Wang Yongli on SWIFT, sanctions, and sovereignty

On the nature of currency, the former Vice President of the Bank of China argues that commodity-backed money is obsolete and what China should and shouldn't do.

This is Part II of Wang Yongli’s lecture titled “Viewing the Global Financial War Through the Lens of the U.S. Dollar” on November 15, 2024 at Chongyang Institute for Financial Studies, Renmin Univerisity of China. The lecture is available on the Chongyang Institute’s official WeChat blog.

Wang Yongli is the Co-Chairman of the Board of Digital China Information Service Group Co Ltd, former General Manager of China International Futures Co(CIFCO). and former Vice President of the Bank of China (BOC), one of the four largest commercial banks in China. He also served as the first Chinese mainland member of the board of SWIFT.

For those of you who do not have enough time to read through the whole thing, here is a summary:

Wang Yongli emphasized that the evolution of currency has followed a general trajectory from commodity money to fiat money. China has played a historical role in this transition, pioneering early forms of paper money due to the need for currency in its vast territory. However, despite this history, the traditional view that money must be physically printed and issued by central banks still persists in China’s legal framework. This perspective is outdated and does not account for the reality of modern fiat money, which is no longer backed by commodities like gold but instead by sovereign credit and legal frameworks.

He pointed out that Chinese laws still define currency in terms of physical cash, which creates complications for the digital RMB (e-CNY). While some argue that digital RMB should be classified as cash, Wang questioned why deposits held by commercial banks under central bank monetary policies are not also considered cash. He stressed that the notion that “currency is the central bank’s credit and liability” was only applicable during the era of metal-backed money, but since modern currency is fiat money, this concept is now legally unfounded. Holding RMB and demanding its exchange for gold is not a valid claim under current legal structures.

Wang criticized the global misunderstanding of fiat money, arguing that many people still view currency as though it is tied to the gold standard, failing to recognize its true nature as a flexible instrument of economic exchange. He noted that the U.S. dollar’s role as the dominant international currency is often framed in simplistic terms, such as the claim that a U.S. hundred-dollar bill, printed at low cost, imposes a global seigniorage tax. He argued that this perspective does not hold up under rigorous scrutiny.

Fiat money, Wang asserted, is an inevitable stage in the development of monetary systems. The idea that currency must be backed by tangible commodities is outdated. Money’s value should be relatively stable, and its supply should be adjusted to match the total tradable wealth in an economy. Relying on gold or any other commodity as a monetary standard would lead to scarcity problems, making global trade and investment inefficient. This explains why fiat money has continued to develop into more intangible, digital forms.

In the case of China, cross-border transactions no longer involve physical cash; instead, they are settled electronically through clearing institutions. Digital transactions have further detached money from its traditional physical form, paving the way for encrypted global transfers and digital currencies. However, Wang stressed that the success of a currency still depends on credit backing. Historically, money derived its credibility from religious or royal authority. Today, it is backed by state sovereignty. While Bitcoin and other cryptocurrencies exist, they lack sovereign credit backing, leading to significant price volatility.

Wang also discussed China’s efforts to integrate the RMB into the International Monetary Fund’s Special Drawing Rights (SDR) basket, where its share has increased to 12.28%, making it the third-largest currency. However, he noted that the RMB was deliberately excluded from Facebook’s Libra cryptocurrency project, which he saw as an attempt by the U.S. to sideline the digital RMB. In response, Chinese authorities accelerated the development of the e-CNY. Despite progress, there is no clear timeline for its full implementation.

Regarding fiat money issuance, Wang explained that modern monetary systems rely on credit issuance rather than commodity backing. Central banks manage the monetary base, but commercial banks play the dominant role in issuing money through lending. This shift raises challenges, as money supply expansion depends on credit assessments, which can lead to misjudgments and financial crises. If banks overestimate asset values and issue excessive credit, they risk creating over-issued money that cannot be recovered. This has led to debt crises in various economies.

