Miao Yanliang on renminbi internationalisation: China’s test is domestic after peak dollar

CICC chief strategist & former SAFE chief economist says U.S. slippage opens space, but only China’s reforms—floating exchange rates, capital account opening, and credibility—can secure durable status

Miao Yanliang joined China International Capital Corporation Limited (CICC) ,a leading investment bank, in March 2023 as Chief Strategist and Executive Head of the Research Department. Before that, he served for 10 years at the China State Administration of Foreign Exchange (SAFE), part of China’s central bank, including as its Chief Economist since May 2018. He joined SAFE in 2013 as Senior Advisor to the Administrator and then Head of Research. Before SAFE, he worked as an economist at the IMF for 5 years. He holds a Ph.D., an M.A., and an M.P.A. from Princeton University.

The following excerpt is the last two sections（Section 5 & 6) of a CICC report published on November 28, 2025. The report is available on Zhongjin Dianjing, an official WeChat blog that publishes CICC research reports.

Miao, the lead author of the report, reviewed the translation before publication.

国际货币秩序的“变”与“不变” ——从“中心-外围”结构看国际货币体系的推动力

What Changes and What Endures in the International Monetary Order—A Core–Periphery Account of the System’s Driving Forces

五、货币秩序如何改变？

5、How Does the Monetary Order Change?

Under the combined effects of high entry barriers, endogenous self-reinforcement, and external institutional support, once a monetary system attains central status, it can be sustained for a long period, lending stability to the international monetary order. Yet stability itself breeds instability (Minsky, 1986). The forces that underpin a stable monetary order are often the very forces that, over time, propel its reconfiguration.

Krugman’s new economic geography provides a useful analogy for thinking about how monetary orders evolve. The location of economic activity is governed by a shifting balance between “agglomeration forces” and “dispersion forces.” Agglomeration is driven by economies of scale and market-size effects, while dispersion reflects intensified competition and rising costs. Which tendency dominates depends on trade costs (often modelled as iceberg costs). When trade costs fall below a critical threshold, production and employment tip towards the core; when trade costs rise, competition pressures make dispersion towards the periphery more attractive.

By the same logic, the international monetary order evolves through a shifting balance between agglomeration and dispersion forces. Its agglomeration forces stem from the network externalities of the old centre’s economic, financial, institutional, and technological advantages. Dispersion forces, by contrast, reflect states’ persistent incentives to safeguard policy autonomy and financial security.

In this analogy, the relevant “trade costs” are the frictions and risks that countries must bear when operating within a core-currency system, for instance, exchange-rate volatility, balance-sheet and asset-price mismatches, and vulnerabilities created by financial dependence. As global economic weight is redistributed and the centre of gravity in trade and investment shifts towards emerging economies, peripheral states face rising costs in maintaining alignment with the incumbent currency: greater currency mismatch and financial fragility, alongside tighter constraints on domestic policy. As dispersion forces increasingly outweigh agglomeration forces, the monetary order will move from a single-core configuration towards a more plural and decentralised one. Only when a new economic centre can integrate global networks at lower trade costs can agglomeration re-emerge around a new core, restoring a measure of stability.

This shift from agglomeration to dispersion unfolds through the intertwined decline of the old centre and the rise of the new. Understanding how a new centre displaces an incumbent one is therefore central to explaining the evolution of the international monetary order.

The Decline of the Old Centre Creates a Window of Opportunity

History suggests that great powers often collapse on their own weight. In the sixteenth century, Spain briefly became Europe’s richest power on the back of American silver and colonial monopoly rents, yet a classic “resource curse” weakened its productive base, culminating in fiscal strain and prolonged inflation.

In the seventeenth century, the Dutch Republic rose to global prominence through breakthroughs in finance and shipping, with Amsterdam emerging as a leading hub of international capital. Over time, however, a reliance on financial income contributed to a hollowing-out of the real economy, leaving the Republic vulnerable and ultimately overtaken by Britain in contests for maritime supremacy.

