Published 27 May 2025
In March this year, unverified reports surfaced that China had fully connected a digital fiat payment system with some ASEAN and six Middle East states. Among its many features, its most valuable might be a means to bypass the dollar-denominated trading system.
China attaches great importance to the development of its Central Bank Digital Currency (CBDC) or e-CNY as it is officially known. Beijing has been working to internationalize the use of the digital renminbi. Among the many reasons is one that the central government rarely discusses publicly: A digital yuan system would be an effective piece of financial architecture to circumvent the US dollar payments system and therefore potentially immunize China and its trading partners from potential US sanctions.
In March this year, the People’s Bank of China (PBOC) was reported as having announced that its CBDC cross-border payment system was fully connected and operational with member states in the Association of Southeast Asian Nations (ASEAN) and six Middle East countries. One of the report’s origins was from Proshare, a Nigerian news platform and an unlikely source for such a global "scoop". Nobody can find the official PBOC announcement on the matter.1 China has neither confirmed nor refuted the report.2
If the report is true, this would represent a significant step toward China’s goals.
The genesis of the project is significant. In 2021, the Basel-based Bank for International Settlements (BIS), essentially the world’s central bank for central banks, kicked off a key phase of collaboration with China, Thailand, Hong Kong, and the United Arab Emirates (UAE), to develop the mBridge project, a system that would allow multiple CBDCs to use a fast and cost-effective platform for conducting cross-border transfers and foreign exchange operations. Eleven other countries took observer status in the project, including some ASEAN members and Middle East states.
In November last year, BIS effectively pulled out of the project, announcing that mBridge had reached its "minimum viable product" stage, which typically means the platform has a basic functional version that can already be used and further developed. Why the BIS withdrew from further participation is an open question. The BIS decision coincided with a period when leaders attending the BRICS Summit discussed the creation of a "BRICS Bridge," based on the mBridge technology.
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The BIS is not a US creature. Established in 1930, it is the world’s oldest international financial institution and owned by 63 central banks from countries around the world. The central bankers who attend its monthly meetings view themselves as above politics and acting only in the interests of global financial stability.
China’s participation in mBridge was not surprising. Beijing is ahead of other major governments in embracing a digital fiat, though the e-CNY has not exactly been popularly used at home. The renminbi already is increasingly used as a trade settlement currency, though a small but rising share of a global market still overwhelmingly denominated in the dollar.
Whether the report on China’s operationalization of the mBridge technology for the e-CNY with a widening set of trading partners is true or not, it is a reminder that it is probably only a matter of time before such a fully operational system comes into being.
Financial plumbing is an important facilitator of trade and therefore the incentives are high and often, as the BIS views itself, apolitical. Tests have shown that CBDC cross-border payments will significantly reduce both the time and cost of settling international transactions, compared with traditional settlement methods through the US-dominated and dollar-based SWIFT (Society for Worldwide Interbank Financial Telecommunications) messaging system. Digital settlement with digital fiat will be more or less instantaneous and the costs potentially 75% or so lower than current alternatives. As importantly, from an efficiency perspective, CBDC payments systems can more easily build in anti-money laundering (AML) and anti-terrorism compliance terms.
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China’s leadership in this sphere and the resources that Beijing is putting into it beg the question as to its key motivation.
China has made no secret of the fact that the driving motivation is "monetary sovereignty" and the avoidance of dollar dependence. Given the increasingly widespread use of economic statecraft and the vulnerability of all countries to the dollar-based international financial system, such a strategy makes sense in ensuring national security and a nation’s autonomy of action. Any country facing US sanctions would be economically crippled, at least for a period, if cut off from dollar markets that depend on the Clearing House Interbank Payments System (CHIPS) and the SWIFT system that supports it. More than 80% of global trade is still invoiced – and therefore have to be paid – in US dollars and the global reserve currency lubricates all foreign currency exchange.
If an e-CNY system increases the use of renminbi in international trade, it will increase the foreign demand for the Chinese currency. Usage of China’s own international payments settlement system, the Cross-Border International Payments System or CIPS, has grown dramatically in recent years. However, at a daily usage of about US$60 billion, the volume of payments processed by CIPS is still dwarfed by the $1.8 trillion payments processed each day by CHIPS.3 Complicating the growth of CIPS and any Chinese system is the limited internationalization of the renminbi itself; Beijing remains wary of fully floating its currency, which remains state-managed behind a wall of Chinese capital controls.
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Wider use of the renminbi as a medium of exchange, which seems like the inevitable result of China’s lead in digital currency, will not necessarily result in it becoming the currency of choice for storing value. Those are two key components needed for any global reserve currency.
One key variable to watch is the speed with which renminbi-denominated cross-border lending grows. With Chinese interest rates lower than US rates, there is an incentive for borrowers to look to access Chinese capital markets. Cross-border yuan-denominated lending remains extremely small for now and China’s capital controls mean the yuan will always play second – if not third or lower – fiddle to the US dollar to investors.
But the financial plumbing is key and China is moving ahead.
When it comes to trade settlement, however, the chaos of the past few months and the bellicosity of the Trump administration so far, mean that, without some serious diplomacy, China will be operating with greater advantage when it comes to expanding its network of trading partners willing to participate in its cross-border CBDC payment system, especially when it takes full form.
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[1] https://www.proshare.co/articles/digital-yuan-the-new-era-of-cross-border-payments-in-global-trade
[2] https://currencyinsider.com/2025/04/25/did-china-link-its-cbdc-to-10-asean-6-middle-eastern-countries
[3] https://www.federalreserve.gov/econres/notes/feds-notes/internationalization-of-the-chinese-renminbi-progress-and-outlook-20240830.html
© The Hinrich Foundation. See our website Terms and conditions for our copyright and reprint policy. All statements of fact and the views, conclusions and recommendations expressed in this publication are the sole responsibility of the author(s).
Stewart Paterson is a Senior Research Fellow at the Hinrich Foundation who spent 25 years in capital markets as an equity researcher, strategist and fund manager, working for Credit Suisse, CLSA and most recently, as a Partner and Portfolio Manager of Tiburon Partners LLP.
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