As tensions between the United States and China continue to escalate, Beijing is increasingly focused on weakening what it views as the cornerstone of American power: the U.S. dollar. The ongoing financial war between these two superpowers is intensifying, with China taking deliberate steps to challenge the dollar’s dominance. The objective is clear—dismantle the U.S.-led financial system and replace it with a Chinese-centric order, where the renminbi reigns supreme.
China’s Plan to Break Free from Dollar Dependence
The sweeping economic sanctions imposed by the United States on Russia in response to the invasion of Ukraine served as a wake-up call for Beijing. These sanctions crippled the Russian economy, blocking access to dollar reserves and choking Russia’s financial arteries. To Beijing, these actions demonstrated the immense power the U.S. wields through the dollar—and the immediate threat that power poses to China’s own ambitions. Yu Yongding, a former member of China’s central bank’s monetary policy committee, pointedly warned that Chinese dollar assets are increasingly becoming “hostages.” The message was clear: China cannot afford to leave its financial future vulnerable to the whims of American policymakers.
The U.S. has not yet targeted China’s largest financial institutions with full-scale sanctions, but reports that some smaller Chinese banks might face penalties for their dealings with Russia have only increased Beijing’s sense of urgency. Chinese policymakers know that unless they act decisively, their own institutions could one day face the same fate as those in Russia, held hostage by the U.S.-controlled financial network. The only way to truly safeguard China’s future, they believe, is to dismantle the U.S. financial stranglehold.
Fortress Russia 2.0: China’s Attempt to Escape the Dollar’s Grip
To achieve this, Beijing is now eyeing a strategy similar to Russia’s so-called “Fortress Russia” approach, where Moscow worked for years to reduce its reliance on the dollar in anticipation of Western sanctions. Russia’s tactics were largely successful; when the U.S. and its allies froze Russia’s reserves in 2022, the dollar’s share had already been drastically reduced. Despite these efforts, however, about $300 billion of Russian reserves—mostly held in euros—remains frozen.
China’s situation is far more precarious. The scope of its dollar reserves—estimated to be between $3.1 and $3.29 trillion—is massive compared to Russia’s. About 50-60% of these reserves are dollar-denominated, tying China closely to the currency of its geopolitical rival. Moreover, roughly half of China’s external debt is also denominated in dollars, leaving Beijing’s financial system deeply exposed to potential U.S. sanctions. China’s four largest state-owned banks, the largest in the world by assets, rely on the dollar to finance their overseas activities, making them especially vulnerable.
China’s dilemma is whether it can escape the dollar’s grasp without causing self-inflicted economic damage. Beijing’s moves are not merely about avoiding sanctions—they’re about challenging U.S. financial supremacy head-on. The Chinese leadership knows that to dominate the global financial stage, it must dethrone the dollar, and it has begun laying the groundwork to do just that.
Attacking the Dollar: Beijing’s Offensive Strategy
China’s actions are part of a broader strategy to systematically weaken the U.S. dollar. Beijing is not merely looking to shield itself from the economic weapons of the West; it is orchestrating an offensive aimed at displacing the dollar as the world’s reserve currency. China’s leaders understand that in order to supplant the United States as the leading global power, they must strike at the heart of America’s strength—its currency.
One key part of this plan is to diversify its foreign exchange reserves. Chinese officials have already taken steps to reduce their holdings of U.S. Treasury securities, decreasing these holdings by 11% between November 2022 and April 2024. Instead of holding U.S. government debt, China has been buying gold, with its gold reserves increasing from 3.4% to 4.9% of total reserves. Yet, the challenge remains enormous—diversifying such a massive amount of reserves is no easy feat, especially when high-quality alternatives to the dollar are limited.
Another significant part of Beijing’s strategy is promoting the renminbi in global trade and payments. China has succeeded in surpassing the dollar’s share in its cross-border payments, a symbolic victory that underscores the nation’s push for financial independence. The renminbi’s share of China’s total cross-border transactions crossed 50% in 2024, marking an important milestone. But this is just the beginning. Beijing’s ultimate goal is to break the dollar’s dominance in global commodities markets, where most of China’s imports—such as oil and raw materials—are still priced in dollars.
China’s ambitions go beyond just diversifying its own reserves and expanding renminbi use. Beijing wants to create a world where the dollar no longer holds unrivaled sway over global finance. To achieve this, China is aggressively promoting the use of its own Cross-Border Interbank Payment System (CIPS), an alternative to the U.S.-controlled SWIFT network. Though CIPS is still reliant on SWIFT for many transactions, the system is expanding, with the aim of eventually providing a fully independent network for renminbi payments, thereby bypassing potential U.S. sanctions.
