China orders top banks to raise yuan share in cross-border trade amid tariff tension

China told its biggest banks to increase the use of the yuan in trade with foreign partners, raising the required ratio to 40% from 25%, according to Bloomberg.

The People’s Bank of China is using this new policy to push the currency deeper into global markets, especially as more countries question their dependence on the US dollar.

This change, while not legally binding, could hurt banks that fail to comply, and regulatory reviews tied to the Macro Prudential Assessment now factor in this ratio. If a bank misses the target, it could get a lower rating, making it harder to expand services, according to Bloomberg.

The adjustment is part of Beijing’s broader effort to promote the yuan and reduce exposure to US financial tools at a time when political tensions have made the dollar look more like a liability than a lifeline.

Banks face tighter rules as Beijing demands more yuan in trade

US President Donald Trump fired off his latest round of tariffs earlier this month, raising duties across a wide range of Chinese imports. That move rattled financial markets across Asia, Europe, and North America.

In response, China raised its own tariffs, but the two countries agreed to a 90-day pause to keep talking. Meanwhile, the PBOC is moving fast to make sure the yuan becomes a bigger player in trade.

Central bank governor Pan Gongsheng said in January that 30% of China’s goods trade was already being done using the yuan. In 2024, the total volume of goods traded by China was 43.8 trillion yuan, or about $6.1 trillion.

Beijing now wants to push that percentage higher, using a mix of policy nudges and technical upgrades. In Shanghai, officials recently promised to streamline cross-border financial services, speed up settlement systems, and give better exchange rate tools to businesses trading in yuan.

Banks are also offering lower service fees to exporters and importers using the local currency. And traders are reacting. The onshore yuan has gone up 1.57% this year, now trading near 7.187 per dollar.

That’s helped convince exporters to dump their stored-up dollar revenues in favor of switching back to yuan, something many of them had been hesitant to do in 2023.

Traders look beyond the dollar as yuan alternatives gain ground

Demand is rising for trades and hedges that cut out the dollar completely. Brokers across Asia are seeing more businesses ask for yuan, euro, dirham, or Hong Kong dollar-based deals. This includes hedging contracts and loans priced in yuan. A major foreign bank in Indonesia is even setting up a dedicated team in Jakarta to handle rupiah-yuan transactions.

The need to bypass the greenback is not just about saving costs. The dollar’s use as a middle currency is facing pushback. One example: when an Egyptian firm buys Philippine pesos, it usually goes through the dollar first. Now, more companies are skipping that route.

Meanwhile, Stephen Jen, known for his “dollar smile” theory, warned that up to $2.5 trillion in dollar holdings could be dumped as more investors look elsewhere. He called it an “avalanche” waiting to hit the greenback’s global dominance. While some of that pressure is short-term panic over Trump’s tariffs, there’s a deeper structural shift happening. More firms are asking how long the dollar will stay on top.

That concern is especially strong in Asia and the Middle East, where tighter commercial ties with China are encouraging direct trades using local currencies. A Singapore-based commodities trader said European carmakers have ramped up requests for euro-yuan contracts. And Chinese exporters are also converting dollars into yuan more quickly than before, no longer waiting out the exchange rate.

The global role of the yuan is still small, making up just 4.1% of all cross-border payments in March. The dollar still dominates at 49%, but things are moving. China’s Cross-Border Interbank Payment System, or CIPS, processed 175 trillion yuan last year — a 40% jump from the year before. That signals more business is getting done on China’s terms without relying on New York.

The BRICS countries, including Brazil and Indonesia, are backing efforts to reduce dollar reliance. And ever since Russia’s 2022 invasion of Ukraine, sanctions have made many governments wary of keeping too many reserves in US assets.

China, meanwhile, has been signing currency settlement deals and pushing for more international use of the yuan, laying the groundwork for what looks like a long game.

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