Yuan eyes greater role among safe-haven assets

The US dollar and US Treasury bonds have long been seen as the bedrock of global safe-haven assets. However, since late 2024, growing fiscal and credit risks in the United States have raised market concerns, accelerating the global shift toward more diversified foreign exchange reserves. The weakening safe-haven function of the greenback and US Treasuries has created an opportunity for the Chinese yuan, also known as the renminbi, to fill the gap in global safe assets.

The RMB has already begun to exhibit key characteristics of a safe-haven currency, supported by China's strong institutional credibility and macroeconomic stability.

First, China's long-standing current account surplus and sizable foreign exchange reserves provide a solid foundation for the RMB. These reserves enable the central bank to defend the currency during periods of volatility, bolstering confidence among foreign official investors.

Second, China's financial market is already large and liquid. By the end of 2024, outstanding Chinese government bonds exceeded 34 trillion yuan ($4.75 trillion), and interbank liquidity remained robust. Last year, the average daily trading volume in the domestic RMB foreign exchange market surpassed $160 billion, ranking the RMB among the most actively traded global currencies.

Third, RMB assets are gaining in appeal. China's bond market carries an A+ credit rating, government debt-to-GDP ratios are moderate and inflation remains low. In 2024, net foreign investment in Chinese bonds reached $46.8 billion, a 4.2-fold increase from 2023 — pushing total foreign holdings beyond 4 trillion yuan. Over 80 central banks now include the RMB in their foreign exchange reserves, primarily in Chinese government bonds and other high-credit securities.

When compared with traditional safe-haven currencies — the US dollar, Japanese yen, and Swiss franc — the RMB stands out for its exchange rate stability and relatively attractive interest rates. Its level of internationalization has also advanced significantly.

Nonetheless, RMB assets have yet to gain full traction in global financial markets. This is partly due to lingering operational complexities in China's financial market and the fact that the RMB has not yet achieved full convertibility, with certain capital account controls still in place.

To further position the RMB as a safe-haven currency, we propose the following policy recommendations.

First, enhance the intrinsic value of RMB assets and reinforce market confidence.

Safe-haven currency holders prioritize the economic and financial health of the issuing country. China should therefore focus on sustaining stable growth and preventing financial risks to enhance the real value of RMB assets. This requires maintaining a reasonable pace of economic expansion and job creation, boosting domestic consumption and advancing economic transformation to improve long-term growth expectations.

Addressing risks in key sectors, such as real estate, is also vital to prevent systemic instability and boost confidence in the safety of RMB assets. In parallel, macroeconomic policy should remain consistent and transparent, reinforcing the RMB's credibility and its image as a "stability anchor" in the global economy.

Second, improve cross-border capital flow management and attract long-term investors.

China has established a framework for overseas institutions, including central banks, sovereign wealth funds and international institutional investors, to access its onshore markets. The next step is to deepen and streamline access by refining capital flow management.

This includes simplifying operational procedures of cross-border investment. Currently, foreign investors face complexities in account setup, custody and currency settlement, often needing multiple accounts and navigating varied regulatory requirements. A more integrated, "one-stop" account system for investment and settlement would reduce operational and time costs.

At the same time, capital flow controls should be more flexible and risk-based. Rather than applying blanket restrictions, measures should be targeted, temporary and used only in response to sharp and abnormal cross-border capital fluctuations that threaten financial stability. Ongoing communication with international institutions like the International Monetary Fund is essential to ensure such interventions are transparent, appropriate in scale and limited in duration.

Third, deepen and improve liquidity in the offshore RMB market.

The offshore RMB market remains relatively small, with limited instruments and liquidity that tend to tighten during global crises. A multipronged approach is needed to address this.

China should support key offshore RMB hubs, such as Hong Kong Special Administrative Region, in enhancing liquidity provision. During periods of market stress, the People's Bank of China — the country's central bank — should inject liquidity through its currency swap arrangements with the Hong Kong Monetary Authority to prevent sharp interest rate spikes and excessive divergence from the onshore exchange rate.

Expanding the range of offshore RMB products is also essential. This includes normalizing the issuance of offshore RMB government bonds and promoting RMB-denominated commodities and equities to create more investment-grade instruments with safe-haven appeal.

Additionally, China should encourage broader participation from other financial centers. Expanding the network of RMB clearing banks and market makers in regions like Europe and the Middle East would mitigate the liquidity risks associated with reliance on a single hub in Asia.

Fourth, expand the supply of RMB safe assets and improve market pricing and risk management.

Although China's bond market is open to foreign investors, holdings are still heavily concentrated in central government and policy bank bonds. To broaden the base of safe assets, China should strengthen the RMB government bond market by increasing the issuance of long-duration bonds to provide more benchmarks for long-term risk-free rates. It should also enhance information disclosure and credit ratings, and optimize custody, settlement and tax policies to reduce operational costs for foreign institutions investing in Chinese bonds.

It is also necessary to encourage foreign investment in select local government bonds under controlled risk conditions. Instruments with credit enhancements, guarantees and stronger disclosure can improve appeal and expand the supply of RMB safe assets.

Moreover, developing a mature derivatives market is essential for China. Global investors need effective risk management tools to hedge RMB-related exposures. However, RMB foreign exchange futures are not yet available domestically, and treasury futures access is limited to domestic institutions. China should introduce new instruments such as RMB forex futures and explore pathways for opening the treasury futures market to foreign participants.

Meanwhile, the interest rate swap market, accessible via the Swap Connect program, should be expanded in scale and product range. Credit derivatives — such as credit default swaps — should also be developed to help manage credit risk and enhance investors' willingness to hold RMB bonds.

International experience shows that government bonds widely accepted as collateral gain in both liquidity and global appeal. The PBOC and the Hong Kong Monetary Authority announced in March that global investors could use onshore RMB bonds for offshore RMB repo transactions and as margin for overseas derivatives trading. This marks a key step in enhancing the utility of RMB bonds in global financial markets.

To support this, China must strengthen its legal and regulatory framework for cross-border collateral management, ensuring efficient mechanisms for collateral disposal and risk control. This will lay the foundation for expanding the range of RMB bonds used as cross-border collateral in the future.

Finally, China should take a more active and leading role in international financial cooperation.

To position the RMB as a key pillar in a diversified global system of safe assets, it must gain wider international acceptance and stronger institutional backing. China can advance this goal through several steps.

First, promote discussions within multilateral institutions such as the International Monetary Fund on expanding the global supply of safe assets, and advocate for a multicurrency framework that enhances global financial stability — thus building consensus for a greater role for the RMB.

Second, deepen financial cooperation with major economies by expanding local currency swap agreements with central banks in Europe and Asia, and establish RMB liquidity support frameworks in regions such as Africa and Asia.

Finally, solidify the Chinese currency's role as a stabilizer in regional economies — for example, by promoting greater use of the RMB in cross-border payments and settlements, especially among countries participating in the Belt and Road Initiative.

The views do not necessarily reflect those of China Daily.

Sheng Songcheng is an adjunct professor of economics and finance at the China Europe International Business School and former head of the Statistics and Analysis Department of the People's Bank of China. Sun Dan is a research fellow at the CEIBS Lujiazui International Institute of Finance. The article was translated based on the one published in Hong Kong International Finance Review.