In the nineteenth century, Britain prospered under the Industrial Revolution and the gold standard, but mounting imperial governance costs, expanding social-welfare commitments, and industrial ageing gradually eroded its competitiveness. Ray Dalio frames this pattern as the “Big Cycle.”

The logic of “decline at the peak” is rooted in a paradox: the very forces that elevate a currency to the centre of the system can also set in motion its own erosion. Economically, monetary primacy rests on formidable national fundamentals. Yet as globalisation deepens, industrial capital and productive factors are reallocated across borders. Manufacturing activity and foreign direct investment increasingly migrate from advanced economies towards lower-cost, demographically younger, and faster-growing peripheral economies. Countries that once faced capital scarcity begin to industrialise and move up the value chain. As these economies accumulate capital, build industrial capacity, and develop technological capabilities over extended periods, they move steadily from the periphery towards the core, emerging as new engines of global growth. Meanwhile, the incumbent centre confronts rising production costs and stronger incentives for offshoring, and its relative weight in the world economy correspondingly declines.

From a financial perspective, debt expansion in the core country is both an enabling condition of dominance and a potential source of its eventual credibility strains. The central currency’s systemic role rests on its capacity to supply liquidity to the world economy and to provide a deep pool of safe assets. But this function is often underwritten by sustained debt issuance, which in turn can erode the solidity of the core currency’s credit foundations.

This tendency becomes especially pronounced when growth slows or when the system is hit by external shocks. In such moments, the incumbent centre is often drawn towards further debt-financed stabilisation. Structural reforms are costly, contested, and slow to deliver; monetary easing can be constrained by the zero lower bound; fiscal expansion, by contrast, is less costly, has a faster impact, and is more politically feasible.

A structural tension exists between global demand for reserve assets and the core issuer’s credit constraints—what might be called the fiscal, or “safe-asset”, version of the Triffin dilemma. Under the gold standard and Bretton Woods 1.0, this tension appeared as an imbalance between the centre’s gold reserves and its growing external liabilities. After the breakdown of Bretton Woods, the world entered the fiat-money era, and the constraint resurfaced as a “safe asset shortage” (Caballero, Farhi, and Gourinchas, 2017). Benefiting from the convenience yield on U.S. dollar assets, the United States has been able to borrow from the rest of the world at low interest rates. So long as the interest rate r remains below the growth rate g (r < g), sustained debt issuance can, at least for a time, sustain an appearance of prosperity.

As its relative economic and financial advantages erode, the centre may also be tempted to use, and at times to overuse, its exorbitant privilege. The immediate aim is often to compensate for declining power through international policy spillovers and financial sanctions. Over the longer run, however, such practices can accelerate the erosion of institutional credibility, turning monetary primacy into a source of self-undermining and the starting point of hegemonic decay.

In this sense, a core currency may be supported by multiple mechanisms that sustain long-term stability, yet that very stability can also plant the seeds of “decline at the peak”. Collapse is not merely the product of contingent crises; it is the cumulative outcome of a self-reinforcing credit expansion and the overextension of institutional privilege. The more successful a core currency becomes, the stronger its incentives to expand. Once those incentives outrun fiscal capacity and institutional constraints, stability can flip into fragility, and the credit architecture becomes prone to self-disintegration.

The weakening of the old centre, in turn, creates an opening for a new one. As confidence in the incumbent erodes, global actors begin to search for a new anchor capable of supplying liquidity, safe assets, and institutional stability, thereby setting in motion a reconstitution of the monetary order.

The Rise of a New Centre Also Requires Internal Reform

The rebalancing of economic power between the core and the periphery is often the first fissure in the entry barriers that protect an incumbent centre. As global industry and capital are reallocated, peripheral economies can become new engines of growth by absorbing manufacturing capacity and investment, while the old centre gradually loses ground as production costs rise and activity shifts offshore.

Yet economic ascent alone only pries open a small corner of the core’s structural defences. A new centre can break through only if it can build financial-market depth commensurate with its economic weight. The barrier to a core currency is, in essence, a composite of economic scale, financial architecture, institutional credibility, and technological capacity; through repeated interactions, these elements generate self-reinforcing network effects. Overcoming such path dependence cannot be achieved through economic fundamentals alone.

