China: PBoC Governor’s Vision for the Global Monetary System, Support for Recent RMB Strengthening
Observatory View
· The PBoC’s governor Pan Gongsheng recently outlined his vision for the international monetary system in what appears to be a response to Christine Lagarde’s recent speech on the international role of the euro and an update of the historical view of the monetary system laid out by Governor Zhou Xiaochuan in 2009.
· The dollar should no longer predominate and be a source of instability. Instead, several sovereign currencies including the euro and RMB should compete with each other, creating checks and balances in the system. Pan’s views echo those of Lagarde, who spoke of a “global euro moment” but it differs sharply from Governor Zhou’s vision of a multilateral system revolving around the SDR.
· We believe Beijing now has little interest in devaluing the currency to offset US tariffs. It is confident its export competitiveness round the world will not be materially undermined. Its focus has shifted to the long-term plan of expanding the global role of the RMB as an attractive currency for reserves and investment. We expect this trend to continue at least for the period of détente between US and China ahead of the Xi-Trump summit this fall.
· Plans for RMB internationalization however are limited and will bump against the convertibility question and could raise questions about the future of the HKD. The PBoC still resists making the RMB fully convertible and opening up Chinese capital markets. It retains a gradualist mindset about reform. This should also constrain further RMB appreciation.
In a keynote speech at the Lujiazui Forum of Shanghai on June 18, the Governor of the People's Bank of China (PBOC) Pan Gongsheng expressed his views on the evolution of the global monetary system, advocating for a shift away from one dominated by a single currency to a multipolar system where several currencies coexist and compete. Here are Pan’s key points:
· Pan argued that a system heavily reliant on a single sovereign currency, i.e. the US dollar, entails inherent risks. These risks include: 1) the dominant nation prioritizing domestic policy vs. provision of the global public good of a reserve currency 2) systemic spillovers from its domestic imbalances; and 3) making the currency a way of coercing or sanctioning other countries in geopolitical conflicts.
· Pan envisions a future where several strong sovereign currencies coexist, compete, and provide checks and balances on each other. He suggests that this multipolar system would encourage stronger policy constraints by currency-issuing nations, make the international monetary system more resilient, and ultimately contribute to global financial stability.
· This vision is an important departure from the vision outlined by Governor Zhou in a seminal speech in 2009, which envisioned a multilateral system rather than simply a multipolar system with the SDR at its heart. Pan barely mentioned the SDR in his speech and entirely sidelined multilateral organizations like the IMF in his discussion of the future monetary order. This is possibly reflective of a broader change inside the Chinese leadership about the future of multilateralism.
· The key difference between a multilateral system and a multipolar one is that the former prioritizes collaboration among multiple currencies without challenging the predominance of the dollar, whereas the latter emphasizes the competition among several major currencies and the revision to the old system.
· Pan highlighted the growing international status of the RMB, noting its increasing use in trade finance and global payments. He called its rise one of the two key features in the evolution of the international monetary system over the past few decades, only next to the creation of the euro in 1999. The focus on payment and settlement is relevant and also exposes China’s progress in digital currencies and the ways in which it could be used to expand a Chinese-led digital payment system.
· Pan however stressed the importance of reforming international financial organizations such as the IMF. He noted their governance should better reflect the changing global economic landscape and give a bigger voting share to emerging market and developing countries—especially China. However, his tone did not seem very hopeful that it will happen and implied that China is therefore preparing to move without multilateral institutions.
Pan is not the only central bank governor to critique the current dollar-dominated system., President of the ECB Christine Lagarde called for a greater international role of the euro, as an alternative to the dollar In a speech on May 26 that together with Pan’s outlines what the new international monetary order could evolve towards.
· Lagarde argued that the existing global order based on multilateral cooperation is fracturing, with uncertainty about the dominant role of the dollar. She suggested this changing landscape could open the door for the euro to play a wider international role. She advocated for more cohesion of the EU countries to strengthen the geopolitical, economic and legal foundations of the euro and seize this “global euro moment”.
· The backdrop of Lagarde’s speech was the recent volatility of dollar-based assets, “in the form of highly unusual cross-asset correlations” (Lagarde’s words) since April 2, when the dollar, US Treasuries and US equities declined together. Lagarde attributed this to emerging doubts about the dollar’s legal and institutional framework, i.e., the US government adhering to the rule of law and principles of contract.
· Now China has joined the choir on this shift in the international monetary system. From Beijing’s perspective, a multi-polar system would be more stable and better reflect new trade flows and asset distribution. It would also reduce China’s exposure to currency fluctuations and insulate its economy from potential US sanctions and coercive measures.
RMB internationalization and exchange rate management
In our view, Pan’s speech also explains, at least partially, why the PBoC has been deliberately strengthening the RMB vs. the dollar in recent months.
· Over the past two years, the PBoC has maintained the RMB at a very stable rate against the US dollar in a de facto peg around 7-7.35 (please see chart 1), despite domestic economic slowdown, deflation pressure and Trump’s tariffs. The weak end of the range—7.35—was considered a “line in the sand” that the PBoC defended via regular FX market intervention. Its key instrument is the central parity rate in the onshore RMB market, or so-called CNY fixing, which is the midpoint of the daily trading range (+/- 2% from the CNY fixing rate). To keep the USD/CNY rate below 7.35, the PBoC deliberately set the CNY fixing rate below 7.20 for most of the time.