China’s economic expansion has relied heavily on infrastructure investment and resource monetization. However, if these investments fail to generate sufficient returns, the resulting debt burden could become unsustainable. Wang warned that excessive reliance on credit issuance could lead to financial instability. He argued that China must carefully balance financial expansion with economic fundamentals to avoid over-leveraging.

Wang also addressed concerns about U.S. financial sanctions on China, particularly the potential freezing of Chinese assets held in the U.S. If the U.S. were to freeze China’s official reserves, he stated that it would be equivalent to declaring war. While official assets might be targeted first, private Chinese assets in the U.S. are less likely to be seized due to legal and commercial risks. However, China must prepare for all scenarios by strengthening its financial infrastructure and attracting foreign investment to mitigate potential economic risks.

China has explored alternative reserve strategies, such as stockpiling commodities and increasing foreign investments. However, Wang argued that these approaches face practical limitations. He emphasized that China’s financial security depends on its global influence. Unlike the U.S., which benefits from high-return overseas investments, China has adopted a conservative approach, leading to lower returns on its foreign holdings. This reflects the broader issue of whether China’s international influence is strong enough to support more aggressive financial strategies.

Wang also discussed the role of SWIFT in global financial transactions. While originally a neutral organization, SWIFT has come under U.S. influence, particularly after 9/11 when the U.S. demanded access to financial data for counterterrorism purposes. The U.S. later used SWIFT to impose sanctions on Iran and Russia. China must take lessons from these developments and build its own financial infrastructure to ensure independence in global transactions.

Regarding Trump’s potential second term, Wang warned that his policies could have unpredictable effects on global finance. If Trump continues his “America First” approach, it could disrupt international economic relationships, presenting both risks and opportunities for China. He noted that Trump’s leadership could bring about transformative changes but also lead to instability.

In conclusion, Wang argued that China must fundamentally reform its understanding and management of money. The international monetary system is evolving, and China must take proactive steps to shape these changes rather than passively reacting to them. While de-dollarization remains difficult as long as U.S. influence remains strong, China must work on improving its financial system, strengthening global influence, and attracting resources. Reforming the international monetary system, including SWIFT, should be a key priority for China to enhance its financial security and global competitiveness.

Wang Yongli has kindly reviewed the translation and summary before publication. For Part I of his lecture, please take a look at the last newsletter. All emphasis below is ours.

中行原副行长王永利：把准信用货币，改革货币管控

Wang Yongli, Former Vice President of the Bank of China: Understanding Fiat Money and Reforming Monetary Control

IV. Understanding Currency and Fiat Money

Why must currency be backed by a sovereign state? This requires an accurate understanding of currency, particularly fiat money.

Historically, the evolution of currency has generally followed four stages—though not every country has followed this exact path: commodity money, standardised metal coins, paper money under a metal standard, and finally, pure fiat money, which is completely detached from any physical commodity.

The overall trend has been a shift from tangible to intangible forms of money, becoming increasingly divorced from physical assets and no longer requiring a direct anchor to any commodity.

The first three stages of currency evolution resulted from proactive and continuous exploration, including China’s early development of promissory notes, the jiaozi system, and paper money, all of which appeared much earlier than in other parts of the world. Due to China’s vast territory, there was a high demand for currency in cross-regional circulation. The shortage of currency pushed people to continously explore alternatives.

Initially, people used promissory notes to record transactions, allowing debts to be offset against each other so that only the net balance needed to be settled. Eventually, a key question arose: Could these promissory notes be used for payment transfers? If so, could they be issued in standardized denominations, rather than printing every possible value? By using only a few basic units—such as 1, 2, and 5, which can be combined to represent any other amount—printing costs could be significantly reduced.

However, the transition to fiat money always occurred under significant external pressure. When the metal standard became unsustainable, societies were forced to reluctantly adopt fiat currency. As a result, fiat money was often seen as a morally questionable necessity, something that many believed should be corrected or reversed.

Even today, laws in China still reflect the traditional perspective that money must be physically printed, issued, and managed by central banks—paper banknotes and coins. This effectively treats currency and cash as synonyms.

