For decades, cross-border trade in the Asia-Pacific has been denominated in US dollars. Given the currency’s relative stability and accessibility, small and medium-sized businesses, merchants and manufacturers looking to expand across borders traditionally conducted international trade in the US dollar.
For instance, a Shenzhen manufacturer in China paying its Indonesian supplier would convert yuan to US dollars for the payment, which when received will be converted to Indonesian rupees, and vice versa. This exposes both parties to foreign exchange risks and costs but businesses accepted these for the sake of the advantages of internationalisation.
Today, these terms of trade are being rewritten quickly, driven by the exacerbation of tariffs around the world and business owners’ fear of uncertainties: the Organisation for Economic Cooperation and Development (OECD) recently warned that the world faced major threats to growth that could materialise soon and persist into the next year.
Against this backdrop of uncertainty, we are seeing a remarkable acceleration of direct currency settlements, particularly involving the renminbi, bolstering the case for the globalisation of the Chinese currency.
This is not a speculative future scenario but a trend that has been developing since the Covid-19 pandemic. While the US dollar remains the world’s most widely used currency, accounting for 88 per cent of foreign exchange transactions and 54 per cent of international trade, its dominance has diminished in recent decades. According to International Monetary Fund data, in 2001, the dollar represented 71.5 per cent of the world’s reserves but by last year, that had fallen to 58 per cent.
Meanwhile, China has authorised 34 offshore yuan clearing banks in 32 countries and regions, including most advanced economies and many large emerging economies. Its Cross-border Interbank Payment System (CIPS), introduced in 2015, is also increasingly adopted for use. Daily payments on CIPS have grown to about US$60 billion, compared to US$1.8 trillion on the Clearing House Interbank Payments System (CHIPS), the main method of settling large US dollar transactions.
The impetus for this shift is twofold, and goes beyond simply cost savings. Firstly, it is a pragmatic response to deepening regional trade integration. With China firmly established as Asean’s largest trading partner, the old logic of converting between local currencies and the US dollar, for many members of the Association of Southeast Asian Nations, is increasingly seen as inefficient. It adds a layer of cost, delay and volatility that many businesses feel they can no longer afford.
Secondly, and more profoundly, is the strategic drive for fiscal independence. Emerging markets are getting tired of the painful economic jolts they suffer on account of the US dollar, such as when the US Federal Reserve raises its interest rates to combat domestic inflation. A stronger dollar also makes servicing dollar-denominated sovereign and corporate debt significantly more expensive and can trigger capital outflows and currency depreciation across regions such as Southeast Asia.
By reducing their reliance on the dollar to conduct direct settlements, businesses from emerging markets are able to build a buffer against this imported financial volatility.
This strategic pivot is being enabled by groundbreaking digital infrastructure. Initiatives like mBridge, a multi-central bank digital currency (CBDC) platform involving Thailand and Hong Kong, are moving from pilot to reality, promising a future of instant cross-border settlements outside traditional dollar-centric systems. Furthermore, the linkage of real-time payment systems like Singapore’s PayNow with Thailand’s PromptPay and Malaysia’s DuitNow is creating a seamless local-currency network for the region.
Hong Kong is also poised to play a critical role in this transition. Its position as a bridge between China and the world is evolving. It is becoming a testing ground for how digital assets, including regulated stablecoins, can serve as new payment rails, offering a blueprint for efficient yuan internationalisation.
While it is not to say the US dollar’s dominance will be replaced in the short term, the accelerating use of yuan in direct settlements will only empower small and medium-sized enterprises. Even with quickly changing geopolitical dynamics, the ability to diversify settlement options will give businesses a greater array of options in their arsenal when trading with international partners.
The move towards direct yuan settlements is a defining feature of Asia’s economic maturation – a complex challenge to manage but also, more importantly, a monumental opportunity to seize for greater resilience and control over the region’s future prosperity.