The transition from sterling to the dollar vividly illustrates that a rising power’s ability to break through the incumbent centre may hinge on the maturity of its financial system and its capacity to supply safe assets. By the late nineteenth century, the United States had surpassed Britain in economic output, industrial capacity, and trade presence, yet the dollar did not immediately displace sterling as the system’s anchor. A central reason was that U.S. finance remained comparatively underdeveloped: banking was fragmented by state-level restrictions that impeded nationwide operations, payments and clearing lacked a unified infrastructure, regulatory authority was dispersed, and recurrent bouts of financial instability undermined confidence. Under these conditions, the United States could not credibly provide the world with stable, reliable, safe assets. Only after the establishment of the Federal Reserve in 1913, together with the gradual consolidation of national clearing arrangements and the rapid expansion of the Treasury market, did the concentration and institutional coherence of the U.S. financial system strengthen sufficiently to mount a sustained challenge to sterling.

However, gains in economic strength or financial-market depth do not automatically translate into international trust. Whether other states are willing to invoice trade, invest, or hold reserves in a currency depends on deeper forms of institutional credibility—including fiscal discipline, policy predictability, central-bank reputation, and the institutional foundations of the rule of law and property-rights protection. Where these institutional foundations remain weak, even an economy with impressive scale and sophisticated financial markets may struggle to secure broad international use of its currency.

Returning to the underlying logic of how international monetary orders form, competitive selection matters, but free competition is always safeguarded by institutional arrangements. The more robust the institutions, the more convincingly they can deliver credible, across-the-cycle commitments, and the more willing global actors are to project confidence into that currency’s future, making genuine substitution of the incumbent centre more plausible.

For this reason, the shift from a changing economic landscape to a reconstituted monetary order is rarely smooth. It requires the interaction of timing and reform. Monetary transitions are not self-executing. The incumbent centre benefits from powerful institutional inertia and entrenched network effects: global invoicing, reserves, clearing, and payment infrastructures form dense networks under its leadership, raising immense switching costs for potential challengers.

More importantly, incumbents can often extend the lifespan of monetary primacy through institutional engineering and technological innovation—by reshaping settlement arrangements or by tying critical materials to their own system. For example, after the Second World War, despite the erosion of its industrial and colonial advantages, Britain still tried to defend sterling’s role by promoting “petro-sterling” arrangements that linked sterling to the settlement of Middle Eastern oil trade, thereby sustaining its relevance within the global payments system. In 2025, the United States likewise sought to leverage dollar-denominated stablecoins to extend the dollar system into the underlying infrastructure of crypto-asset markets and cross-border payments, thereby reinforcing its primacy within an emerging digital financial architecture.

The dollar’s displacement of sterling is a canonical case of “timing plus reform.” After the First World War, Britain, though formally among the victors, faced fiscal strain, gold losses, and an erosion of industrial competitiveness, all of which began to open fissures in sterling’s central position.

In 1925, Britain attempted to restore the gold standard at the pre-war parity. The decision left sterling significantly overvalued, compressed export competitiveness, and intensified strains within the domestic economy and financial system. These pressures culminated in 1931, when Britain was forced to abandon the gold standard, further weakening sterling’s international credibility.

As the incumbent centre faltered, the United States moved to modernise its institutional and financial market foundations. The creation of the Federal Reserve in 1913 provided a more unified and dependable monetary framework. During the First World War, large-scale lending to the Allies helped shift the United States into the position of the world’s leading creditor. In the 1920s, the rapid expansion of the Treasury market, alongside improvements in market-making, settlement, and clearing, enabled U.S. Treasuries to emerge progressively as global safe assets.

By the 1920s, New York had risen to rival London as an international financial centre, strengthening the foundation for the dollar’s post-1945 ascendancy. After the Second World War, the Bretton Woods framework, underwritten by U.S. fiscal capacity, financial depth, and institutional credibility, completed the transition away from sterling. The episode underscores that shifts in international monetary leadership are not the automatic by-product of an old centre’s decline; they are the joint outcome of historical timing and deliberate reform. The United States capitalised on sterling’s moment of maximum vulnerability and paired it with institutional consolidation and financial deepening, thereby positioning the dollar at the core of the international monetary system.

