Yuan vs. Yen vs. the World: The Race to Global Dominance or?

Currency Clash: Yen Falls—Is the Yuan Next in the Race for Global Dominance?

Jan 1, 2025

The Yuan’s transformation from a minor player to a major contender in the global financial arena is nothing short of extraordinary. Over the past two decades, China’s currency has risen from obscurity to becoming the fourth-most-traded currency as of 2024. With China’s unyielding ambition and carefully orchestrated strategies, the Yuan is not merely challenging the Japanese Yen’s dominance but also setting its sights on global currency supremacy. This assertive ascent mirrors historical patterns of other dominant currencies, suggesting a trajectory that could eventually rival the US dollar itself.

The Yuan vs. Yen: A Battle for Supremacy

The Japanese Yen has long been a staple of stability in global markets, renowned for its resilience and status as a safe haven currency. However, Japan’s economic stagnation, ageing population, and reliance on expansive monetary policies have weakened its long-term outlook. In contrast, the Yuan’s rise is underpinned by China’s unparalleled economic growth, strategic initiatives, and increasing integration into global trade.

As of 2025, the Yuan’s share in global trade finance exceeds 6%, surpassing the Yen’s declining share of under 4%. China’s Belt and Road Initiative (BRI) has been instrumental in this shift, with countries across Asia, Africa, and Europe increasingly using the Yuan for trade settlements. Furthermore, the Digital Currency Electronic Payment (DCEP) system, the world’s first state-backed digital currency, positions China as a leader in the digital finance revolution. This innovation directly challenges the Yen and other fiat currencies, offering unprecedented efficiency and control in cross-border transactions.

Historical Parallels: How Currencies Rise

The Yuan’s ascent follows a path historically trodden by other dominant currencies, such as the British Pound in the 19th century and the US Dollar in the 20th. These currencies rose to prominence by aligning economic power with global influence. For example:

The British Pound: Dominated during the height of the British Empire, backed by industrialization, global trade routes, and colonial control.
The US Dollar: Solidified its dominance post-World War II, supported by the Bretton Woods system and the US’s economic and military hegemony.

China’s strategy mirrors these trajectories. The Yuan is systematically building its foundation for global acceptance through economic dominance, technological leadership, and expansive trade networks. Like the Pound and Dollar before it, the Yuan’s rise is reinforced by the bandwagon effect: as more countries adopt it, others follow suit to avoid being left behind.

Mass Psychology and Cognitive Biases: Fueling the Yuan’s Momentum

The Yuan’s rise is as much about perception as economics. Mass psychology plays a critical role in the adoption of a currency. Cognitive biases, such as the bandwagon effect, amplify the Yuan’s momentum. As nations witness China’s economic clout and the increasing use of the Yuan in global trade, they are compelled to align with this trend, fearing economic marginalization if they do not.

Another cognitive bias at play is the anchoring effect. Many nations, especially those heavily involved in China’s BRI projects, are anchored to the idea of China as an indispensable economic partner. This perceived dependency makes the Yuan’s adoption almost inevitable.

China’s Strategic Moves: Burying the Yen

China’s strategic manoeuvres are systematically dismantling the Yen’s dominance. Key initiatives include:

Bilateral Currency Swap Agreements: China has signed over 50 agreements, including with major economies like Russia, Brazil, and South Africa. These agreements reduce reliance on the Yen and Dollar, expanding the Yuan’s footprint.
Cross-Border Interbank Payment System (CIPS): This alternative to the SWIFT system enables Yuan-based transactions, circumventing traditional financial networks dominated by the Dollar and Yen.
Belt and Road Initiative (BRI): By financing infrastructure projects in the Yuan, China creates a cycle of dependency. Countries involved in the BRI increasingly conduct trade and settle debts in Yuan, eroding the Yen’s influence in Asia.
Digital Currency Leadership: The DCEP’s rollout places China at the forefront of financial innovation. The ease and efficiency of using a digital Yuan could render traditional fiat currencies like the Yen less attractive over time.

Expert Views on the Yuan’s Prospects

Prominent economists and financial analysts highlight the Yuan’s potential:

Eswar Prasad, economist and author: “China’s strategic approach to internationalizing the Yuan is unparalleled. While challenges remain, the currency’s role in global trade is set to expand significantly.”
Jim O’Neill, creator of the BRIC acronym: “The Yuan’s inclusion in the IMF’s SDR basket was a watershed moment. It’s only a matter of time before it rivals the Euro in global reserves.”
Bridgewater Associates Ray Dalio: “Currencies rise and fall with the strength of their underlying economies. Given China’s trajectory, the Yuan’s ascent seems almost inevitable.”

Challenges Ahead for the Yuan

While the Yuan’s prospects are bright, challenges remain:

Capital Controls: China’s strict capital controls hinder full internationalization. Liberalizing these controls is crucial but risks destabilizing the domestic economy.
Trust and Transparency: Concerns about China’s opaque financial system and government intervention deter some investors.
Geopolitical Tensions: US-China rivalry and regional disputes could slow the Yuan’s acceptance, especially in Western economies.

Despite these hurdles, China’s calculated approach suggests it is prepared to address these issues over time, further solidifying the Yuan’s position.

The Yen’s Waning Influence

The decline of the Yen is not merely a consequence of the rise of the Yuan but also of Japan’s internal challenges. Decades of low growth, deflation, and a shrinking workforce have diminished Japan’s economic clout. The Bank of Japan’s ultra-loose monetary policies, including negative interest rates, have eroded the Yen’s attractiveness as a store of value.

Furthermore, Japan’s limited geopolitical influence compared to China restricts Yen’s global appeal. While the Yen remains a safe haven in times of crisis, its long-term prospects are overshadowed by the Yuan’s dynamic growth and strategic positioning.

Implications for the Global Economy

The Yuan’s rise has profound implications:

Diversification of Reserves: Central banks gradually increase Yuan holdings, reducing reliance on traditional currencies like the Dollar and Yen.
Shift in Trade Dynamics: As more countries adopt the Yuan for trade, the dollar and yen’s dominance in global trade finance will wane.
Geopolitical Power Shift: The Yuan’s internationalization enhances China’s influence in global economic governance, challenging the US-led order.
Investor Opportunities: The growing Yuan market offers new avenues for investment, particularly in China’s deepening capital markets.

The Road to World Currency Status

China’s journey toward making the Yuan a world currency is a marathon, not a sprint. Lessons from the rise of the Pound and Dollar show that economic dominance, trust, and strategic alliances are key. The Yuan is steadily ticking these boxes. As China continues to liberalize its financial markets, enhance transparency, and assert its geopolitical influence, the Yuan’s position will strengthen.

Conclusion: A New Global Paradigm

The rise of the Yuan is not merely a challenge to the Yen but also a harbinger of a new global financial order. With China’s strategic vision, technological advancements, and economic might, the Yuan is poised to eclipse the Yen and potentially rival the Dollar. While challenges remain, the currency’s trajectory is unmistakable: upward and outward.

The global economy stands at a crossroads, with the Yuan leading a shift toward a multipolar currency system. The next decade will determine whether the Yuan can fully realize its potential, but its journey thus far is a testament to the power of strategy, perception, and economic dominance. Prepare for a future where the Yuan isn’t just a contender but a central pillar of the global financial system.