Why China is steering clear of the US’ ‘exorbitant privilege’ model
Beijing is decoupling the internationalisation of the yuan as a transactional currency from the role of an unconstrained global reserve store of value
China is now the world’s top trading nation, accounting for roughly 15 per cent of global exports – a milestone last reached by the United States during the mid-20th century. Historically, such trade dominance often led to a financial paradigm shift. As American industrial power crested in the early-to-mid 1900s, New York eventually supplanted London as the world’s financial capital, and the US dollar superseded the British pound as the primary global reserve asset after World War II.
Yet China is carving out a fundamentally different path. Both the British pound in its prime and the US dollar today have functioned simultaneously as the default medium of exchange for global trade and the ultimate store of value as reserve currencies. Beijing, by contrast, is aggressively encouraging its trading partners to adopt the yuan for cross-border settlements while maintaining its stringent capital controls. We are consequently witnessing a deliberate decoupling: the internationalisation of the yuan as a transactional currency but explicitly not as an unconstrained global reserve store of value.
This strategy bypasses the classic structural trap that redefined Anglo-American finance. Under the traditional dollar framework, supplying the world with liquidity requires open capital accounts and deep financial markets that attract global capital inflows – a dynamic that pushes up the currency’s real exchange rate and routinely leads to current account deficits. While proponents label the ability to borrow cheaply in one’s own currency an “exorbitant privilege”, it can systematically hollow out a nation’s manufacturing base over time.
Chinese leaders are firm believers in the hard power of industrial capacity. They have no intention of following that script.
Beijing’s policy of separating the yuan’s medium-of-exchange role from its store-of-value function also stems directly from a core policy principle: financial stability and absolute state control over capital. Standard economic doctrine dictates that creating a global reserve currency requires opening capital accounts, floating exchange rates, and granting foreign institutions unfettered access to domestic financial markets. The Chinese leadership views that model as an unacceptable risk to its financial governance.
The uniqueness of Beijing’s approach becomes clear when contrasted with history. When West Germany and Japan ran massive trade surpluses in the 1970s and 1980s, their central banks actively suppressed the global adoption of the deutsche mark and the yen out of fear that currency appreciation would destroy their export competitiveness – though market forces eventually pushed both into global reserves anyway.
China, conversely, is intentionally driving global yuan settlement, not to replace the dollar as a universal store of value, but to reduce its dependence on Western financial rails, insulate itself from potential sanctions – such as disconnection from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) global messaging system – and deepen trade ties across the Global South. In short, Beijing wants global adoption of the yuan, but strictly on its own terms.
Hong Kong plays a vital role in this machinery: through regulated corridors like the Southbound Stock Connect and Bond Connect schemes, Chinese institutional investors channel capital outward, supplying offshore markets with yuan liquidity without compromising mainland capital controls.
Hong Kong can help partially mitigate the yuan’s weak store-of-value function by expanding offshore yuan investment options, but this cannot fully solve the core problem without liberalising the onshore capital account. Developing an isolated, offshore yuan market creates a functional “sandbox” but cannot resolve the fundamental constraints that limit how strong a store of value that currency market can provide.
Where the traditional dollar framework invites the world to acquire the currency through American consumption and store that wealth in open US capital markets, China supplies yuan through state lending while strictly capping foreign access to its onshore assets. Whether Beijing can sustain this balancing act against credit risks abroad and capital controls at home remains to be seen – but watching this novel macroeconomic experiment unfold from a ringside seat here in Hong Kong as a journalist is nothing short of fascinating.