Building Alliances to Undermine the Dollar
China is not fighting this battle alone. Beijing has found eager allies in its quest to weaken the dollar. Western sanctions on Russia have accelerated a global movement towards de-dollarization, especially among nations that fear being similarly targeted in the future. China has leveraged multilateral organizations such as BRICS and the Shanghai Cooperation Organization (SCO) to form a coalition against the dollar. These groups, comprising countries like Russia, India, Brazil, and newly added oil-rich nations like Saudi Arabia, aim to reduce their dependency on the dollar and create a multipolar financial world.
Iran, for example, sees its inclusion in SCO and BRICS as a way to bypass American sanctions and challenge U.S. influence. Chinese leaders view these alliances as an opportunity to establish a network of nations willing to conduct trade in renminbi, thereby eroding the dollar’s dominance. This push aligns with China’s aggressive Belt and Road Initiative (BRI), which seeks to use infrastructure investment to bind other countries to China’s economy and, by extension, to its financial systems.
This expanding coalition, centered around the renminbi, represents a direct attack on the existing dollar-based financial system. By promoting local currency settlements, establishing currency swap agreements, and expanding its influence in critical regions like the Gulf and Central Asia, China is building a new financial order that challenges the status quo. This isn’t just about regional dominance—it’s about rewriting the rules of the global economy to serve Beijing’s interests.
The Challenge of Alternatives: Breaking Dollar’s Stranglehold
China’s attempt to dismantle the dollar’s dominance faces significant hurdles. The global marketplace is still deeply structured around the dollar, with approximately 94% of trades involving the renminbi paired with the dollar. Moreover, attempts to diversify into other currencies, like the euro and yen, are constrained by structural market limitations. The supply of high-grade euro- and yen-denominated assets is limited, and any significant purchases by China could destabilize these financial systems.
European and Japanese policymakers are also wary of China’s ambitions and are unlikely to accommodate Beijing’s attempts to reshape their financial systems for its own gain. This presents a major obstacle for China’s broader de-dollarization agenda, but it hasn’t deterred Beijing from trying. China has continued to push for the creation of renminbi-centric trade arrangements, especially in commodities markets, where the dollar still dominates.
China has also targeted strategic sectors, such as rare earth metals, to weaken the dollar’s grip on commodities pricing. Ganzhou, home to China Rare Earth Group, now plays a crucial role in Beijing’s financial offensive. By using renminbi to quote prices for critical minerals, China is trying to challenge the dollar’s role in global commodities markets, hoping to tilt the scales of financial power in its favor.
The Implications for the United States: A Looming Threat
If Beijing’s strategy succeeds, the implications for the United States are dire. The dollar’s role as the world’s reserve currency grants the U.S. unparalleled economic leverage. It allows Washington to issue debt at low interest rates and exert influence over other nations through financial sanctions. Should China succeed in reducing global reliance on the dollar, the ability of the U.S. to project power economically will be severely compromised.
This de-dollarization effort also poses a direct challenge to America’s ability to use sanctions as a tool of foreign policy. As former U.S. Treasury Secretary Jacob Lew warned, “The more we condition the use of the dollar and our financial system on adherence to U.S. foreign policy, the more the risk of migration to other currencies and other financial systems in the medium-term grows.” The ongoing push by China to create a rival financial system is a direct response to America’s use of its financial might as a weapon—and it is beginning to bear fruit.
The erosion of the dollar’s dominance would mean the United States loses its ability to dictate the terms of international finance. China, in turn, would emerge as a leading power capable of leveraging its own financial system to pursue its geopolitical objectives. The growing use of the renminbi in trade and investment, coupled with the creation of alternative payment systems like CIPS, indicates a strategic, calculated move by Beijing to undermine U.S. influence.
China’s Long-Term Vision: Financial Domination
The ultimate aim of China’s attack on the dollar is clear: to establish a Chinese-led financial system that rivals, and eventually surpasses, the American one. President Xi Jinping has reiterated his ambition for China to become a “financial power” and create a system that is “distinct from Western models.” For Beijing, this is not merely about self-preservation—it’s about domination. Xi’s vision is for China to lead a multipolar financial world where the renminbi stands as one of the world’s dominant currencies, rivaling the dollar and setting the rules of the game.
By promoting its currency, building alternative financial infrastructure, and forging alliances against the dollar, China is actively attacking the foundation of U.S. global power. It is a multi-pronged strategy that involves reducing reliance on dollar reserves, establishing new payment systems, and using China’s dominant position in sectors like rare earth metals to push the renminbi in global markets.
If China is successful, the global financial landscape will be transformed. A world less reliant on the dollar would mean diminished U.S. influence, the weakening of America’s ability to impose economic sanctions, and a significant reduction in its geopolitical leverage. For Beijing, this represents not just an economic victory, but also a triumph in the broader strategic contest with the United States for global supremacy.
In this escalating struggle, China is no longer content to merely defend its interests—it is on the offensive, systematically working to dismantle the financial dominance of the United States. The consequences of this battle for financial supremacy are profound, and the stakes could not be higher.
https://carnegieendowment.org/research/2024/10/chinas-dollar-dilemma?lang=en