In recent weeks, China announced several significant steps to address the barriers that hold back adoption of the renminbi by global investors.
1. Chinese government bonds can now be quickly converted into cash - making them far more attractive to hold. Through a new repo facility, foreign investors will be able to use their Chinese government bond holdings as collateral to borrow short-term renminbi cash. This mirrors the US Federal Reserve’s repo facility, which lets foreign central banks swap US government bonds for dollars. Previously, Chinese government bonds were difficult to liquidate quickly, making them relatively unattractive to hold for global investors who need to be able to move in and out of positions.
2. Global investors can now protect themselves against losses on Chinese bond holdings - removing a key barrier to owning them. A new Hong Kong-based futures market for Chinese government bonds will allow global investors to hedge interest rate risk in their Chinese bond holdings without needing mainland China market access. The absence of such a hedging mechanism was a key reason for underweighting Chinese bonds in global investment portfolios.
3. More support for two-way capital flows - a necessary step in making the renminbi a currency global investors can comfortably hold. China has increased the quotas under its Qualified Domestic Institutional Investor program, allowing more Chinese capital to flow into foreign markets. Enabling outward capital flows is a classic step in the internationalization of a domestic currency because it creates a two-way market and reduces the perception of a one-way trap.
4. More support for the offshore renminbi, which is freely traded outside China - making it easier for global investors to transact in the currency. Six major state-owned banks have been authorized to conduct transactions in offshore renminbi - a currency market distinct from the onshore renminbi, freely traded in financial centers such as Hong Kong and Singapore - directly from the mainland. Previously, such transactions had to be routed through these offshore hubs. This is likely to increase the pool of freely traded renminbi in global markets.
Analysis of the internationalization of the renminbi should go further than reflecting on “de-dollarization” - although foreign demand for US dollars could indeed decline as the renminbi becomes a more credible alternative. More importantly, the internationalization of the renminbi is likely to begin in Asia, where central banks and sovereign wealth funds have the most to gain from diversifying into renminbi assets, something Chinese government statements in recent years have made explicit. The infrastructure to support that vision is now being put in place, and global investors would be unwise to ignore it.
One way in which the 2026 war in Iran will be remembered – if the situation does not escalate further – is that the largest oil supply disruption in history triggered a far smaller oil crisis than expected. A key reason, besides the US withdrawing from the conflict without achieving its objectives, is China's oil reserves. When the war broke out, China stopped importing oil and began drawing on those reserves, which relieved pressure on global oil markets. This matters because it demonstrates that stockpiling and diversification of key commodities – a topic that has received intense attention since COVID – can be very effective.
The EU has identified diversification of key commodities as a political goal, just like the US and China, but compared to them has the longest way to go. For its energy needs, Europe has infamously traded its dependency on Russian gas for a dependency on American liquefied natural gas – which is also more expensive, a cost that continues to weigh on European industry’s “existential” situation. This shows that the war in Ukraine did not produce any serious diversification in European energy supply. For its metals needs, the challenge is greater still. Last week, the G7 announced a 60% target to cap dependency on rare earth imports from any single source – meaning China, which holds a market share of up to 99% in some metals. But how the mining and processing of these materials will scale up, short of major investment projects spanning multiple decades, remains the central question. It is telling that Reuters recently reported on China's vast ecosystem of rare earth laboratories and university programs – and could not identify a single comparable education program outside China.
This week, Kevin Warsh begins his term as the US central bank's new chair. He was chosen by Trump for his belief in AI as a driver of lowering costs across the economy, which would open the possibility of cutting the short-term interest rate. However, there are several reasons why US interest rates – both short-term (set by the central bank, which raises them when inflation is too high) and long-term (set by the bond market, which raises them when inflation expectations are elevated or too much debt is being issued) – are likely to remain high and may go even higher.
First, there has been a global regime change in the past five years: interest rates have stopped declining for the first time in decades. There are several structural reasons for this – from massive government spending to international conflicts, all of which raise inflation and consequently interest rates – and such structural changes are unlikely to reverse without a clear cause, such as a meaningful reduction in debt or a resolution of major conflicts, neither of which seems likely anytime soon.
Second, the global shift towards higher interest rates is generating new mechanisms that reinforce the trend. Japan, for instance, may increasingly sell US assets to protect the value of its currency. If Japanese investors were to sell US government bonds at sufficient scale, it would add further upward pressure on US interest rates. A similar dynamic has emerged as a possibility from the troubled Gulf states – suggesting this is a structural feature of the new global economy, not something specific to Japan.
Third, the US economy has been running close to overheating for several years and still is, which calls for higher interest rates, not lower ones. US employment has been near maximum levels for 55 consecutive months, while the central bank has missed its inflation target for 63 months.
Fourth, while AI – Warsh's rationale for lowering interest rates – may create disinflation over the long term, its near-term effects have been more inflationary: demand for the metals, energy and chips needed to build data centers has driven up the costs of all three.