A few years ago, there was a proposal to amend related regulations to include the phrase “in digital form” to accommodate the digital RMB (e-CNY). Some believe that currency issued by the central bank is inherently cash, so digital RMB should be classified as cash.

However, the problem is that when the central bank issues the monetary base, it does so mainly by providing loans to commercial banks, which are directly deposited into their accounts. If these central bank-issued deposits are considered currency, why should digital RMB be any different?

Despite this, Chinese laws still reflect the traditional view—not only in China but in many countries worldwide—that currency is the credit and liability of the central bank.

I want to emphasise that the notion that “currency is the central bank’s credit and liability” was only valid during the era of metal-backed paper money. Under the metal standard, paper currency essentially functioned as a contract—an IOU—because the central bank promised that the holder could exchange the note for a specified quantity of metal. Today, however, the law stipulates that currency is fiat money and is no longer pegged to any tangible commodity. Consequently, presenting RMB at the People’s Bank of China and demanding an exchange for gold is legally unfounded.

Of course, many concepts were used interchangeably in our previous discussion. For example, the Bank for International Settlements (BIS) categorises currency into various forms such as central bank money, commercial bank money, and wallet money. Central bank money includes physical cash and reserves held at the central bank, possessing the highest legal tender status and creditworthiness. Commercial bank money refers to deposits created by commercial banks, representing their liabilities. Wallet money, often issued by payment companies, reflects these companies’ credit and liabilities.

I’m trying to emphasise that these classifications pertain only to different representations or carriers of money, rather than the fundamental nature of money itself. The essence of money has remained consistent; what has evolved are its forms, carriers, and methods of operation. Therefore, equating money with cash is an outdated and wrong perspective.

Of course, the claim that a hundred-dollar bill, printed at a cost of only 17 cents, can purchase hundreds of dollars worth of goods worldwide, exemplifying “U.S. dollar hegemony,” and that the U.S. imposes enormous seigniorage taxes globally, does not withstand rigorous scrutiny.

Overall, it becomes evident that the prevailing global understanding of currency—especially fiat money—is awfully inadequate. Definitions, legal principles, and management practices regarding currency remain largely stuck at the stage of metal standard paper money. In reality, the evolution of fiat money has spurred the rapid expansion of financial transactions and driven the globalisation of the world economy and financial systems, far beyond the capacity of current regulatory frameworks. This has given rise to various problems, which are not merely the result of insufficient understanding or ineffective management but stem from erroneously attributing these issues to the very nature of fiat money. Consequently, efforts to re-anchor currency are fundamentally misguided, as fiat money represents the inevitable direction in the evolution of monetary systems.

V. Fiat Money is the Inevitable Direction of Currency Development

In my book, 《货币大裂变——颠覆认知的信用货币》 The Great Transformation of Money—Revolutionary Insights into Fiat Money, I define money as a medium for facilitating exchange. Its essential property is its role as a measure of value, with its core function being a medium of exchange. Money is fundamentally safeguarded by the highest level of credit protection—state sovereignty and statutory law—which ensures its status as the most liquid form of value token or value warrant.

Money's primary requirement as a measure of value is that its value remain relatively stable. If money’s value fluctuates drastically, it cannot effectively fulfil this role, as such volatility would disrupt the entire transaction system.

The total money supply should be adjusted to the total amount of tradable wealth to maintain stability. From this perspective, using any tangible commodity as money or a monetary standard will inevitably fail to keep up with the growing demand for money driven by wealth expansion. This mismatch ultimately leads to a “scarcity trap.” As a result, commodities like gold, which were historically used as money, were inevitably phased out of the monetary system and returned to their original role as tradable assets.

Money, therefore, must inevitably detach from tangible commodities and evolve into pure fiat money, steadily progressing toward a more intangible, digital, and intelligent form. This transformation is both irreversible and inevitable.

