Daniel Gros on What China Can Learn From the Euro as It Works Towards a Global Yuan

Why It Matters

The analysis underscores the structural hurdles China faces in elevating the yuan, signaling that monetary competition will remain dominated by the dollar unless China reforms its financial ecosystem.

Key Takeaways

• Euro’s reach limited by dollar’s deep, open markets
• Yuan lacks comparable market depth for global use
• Dollar lock‑in makes currency switching costly
• Stablecoins and CBDCs won’t overturn dollar dominance
• EU‑China economic ties strained by monetary competition

Pulse Analysis

The euro’s two‑decade journey offers a cautionary tale for any currency aspiring to global status. While the euro succeeded as a regional anchor, it never displaced the dollar because the United States maintains the world’s most liquid bond markets, a vast pool of dollar‑denominated assets, and a regulatory environment that encourages cross‑border capital flows. These structural advantages create a network effect: businesses, governments, and investors default to the dollar to avoid conversion costs and market fragmentation.

China’s ambition to promote the yuan internationally confronts the same barriers highlighted by Gros. Despite substantial foreign‑exchange reserves and growing trade volumes, the Chinese financial system remains relatively closed, with capital controls limiting foreign participation in yuan‑denominated securities. Without a deep, transparent market that can match the dollar’s breadth, the yuan will likely remain a regional medium of exchange rather than a true reserve currency. The lock‑in effect described by Gros means that even if the yuan gains traction, users will hesitate to abandon the entrenched dollar infrastructure.

The rise of stablecoins and central‑bank digital currencies (CBDCs) has sparked speculation about a new monetary order, yet Gros warns that these innovations are unlikely to shift the balance of power. Stablecoins depend on underlying fiat reserves, often denominated in dollars, while CBDCs, including China’s digital yuan, still operate within existing monetary frameworks and lack the global network effects needed to challenge the dollar’s supremacy. For policymakers and investors, the lesson is clear: achieving currency internationalisation requires more than political will—it demands deep, open markets and the ability to lock in users through network effects.