(Yicai) June 18 -- The key to advancing broader international use of the Chinese yuan lies in building a financial market environment with ample liquidity and a complete set of risk-hedging tools for global yuan holders. Accelerating Shanghai’s development as an international financial center and swiftly launching an international financial assets trading platform are viable ways to achieve this.

In today's great power competition, victory will belong to those whose technical standards, currency, financial markets, and language gain wider global adoption. The larger the international market share a country commands, the greater its international influence, and the higher its chance of prevailing. The same principle applies to a nation's currency: widespread international use is the greatest source of its strength.

At present, the US dollar remains the undisputed sole global currency. But America's massive national debt and fiscal deficit have reached unsustainable levels, raising international financial market concerns about the stability of the dollar's value. The Trump administration’s erratic and unpredictable economic policies have only added to those concerns.

Christine Lagarde, president of the European Central Bank, recently outlined three areas where the euro can challenge the dollar's dominance: ensuring geopolitical security, perfecting legal frameworks, and unifying capital markets.

While the EU's economic scale rivals that of the US, it suffers from significant geopolitical uncertainty, lacks unified fiscal policies, and its capital markets remain fragmented and small. These factors severely constrain the euro's capacity to challenge the dollar's global status.

In contrast, China enjoys a secure geopolitical environment, stable economic growth, and the advantages of large, unified fiscal and financial systems. Compared with the euro, the yuan has stronger foundations to become the next widely adopted international currency. The critical step now is to provide global yuan holders with a financial market environment that ensures ample liquidity and complete risk-hedging tools.

The current approach to boosting the yuan’s internationalization that promotes yuan-denominated trade in goods and financial products for international settlement and investment purposes cannot go much further. This is because exchange rate risks arising from transactions and settlements, coupled with currency and return risks in investments and financing, deter international traders from adopting the yuan.

These challenges can be addressed by accelerating Shanghai's development as an international financial center, and expediting the launch of an international financial assets trading platform.

China could also expand the range of yuan assets available for international investors, introduce yuan exchange rate futures and options, broaden foreign access to treasury bond futures, enhance over-the-counter derivatives and offshore financial services capabilities, and strengthen corresponding market supervision mechanisms.

(Fang Xinghai is vice president of the China Society of Finance and Banking and was vice chairman of the China Securities Regulatory Commission from October 2015 to July 2024.)

Editor: Tom Litting