Today, cross-border payments no longer involve physical cash; instead, they are processed through clearing institutions, which record and transfer transactions electronically. The transfer of currency ownership and adjustments to clearing institutions' debts and credits replace the physical movement of money. When U.S. dollars flow out in international transactions, they technically never leave the United States.

As for deposits, it became clear that paper certificates and manual processing could no longer meet the demands of a growing economy. This led to the emergence of electronic money, which eliminated the need for physical certificates and enabled faster transactions via telecommunication.

The next stage in this evolution is likely to involve greater intelligence, where money is encrypted and can be transferred globally over the public internet. This is the foundation of what is referred to as digital currency, representing an inevitable step forward in the future of money.

However, this raises an issue: for money to become the most liquid form of value token, the medium that represents money must undergo competition and elimination. The key determinant of its strength is whether it possesses the highest level of credit backing.

Earlier, this highest level of credit was derived from divine or royal authority. Today, it is backed by state sovereignty, so fiat money is also referred to as sovereign currency or legal tender. However, sovereignty must apply to the currency and the wealth it is used to exchange. This “double backing” ensures that the value of money corresponds to the wealth it can be exchanged for.

Although Bitcoin has emerged as a digital asset, its corresponding wealth remains undefined, meaning it lacks clear credit backing, hence significant price volatility. In the future, there may be regional sovereign currencies or even a unified global currency, but these would still be sovereign currencies, not supranational currencies.

On June 18, 2019, Facebook launched its Libra cryptocurrency, generating immediate global impact. In China, many argued that China had already surpassed the U.S. in digital currency development, as the U.S. had yet to introduce a digital dollar and President Trump openly opposed the idea, claiming that private or supranational currencies like Bitcoin were sufficient, making a digital U.S. dollar unnecessary.

This fuelled claims that the U.S. was lagging behind China and was attempting to catch up by leveraging Facebook’s global platform, consolidating the resources of major multinational corporations under the Libra Association, and developing a digital currency pegged to a basket of sovereign currencies, including the U.S. dollar, euro, Japanese yen, British pound, and Singapore dollar.

In 2015 and 2016, China made significant efforts to include the RMB in the IMF’s SDR basket. Today, the RMB’s share has increased from just over 10% to 12.28%, making it the third-largest currency in the basket. However, the RMB was notably excluded from the Libra cryptocurrency, which some saw as proof that the United States was attempting to sideline the digital RMB and seize dominance in the digital currency arena.

This put considerable pressure on Chinese authorities, prompting officials from the People’s Bank of China (PBOC) to repeatedly affirm that the digital RMB project had been formally launched and was progressing rapidly. However, there is still no clear timeline for its official release, and the PBOC maintains that the project will advance cautiously and methodically. Numerous challenges remain in the process.

This highlights that national sovereignty cannot be easily undermined. Even with sovereign independence, creating a supranational currency—even one pegged to other sovereign currencies—remains highly challenging to implement.

With this understanding, it becomes clear that money is no longer solely the credit and liability of central banks, leading to a fundamental shift in central banking logic worldwide. While central banks can retain profits within fiscal boundaries, all excess profits must be remitted to the national treasury.

Since last year, the Federal Reserve has recorded its first significant loss in history, requiring the government to cover these deficits. Why? Because the power to mint and manage currency is entrusted to central banks by the government, the lion’s share of central bank profits must ultimately flow back to the state.

From this perspective, I have long argued that central bank independence is not as strong as it appears and that this independence will inevitably erode globally. In this context, Trump’s and Musk’s calls for greater presidential intervention in the Federal Reserve, or even for redefining the U.S. dollar as the nation’s currency rather than the Fed’s currency, are entirely plausible.

VI. Fiat Money Requires New Channels or Methods of Issuance

Examining how fiat money is issued is essential to deepening one's understanding of it. Since it has been decoupled from tangible commodities, credit creation is the primary issuance channel for fiat money today.