In contrast, Japan once found itself at arguably the closest historical moment to mounting a serious challenge to the dollar, yet it delayed reform and ultimately missed the window for yen internationalisation. In the 1970s, the United States was weighed down by stagflation and a relative erosion of economic standing. Japan, by comparison, entered a golden era of export-led growth and financial expansion. Japan’s per capita GDP surpassed that of the U.S. in 1987, and by 1995 reached roughly 150% of the U.S. level.

Across indicators such as balance-sheet scale, global trade share, and corporate competitiveness, Japan appeared to possess the capacity to challenge monetary centrality. Yet the yen’s failed internationalisation was not simply a matter of insufficient economic weight; it also reflected Japan’s failure to deliver institutional reform within a critical window of opportunity. For years, Japan’s financial reform was marked by hesitation and policy ambivalence. Policymakers sought liberalisation to elevate Tokyo’s status as an international financial centre, yet feared that rapid opening would expose a banking system still burdened by unresolved non-performing loans. As a result, regulators repeatedly oscillated between loosening and tightening.

Only in 1996 did Japan launch its “Big Bang” reforms, easing foreign exchange and capital account restrictions, promoting market-making, expanding securitisation and derivatives activity, and strengthening disclosure and supervisory transparency. By the time these reforms were launched, however, they came a full decade too late—roughly ten years after the dollar’s position showed signs of strain around 1985.

Worse still, no sooner had reforms begun than Japan’s banking system was hit by a credit crunch and a wave of bank failures, forcing regulators to retrench and tighten controls on capital flows once again. Meanwhile, by 1995, the dollar had reversed its decade-long depreciation and entered a renewed upswing. The information-technology revolution lifted U.S. productivity and restored economic momentum, quickly re-fortifying the institutional and market foundations of dollar dominance. The historical window for yen internationalisation thus closed quietly, but decisively.

Taken together, the lessons from both successes and failures suggest that windows for monetary breakthroughs can be brief. A new centre’s genuine ascent requires decisive reform at the right moment: it must seize the opportunity created by the incumbent’s relative decline, while simultaneously rebuilding its own comprehensive capabilities. Economic strength and trade scale are the necessary foundation; deep and liquid financial markets provide the functional infrastructure; and, ultimately, the contest is decided by institutional credibility—the higher-order belief.

Economic power is the most visible and, in relative terms, the easiest to expand. Financial system construction is more demanding, requiring sustained accumulation. The cultivation of institutional credibility is hardest of all, yet it is often the most decisive factor in international monetary competition. These elements are sequential, and none is dispensable.

六、人民币如何走向货币秩序的中心？

6、How Can the RMB Move Toward the Centre of the Global Monetary Order?

The international monetary system is at a critical historical juncture. The United States’ increasing use—and overuse—of dollar primacy is beginning to fray the economic, financial, and institutional foundations that underpin the dollar’s central status. The entry barriers of the international monetary order have, unusually, started to loosen, creating an opening for latecomer currencies to ascend and for the system itself to be reconfigured.

Against this backdrop, if the RMB can seize the moment and steadily strengthen its role as an international reserve currency, the global system may evolve from a single-core structure towards a more balanced, multi-centre configuration. Zhou Xiaochuan (2025) argues that a key question for the future of the international monetary system is whether any currency is both willing and able to assume some of the dollar’s functions in concrete domains—trade settlement, energy invoicing, and reserve holdings.

How, then, might the RMB capitalise on this opening and move towards the centre of the system? The logic of international monetary order change is that the rise of a new centre depends not only on economic weight and trade scale, but also on the construction of functional anchors in financial markets, and, ultimately, on institutional credibility sufficient to generate broad international confidence.

