Is the Chinese Yuan Poised to Emerge as a Safe-Haven Currency?

2025-08-04 09:43:26

The views do not necessarily reflect those of UDF Space.

Historically, the US dollar and US Treasuries have been the cornerstone of global safe-haven assets. However, growing fiscal and credit risks in the US since late 2024 have prompted a shift toward diversification in foreign exchange reserves. This shift creates an opportunity for the Chinese yuan (CNY) to step in and potentially fill the gap in global safe assets.

The Conditions for a Safe-Haven Currency

For a currency to qualify as a safe-haven asset, it must meet certain conditions:

Political Stability and Legal Framework: The country must have a stable political environment and robust legal protections.
Economic Stability: A sustainable economy with low inflation and manageable debt is crucial.
Net Creditor Status: The country should have significant net foreign assets and a consistent current account surplus.
Liquidity and Convertibility: The currency must be easily tradable in global markets.

Currencies like the Swiss franc (CHF) and Japanese yen (JPY) have historically met these criteria, but both face challenges due to their governments' interventionist policies.

The Yuan's Path Toward Safe-Haven Status

TWO

The yuan is gaining ground as a potential safe-haven currency, driven by several factors:

China's Economic Strength: With a current account surplus and significant foreign reserves, China can support the yuan in times of volatility.
Market Liquidity: China's bond market, worth over $4.75 trillion, is becoming increasingly attractive to foreign investors.
Rising Global Usage: Over 80 central banks now include the yuan in their reserves, and foreign investment in Chinese bonds surged in 2024.

Despite these advantages, the yuan's low global market share remains a limitation. Foreign holdings of RMB bonds and A-shares are still relatively low compared to the US dollar, yen, and franc.

Key Challenges and Policy Recommendations

THREE

To fully realize the yuan's potential as a safe-haven currency, China needs to:

Enhance Market Confidence: Strengthen economic growth, control inflation, and improve policy transparency to boost investor trust in RMB assets.
Optimize Capital Flow Management: Simplify cross-border investment processes and adopt more flexible capital flow controls to attract long-term foreign capital.
Expand Offshore RMB Markets: Increase liquidity and the variety of RMB-denominated products in offshore markets to enhance the yuan's appeal during financial crises.
Broaden the Supply of RMB Safe Assets: Expand the RMB bond market and introduce more long-duration bonds to provide reliable benchmarks for global investors.
Develop RMB Derivatives: Introduce RMB derivatives to help global investors hedge their exposures, and expand the use of RMB bonds as cross-border collateral to enhance their liquidity.