As mentioned earlier, money serves as a measure of value, which raises the question: How large should this measure be, and how is its value determined? While central banks or money-issuing institutions may still purchase reserves, such as gold or foreign currencies, to back value and enhance credibility—especially given that many people remain sceptical of money without physical backing—the quantity of these reserves must be carefully managed. In this case, “the more, the better” does not apply. Excessive reserves could risk a return to a metal standard or a reverting to outdated monetary frameworks.

The most crucial channel for issuing money is credit. However, credit issuance extends beyond just loans, including bill discounting, overdrafts, bond purchases, and other financial instruments. In essence, it involves lending money with the expectation of repayment and interest at a future date.

This is important because it ensures that the total money supply aligns with the total value of wealth. This alignment is achieved through active participation in the broader economy. If real wealth exists but money is lacking, how can this be addressed? As long as real wealth is available, money will be lent to those who need it.

In this scenario, wealth is assessed based on its future realisable value, meaning that as long as an asset holds genuine economic worth, there will be money to back it. This solves the inherent scarcity issue of commodity-based money systems, where someone could possess real wealth but lack access to money. In a credit-based system, the currency supply remains sufficient as long as real wealth exists.

Here’s another problem: how does one determine the value of wealth, particularly its realisable future value? How can such judgments be made accurately?

Take, for example, Beijing’s housing system reform in 1999. At the time, housing prices ranged from 1,200 to 1,500 yuan per square meter. Today, those same properties could be valued at 50,000 to 60,000 yuan per square meter. Issuing loans based on the assumption that prices will continue rising along the same trajectory may seem reasonable. However, if the economy falters and prices drop, a house once valued at 50,000 to 60,000 yuan per square meter might become unsellable at even 15,000 to 16,000 yuan. This could trap borrowers in financial distress.

For instance, if a loan was issued when the property was valued at 50,000 to 60,000 yuan per square meter, with 70% of the value financed, a price drop of 50% or more could leave borrowers owing more than the property is worth. Even after repaying for several years, they could still owe over 60% of the original loan, leading to a debt crisis.

Debt is a legal contract, and interest typically rises steadily. However, the realisable value of assets fluctuates with the market. If banks lend aggressively during price surges, they risk being unable to recover loans when prices decline.

What is money over-issuance? It occurs when the principal and interest of issued credit cannot be recovered. This is true over-issuance because the fundamental principle of credit issuance is that loans must be recoverable, validating the initial value assessment. If a loan cannot be repaid, it signifies that money has been over-issued.

The challenge today is that while credit issuance helps resolve money supply shortages, it is susceptible to errors in value judgment. When the economy is booming and prices are rising, large amounts of money may be issued and become uncollectible.

Over-issuance has become a new challenge in fiat money systems today. It is often exacerbated by national governance policies and global competition, with governments sometimes deliberately encouraging excessive issuance.

In theory, countercyclical operations suggest that more money should be injected during economic downturns to stimulate growth. Excess money should be withdrawn when the economy is booming to prevent overheating. But is this truly feasible?

In practice, when the economy is performing well, governments are often reluctant to impose strict controls or curb excess growth. Instead, there is always a tendency to push for even higher expansion, ultimately forcing the currency to depreciate continuously.

Continuous currency depreciation has its benefits—it encourages people to avoid excessive savings, leading to more debts, investment, and consumption, which seems to stimulate rapid economic growth. However, if mismanaged, this approach can escalate into a debt crisis.

What is the issue in China’s economic environment today? The massive investments and infrastructure projects funded by resource monetisation have driven economic expansion. However, when resource-generated income became insufficient, governments resorted to increasing leverage to sustain short-term growth. This has led to the rapid expansion of government borrowing and debt across society. At its core, debt is borrowing from the future. If resource-based income fails to grow, current tax revenues may become inadequate to support rising debt obligations, leading to a severe financial crisis.

Today, the primary channel for money issuance is credit. However, credit issuance risks over-issuance, which can lead to asset-liability imbalances. If there were only one bank in a country, it could theoretically issue unlimited amounts of money, as all transactions would remain within its system and could be settled directly.

