchallenged dollar dominance may soon come to an end.