Economically, China’s manufacturing ascendancy already provides the firmest foundation for RMB internationalisation. China accounts for more than 30% of global manufacturing output, having scale advantages in lower value-added segments while also building internationally competitive capabilities in higher-technology industries such as new-energy vehicles, artificial intelligence, and 5G telecommunications. This industrial strength enhances China’s leverage and pricing power within global supply chains, creating concrete demand for RMB invoicing and settlement.

At the same time, global trade patterns are being reconfigured. China–U.S. trade frictions and tariff barriers have encouraged a diversification of China’s export destinations away from the U.S. towards Southeast Asia, Latin America, Europe, and the Middle East. As inter-regional trade expands and supply chains extend, more scope opens up for RMB use in cross-border settlement. This de-dollarisation trend provides natural use cases for the RMB within Eurasian trade networks and lays the groundwork for future regional monetary cooperation.

To steadily strengthen the RMB’s international standing, China must “do our own thing well” [Note: as Xi Jinping says]: to advance financial market and institutional reform at a higher level.

On the financial front, this means addressing the structural weaknesses of China’s capital markets and building a “functional anchor” for the RMB. In line with the 15th Five-Year Plan’s objectives of “expanding opening up” and “boosting China’s strength in finance,” China could pursue a gradual, well-sequenced increase in capital account openness, while further improving the infrastructure for RMB pricing, invoicing, and settlement.

The focus is on expanding the supply of RMB-denominated financial products, deepening the markets for bonds, foreign exchange, and derivatives, enhancing market-making mechanisms and liquidity support systems, improving financial infrastructure and the legal environment, and increasing the accessibility, tradability, and hedging capacity of RMB assets. Through ongoing market-oriented reforms, the RMB can evolve from a currency that is simply “usable” for payments into one that is “allocatable and trustworthy” as an asset, thereby establishing a solid financial foundation for its internationalisation.

At the institutional level, China must seize this strategic window to shape the RMB’s institutional credibility through reform. The essence of monetary credibility requires an international currency to offer stable and predictable institutional guarantees to foster high-order trust in global markets.

For the RMB, one priority is to establish an effective macroprudential policy framework to buffer against shocks from cross-border capital flows. Another is to implement a floating exchange rate system, allowing for price adjustments to ease pressures.

A fixed exchange rate may appear stable, but it is actually the hardest to maintain. Like riding a bicycle, balance can only be achieved in motion. Under a fixed exchange rate, currency and maturity mismatches do not disappear but instead shift to the national balance sheet. Under a floating exchange rate regime, risk management is decentralised to market participants.

On the technological front, the development of digital financial infrastructure offers a breakthrough for RMB internationalisation. In the digital age, the evolution of monetary forms and payment systems has become an inevitable trend. Digital finance optimises resource allocation, reduces transaction costs, and enhances cross-border settlement efficiency, all of which help expand the RMB’s use in international settlements and other global applications.

China should, ensuring security and control, steadily promote the digital interoperability of cross-border payment and clearing systems, and explore the use of tokenised RMB instruments in offshore markets to meet real economic demands in cross-border trade and supply chain finance.

Moreover, onshore digital RMB and offshore tokenised RMB instruments can complement each other: the former strengthens the efficiency and security of the domestic payment system, while the latter extends the RMB’s cross-border circulation both in breadth and depth.

As digital financial infrastructure matures, the RMB can achieve deeper institutional embedding in global payments and settlements, and position itself to take a leading role in the monetary transformation driven by the new wave of technological innovation.

In summary, while the emerging cracks in the dollar system provide a rare historical opportunity for the RMB, its future position will be determined not by the relative decline of the dollar, but by China’s own internal strengthening. The key is whether China can capitalise on this opportunity through reforms. By accelerating the development of onshore financial markets, implementing a floating exchange rate system, and advancing capital account opening in a steady and orderly manner, China can fundamentally enhance the RMB’s credibility and functionality within the global system.

The goal of RMB internationalisation has never been to replace the dollar, but to serve as an additional stabilising force in a system under strain. If China can seize this window, the future international monetary system may evolve from a single-centre structure towards a more balanced, multi-centre arrangement, with the RMB playing a constructive role in this new configuration.