A series of monetary management regulations have been implemented to prevent unchecked money creation. One regulation is the separation of commercial and central banks: Central banks cannot issue credit directly to businesses, individuals, or social entities, nor can they provide direct overdrafts to the government or directly underwrite government bonds. Instead, these must be handled by commercial banks.

Why are they called commercial banks? Commercial banks are so named because they operate as independent financial entities responsible for their profits and losses. If a liquidity crisis occurs and a bank becomes insolvent, it must undergo bankruptcy or restructuring—it cannot be indefinitely propped up. If all failing institutions were kept afloat, they would become invisible central banks. To prevent this, there must be a clear management distinction between central and commercial banks. If stability is maintained at all costs, with the central bank constantly providing re-lending to keep struggling banks afloat, money quality will inevitably decline.

More than one commercial bank must exist to ensure interbank transactions. Credit issuance creates money, but it does not create liquidity, hence the need for multiple commercial banks to help enforce liquidity constraints.

Moreover, neither central banks nor commercial banks should create money for themselves, such as by lending to themselves. A complete set of management rules is essential to prevent self-financing.

From this perspective, cash is no longer the primary channel for money issuance. In theory, money can be directly deposited into accounts for use, and cash is only withdrawn when account holders request it. This is why many people still equate money with cash, believing that it is issued, distributed, and managed solely by central banks. However, this view is overly simplistic. In the future, cash will inevitably be phased out, much like shells and metal coinage before it.

Due to credit issuance, the total money supply can be divided into two categories: owned money and borrowed money. It is crucial to analyse the ratio of owned to borrowed money within the total supply, as this proportion reflects the quality of the currency. If a large proportion consists of borrowed money, it suggests that currency circulation is slow, with much of the issued money either inactive or over-issued without being effectively absorbed. This could indicate underlying issues within the financial system.

In cases where the central bank acts as an agent for the treasury, fiscal revenues and expenditures, such as tax revenue and national debt issuance, play a role in adjusting the total money supply. This is one of the key reasons why, when the West discuss the relationship between fiscal and monetary policy, they struggle to clarify fiscal monetisation and monetary fiscalisation. In fact, fiscal revenues and expenditures also adjust the total money supply, which is a new issue that needs to be addressed.

VII. Credit Issuance Brings Profound Changes to Money

First, money can be directly issued without being influenced by deposits. It was once commonly said that loans must be backed by deposits, but in theory, this is not true. Banks can issue loans directly and deposit them into accounts, allowing the money to start circulating. However, there is a key issue: credit can create money, but it cannot create interbank liquidity, which is a significant constraint.

Second, credit issuance does not depend solely on the willingness of the central bank or commercial banks; it is more dependent on the willingness of borrowers.

Some may wonder: If the central bank wants to issue large amounts of money, why wouldn’t borrowers take advantage of zero-interest loans? The reality is that when the economy is struggling, a borrower might hesitate, thinking, “Even with a zero-interest loan, if I cannot repay the principal, why take on the debt?” The ideal scenario for borrowers would be if the principal never had to be repaid. But if that were the case, would money still function as money? No—it would lose all credibility and collapse entirely.

It is crucial to recognize that only the fiscal authority can distribute money directly into society. Central banks and commercial banks cannot simply hand out money freely. If the government lacks sufficient funds, it must issue bonds and expose its deficits and debt to public scrutiny.

If the finance ministry and central bank functions were completely merged, like in China’s pre-reform era, when the PBOC would function as the nation’s cashier. At that time, the PBOC directly funded government-approved projects, as determined by the State Planning Committee. If there was a shortfall, the bank would simply overdraft funds, leading to a chaotic, high-risk, and outdated financial system. Despite the emergence of modern monetary theories (MMT), some fundamental boundaries must still be maintained.

A crucial realisation is who actually serves as the primary issuer of money—the central bank or commercial banks. When credit issuance becomes the main channel for money distribution, and the distinction between the central bank and commercial banks is maintained, it becomes clear that commercial banks have effectively replaced central banks as the main issuers of fiat money. Meanwhile, the central bank withdraws from direct issuance to money management and regulation.

