China's two-track currency strategy against sanctions has lessons for India

China is shifting from dollar rivalry to creating a parallel, sanction-proof financial system through RMB trade settlement, digital currencies and deeper integration with global capital markets

Over the past several years, Chinese policymakers have struggled to internationalise the Chinese currency, the renminbi (RMB), to rival the US dollar. Its leaders have been reluctant to allow full convertibility and a market-based exchange rate for fear of volatility and financial risk, which may in turn lead to social and political unrest. Several policy measures over the past five years have promoted the use of the RMB in international trade, finance and cross-border settlement. China has also, in graduated steps, sought greater integration with international financial and currency markets. Its main objective has been to “sanction-proof” its economy against the seizure of its financial assets and exclusion from dollar-dominated payment channels such as the US-based Clearing House Interbank Payments System (CHIPS) and messaging systems like the Brussels-based Society for Worldwide Interbank Financial Telecommunications (SWIFT). 

CHIPS handles a daily turnover of $1.8-2 trillion, while SWIFT handles 44-48 million messages daily involving bank transfers, totalling an estimated $10 trillion. To be cut off from this international financial plumbing, as Iran was earlier and Russia now, can have significant and adverse economic consequences. China’s response has been to progressively reduce its exposure to dollar designated assets. Its holdings of US Treasuries have declined from $1,072 billion in 2020 to $713 billion in November 2025. China has also added significantly to its gold reserves, purchasing 2,306 tonnes in 2025. It is estimated that 8.5 per cent of its foreign exchange reserves are now held in gold. It has promoted its own payments system, the China International Payments System (CIPS) and an associated SWIFT-like messaging system, known as CIPS Connect. The daily volume handled by CIPS is relatively modest compared to CHIPS but is growing rapidly. CIPS handled $25 trillion of payments in 2025, which was 43 per cent more than in the previous year. 

China has a current trade volume of $6 trillion and 40 per cent of this is settled in RMB, compared to 25 per cent in 2015. This has been pursued as an important part of the internationalisation of the RMB. 

A major initiative has been the mBridge project, which enables virtually instant cross-border settlement using participating central bank digital currencies. This avoids the use of the US dollar or its payment system and is, therefore, sanction-proof. Currently, the People’s Bank of China , the Hong Kong Monetary Authority, and the central banks of the UAE, Thailand and, more recently, Saudi Arabia, are participating members. In January 2026 it was estimated that mBridge had handled $55 billion of instant cross-border transactions. mBridge is now linked to the Shanghai International Energy Exchange, which hosts the “petro-yuan” market, allowing the settlement of oil trade using the Chinese currency. Currently, 15 per cent of Saudi oil trade is settled in Shanghai. This is a major change from the earlier total dependence on the so-called petro-dollar market. China has declared that Shanghai will now be the international hub for its digital yuan and will link it to mBridge. 

In 2015, China had ambitions of making the RMB an international currency and rival the US dollar. This has not proved to be possible, given Chinese aversion to full convertibility and the inevitable volatility associated with it. The policy has shifted to putting in place an alternative parallel financial pipeline, which enables China and its partners to bypass the dollar-based banking and currency system. The narrative is no longer displacing the US dollar, but to create, what the governor of the People’s Bank of China, Pan Gongsheng, has described as “multipolar co-existence”, where “a few sovereign currencies exist, compete and check and balance each other.” The RMB is explicitly projected as a viable alternative in case the US dollar gets weaponised. 

In parallel with this currency internationalisation “with Chinese characteristics”, China has also sought to insulate itself from risk through closer integration with the international financial markets. This may appear contradictory but on closer scrutiny, it is not. What China is trying to do is implement Chinese President Xi Jinping’s directive that China should reduce its economic dependence on other countries but simultaneously make them more dependent on China. 

We have seen this at play on the Chinese stranglehold on rare earths and magnets. In finance, China is opening up its large and expanding financial markets to foreign entities. Over the past few years, China has sought listings for both its securities and bonds on international indices, which result in large, stable passive inflows of funds from international institutional investors like sovereign wealth funds and pension funds. Currently, passive fund inflows into China’s A category securities market amount to $1.5 trillion. 

China’s bond market is worth $26 trillion, of which the central inter-bank bond market consisting of high-quality Chinese government bonds constitute $22.5 trillion, is now open to foreign entities. They have been included in international bond indices, which have brought in stable and passive inflows of $450 billion. Foreign ownership is still comparatively low at 6 per cent of government bonds, but this is increasing steadily as they acquire a safe-haven status in a turbulent world. The greater the exposure of external entities, particularly those managing large assets, to the Chinese equity and bond markets, the greater the leverage China has over them. There is a dual-track approach that merits greater scrutiny. 

India should have no problem with a “multi-currency co-existence” system advanced by the Chinese central bank governor. The measures taken by China to insulate itself from sanctions in a dollar-dominated world should be of interest to India as a risk mitigating policy. 

India should also pursue inclusion in international bond indices, which will bring in a significant and stable flow of passive funds, unlike the “hot money” in the stock market that can create volatility. Currently, it is estimated that the fund pool available as passive funds is $18 trillion, which could be tapped. India is included in the major emerging market bond indices, which have brought in about $20 billion in passive funds. Larger funds would flow if the country was also included in the global aggregate indices. India was on the verge of being included in the Bloomberg Global Aggregate Index but in January this year the process was paused. The reasons relate to cumbersome registration and post-trade tax settlement procedures. This is something that the February 1 Budget should address. The Chinese have moved much more nimbly in this regard.

 

The author is a former foreign secretary