Chart 1: CNY (domestic RMB) spot and fixing rates vs. USD
Source: CEIC
· In contrast to its strategy during the US-China trade war in 2018, Beijing showed no appetite to use RMB depreciation as a main policy tool to offset US tariffs this year. We believe Beijing’s FX policy mainly has reflected its concerns that the RMB depreciation might cause financial instability and capital outflows.
· Since early April, however, the onshore CNY spot rate has appreciated by 2.6% against the US dollar, moving from approximately 7.35 to around 7.16 by July 4. There are a few explanations:
o The dollar’s weakness against all other major currencies (so cross-rates and export competitiveness vis-a-vis other countries are little changed);
o China’s better-than-expected macroeconomic data in recent months; and
o Beijing’s potential gesture of goodwill during the US-China trade talks
· We believe the US-China tariff war was only a secondary factor behind the RMB’s recent strength. During the two rounds of bilateral talks in Geneva and London, currency issues were not a priority for US Treasury Secretary Scott Bessent. In addition, the US Treasury Department's semi-annual foreign-exchange report published on June 5 refrained from labelling any country as a currency manipulator, but only criticising China for its “lack of transparency”.
· In our view, the PBoC is pre-emptively guiding the market to expect a stronger RMB. While the 2.6% move is relatively small, it still sends an important signal that the PBoC is tolerating or even supporting the currency’s strength.
· We believe the trend will continue during the current détente between US and China. We would not be surprised if the RMB value breaks through 7.00 again (appreciating by another 2%) ahead of the potential Xi-Trump summit this fall (likely in late September or late October).
Moreover, Pan’s speech reveals Beijing’s judgment that a new window of opportunity has opened for another round of RMB internationalization.
· Over the past decade, the pace of RMB internationalization has been quite slow. The RMB still lags far behind the dollar and euro in payments, trade finance and its share in the global FX reserves.
Table 1: RMB’s share in the global monetary system
As of May 2025, except as otherwise indicated
Sources: SWIFT RMB tracker, IMF COFER
· From Beijing’s perspective, the timing is particularly important for the RMB internationalization, as a strong dollar cycle creates an unfavorable for financial reforms in China such as liberalization of capital accounts and opening up domestic asset markets to foreign investors.
· Now, a stronger RMB versus the dollar may help attract foreign demand for Chinese assets. For instance, foreign institutional investors increased their holdings of Chinese government bonds by RMB 49.3 bn ($6.8 bn) in April—marking the third consecutive monthly inflow and the longest streak since late 2023—signalling growing confidence in RMB-denominated assets.
· More importantly, the policy of a stronger currency may also be endorsed by Beijing’s top leadership, including Xi Jinping. In an article published in January 2024, Xi laid out China’s path to become a financial power. He argued that six conditions had to be met: a strong currency, a powerful central bank, robust financial institutions, vigorous financial centers, sound financial regulation and a large number of expert and talented people in finance. In Xi’s vision, a strong RMB is a pre-condition for China to become a major financial power that can compete with the US and EU.
However, the key hurdle for RMB to become an international reserve currency is not its volatility, but China’s closed capital accounts.
· In a Bloomberg TV interview last week, Bessent pushed back against the idea of RMB gaining the status of a reserve currency, citing its non-convertibility and China’s capital controls. He said, "it's a complete fallacy". This is not strictly true: Sterling and even the dollar were global reserve currencies at times of significant capital controls. In fact, the creation of the Eurodollar market (the offshore dollar) was precisely a response to the lack of USD capital account openness.
· The PBoC’s governor Pan certainly understands the limiting nature of capital controls on currency internationalization. Capital account liberalization reforms have stalled, since a small devaluation of RMB in August 2015 triggered massive capital outflows. The PBoC lost about $1tn of FX reserves over the following year and was compelled to tighten capital controls substantially to avoid destabilizing the domestic financial system. This indicated a huge pent-up demand of Chinese individuals and companies to diversify away from the RMB, and the Chinese authorities remain acutely aware of this risk.
· Will Beijing aggressively push forward its plan of RMB internationalization from now on? We still doubt it. There are no signs that the PBoC is ready to liberalize China’s capital accounts and make RMB fully convertible any time soon. We believe that Beijing’s policymakers have not abandoned their gradualist mindset in reforming China’s exchange rate regime, which also will be a major constraint on further RMB appreciation.
· Chinese policymakers are fully mindful of lessons from the 1997-1998 Asian Financial Crisis and the failure of their currency/capital account reforms in August 2015. Now they seem to believe that the current cycle of a weak dollar is favorable for China’s plan of RMB internationalization. But they still cannot drop their guard against potential risks. As a Chinese saying puts it, however, “once bitten by a snake, one fears a rope for ten years”. There is still a long way to go for the RMB to be on an equal footing with other major currencies.