The potential problem with this commercial bank-driven model of fiat money issuance is that while the central bank can actively and effectively control inflation, it is often passive and ineffective in countering deflation. Some compare this to pulling on a rope: To control inflation, the central bank can tighten monetary policy, restricting credit and slowing money supply growth—just like pulling a rope tight, which is easy to do. To counter deflation, the central bank must encourage commercial banks to lend more and expand the money supply—but this is like trying to push on a rope, which is difficult and ineffective.

VIII. Currency Over-issuance and Misuse Must be Strictly Prevented

Central bank monetary policy is not omnipotent. The true driving force behind economic and social development lies in institutions, which are part of national governance. In today’s world, where money represents national credibility, a country’s core values—whether it prioritises explosive short-term wealth or long-term stable growth—determine how monetary policy aligns with the broader economic environment. This is why a nation's governance must evolve alongside; the central bank alone cannot bring about substantial change.

To truly understand monetary management, one must focus on payment methods. Today, physical cash payments are rapidly declining, with most transactions now conducted through electronic transfers and bookkeeping settlements.

In this context, foreign exchange reserves are primarily held in the currency-issuing country as the foreign assets of the reserve-holding country and the external liabilities of the currency-issuing country. They can only be spent (e.g., through investment or imports) but cannot be withdrawn.

This is why, when selecting a reserve currency, three key factors must be carefully balanced in strict priority order: security, liquidity, and profitability.

Security must be the top priority, as a reserve currency must be protected from confiscation or seizure. Once security is ensured, the next essential factor is liquidity. A reserve currency must have high cross-border liquidity; otherwise, its holder is effectively forced into exclusive trade with the issuing country, limiting economic flexibility. A case in point is Russia and India’s local currency settlements. Russia accumulated an excessive surplus of Indian rupees, which had limited international liquidity. As a result, Russia promptly suspended the practice.

The third consideration is profitability, meaning that holding reserves in a particular currency should generate returns. The balance between security, liquidity, and profitability is not static—it must be continuously adjusted based on market conditions and international relations.

This trend has led to several changes. For example, historically, significant trade imbalances between nations often led to imbalances in commodity money, ultimately resulting in war. Today, this issue has been largely mitigated. When U.S. dollars “flow out” of the country, it refers to a change in ownership, but the physical dollars themselves remain within the U.S. banking system. Furthermore, sovereign debts still exist in banks, ensuring that bank liquidity is not affected, and the problem is significantly alleviated.

Another major change is the rise of securitised equity transactions, including the securitisation of stocks, bonds, and futures. The high volume of transactions enabled by securitisation significantly improves resource allocation efficiency, far surpassing the efficiency of physical commodity transactions.

Moreover, with the globalisation of financial transactions, markets can theoretically facilitate 24-hour, online, cross-border trading, as seen with Bitcoin.

Additionally, quantitative trading has enabled unlimited expansion of trade volumes. The daily trading volume in global financial markets already far exceeds the total annual value of global investment and trade. Theoretically, this volume can continue growing indefinitely. However, traditional exchanges operate for only 4 hours a day, with the remaining time dedicated to internal clearing and settlement. Bitcoin, by contrast, operates 24/7, though, if not properly controlled, it could lead to serious risks.

In my latest book, 《货币大裂变——颠覆认知的信用货币》 The Great Transformation of Money—Revolutionary Insights into Fiat Money, I explain the fundamental transformations in currency has taken place, one of which is the emergence of fiat money. Our understanding of fiat money remains far inadequate, and many of its underlying truths challenge conventional thinking.

I also discuss what I call the “Great Transformation in Finance—Revolutionary Insights into Financial Transactions.” As financial transactions become increasingly securitized and quantified, what potential risks and challenges might arise? With financial globalisation now far outpacing economic globalisation, will national sovereignty, which remains dominant today, continue to be the determining factor in the future? Or could we see a future where a few large financial conglomerates control global wealth, with nation-states merely serving as their proxies? These are questions for experts and scholars to reflect upon.

