Steady Progress with the Strategic Opening of China’s Financial Markets:Current Situation and Implications for the Currency Hegemony Struggle

Inward investment into China from around the world continues to increase, with particularly notable growth in portfolio investment. This development stems from two factors: the strategic capital market opening that the Chinese government has pursued and the recent easing of U.S.-China tensions. The latter is a short-term factor, whereas the former is a more mediumto long-term structural factor. Specifically, it includes the inclusion of mainland Chinese stocks and bonds in international investment benchmark indices. This should be viewed less as an endorsement of China’s capital market reforms and more as the outcome of “strategic” policies actively pursued by the Chinese government, including efforts to strengthen Hong Kong’s role as a financial intermediary.

As capital mobility liberalization progresses, it is only natural that the volume of international transactions using the renminbi will increase. The Chinese government has long been extremely wary of financial instability caused by excessive fluctuations in the renminbi exchange rate. However, in recent years, it has also demonstrated a proactive stance toward advancing renminbi internationalization and appears to be moving toward accepting to some degree the exchange rate fluctuation risk that accompanies increases in foreign exchange transaction volumes. In international monetary analysis, there exists a proposition known as the “trilemma,” which states that the three objectives of “capital mobility liberalization,” “exchange rate stability,” and “independent monetary policy” cannot be achieved simultaneously. Amid these constraints, Chinese authorities have also signaled a policy shift toward greater monetary policy independence. They are prioritizing capital mobility liberalization and monetary policy autonomy, and in exchange gradually reorienting their policy focus to sacrifice some degree of exchange rate stability. This approach is moving China closer to the combination of international monetary policies adopted by countries such as Japan and the U.S., which indicates that China is also beginning to aim for such a system.

However, China’s current capital liberalization remains a fundamentally “strategic” opening. In that sense, it is only a limited liberalization. Even though renminbi internationalization did progress within this framework, the currency would not have in principle been expected to reach a level where it could genuinely challenge the U.S. dollar for hegemony. However, the instability in U.S. politics brought about by the establishment of the second Trump administration may be providing a tailwind for expanding the international use of the renminbi despite the limited degree of liberalization.

As of 2025, the dollar still accounts for about half of global foreign exchange transactions, and its dominant position cannot be easily shaken. However, this will cease to be the case if the policies of the current U.S. government erode confidence in the dollar, fostering a greater desire among other countries to move away from it. China is steadily expanding the economic sphere in which the renminbi is used and is also moving to secure leadership in the digital currency field. As countries increasingly consider alternatives to the dollar, China sees an opportunity to further accelerate the renminbi internationalization.

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