An essential transformation is how to control the total money supply. Currently, monetary policy adjustments are primarily based on demand-side indicators, particularly the Consumer Price Index (CPI), which measures changes in the prices of consumer goods closely tied to people’s daily lives.

However, under this approach, the impact of monetary policy must pass through multiple channels, from central banks to commercial banks, and then to society. Likewise, price changes travel from upstream industries to downstream sectors before affecting the CPI. This process can take six months to a year and a half to fully materialize. By the time inflation is identified, deflation may already be taking hold upstream, leading to severely delayed policy responses.

Since credit issuance is now the primary channel for money creation, I believe monetary policy should shift away from relying solely on demand-side indicators like the CPI and instead focus on credit control at the source. A comprehensive set of credit control standards should be established, ensuring that loans are only disbursed when these standards are met. Furthermore, global cooperation is essential to prevent situations where a single country dominates its central bank and excessively prints currency for its own benefit. A unified global system for monetary regulation would help constrain individual countries’ actions and prevent the over-issuance of money.

Conclusions

1. After money was detached from physical constraints, its supply became sufficiently flexible, providing strong support for the development of the economy and society, including the globalisation of both the economy and finance. Fiat money is the inevitable direction of monetary evolution. Without it, human society would not have reached its current level of development, and globalisation would have been significantly delayed.

2. The international status of each country’s currency is determined through competitions based on comprehensive national strength and international influence. Only the currency of the strongest country can become the primary international currency.

3. When the sovereign currency of the most powerful nation serves as the international reserve currency, currency and financial conflicts between countries become inevitable, and major adjustments in U.S. monetary policy must be carefully analysed and proactively addressed.

Ignoring these developments is simply not an option for a large nation like China. I agree with the term “war” in this context but disagree with calling it a “conspiracy” because U.S. monetary policy is relatively open and transparent. Its policy models indicate intended actions, and figures like Trump openly declare their intentions, making it an open strategy. It would be a mistake to assume Trump won’t follow through on what he said; China must prepare for the worst and respond with its best efforts.

4. As long as the U.S.'s international status remains fundamentally unchanged, de-dollarisation is unlikely.

The key is to face reality, enhance the ability to respond to financial wars, accelerate the reform of China’s entire monetary system, optimise monetary management, and open financial markets while ensuring the system remains manageable and stable. China must attract massive resources from the U.S. and build its international influence. There is still much, much work to be done in this regard.

5. China must develop a new understanding, accurate grasp, and effective management of money—especially fiat money—and actively shape changes in the international monetary system, including SWIFT.

SWIFT was designed to be neutral and has maintained a reputation for being neutral, efficient, professional, and secure since its establishment. This is why, during the sharp confrontation between the Soviet Union and the U.S., SWIFT continued to provide services to Soviet banks. SWIFT is headquartered in Belgium, not the U.S., and it operates as a commercial entity. The U.S. holds only two of the 25 board seats, which are determined not by investment shares but by transaction volumes handled by each country or region within the SWIFT network.

Previously, when China’s international payments were routed through Hong Kong, Hong Kong held a board seat in SWIFT. However, with China’s growing transaction volume after the reform and opening up, several Chinese institutions became SWIFT members.

In 2009, while overseeing international payment and settlement at the Bank of China (BOC), I proposed adding a board seat for China. By 2012, when SWIFT recalculated its board composition (which occurs every three years), BOC was included, replacing the lowest-ranked institution at the time.

Today, China still holds a board seat in SWIFT. SEIFT board is exclusively for representatives of commercial institutions, not government officials—exclusing even those from the central bank or the Ministry of Finance. At the time, I personally represented the BOC on the SWIFT board.

Initially, SWIFT maintained strict neutrality, but after 9/11 in 2001, the U.S., citing counterterrorism efforts, demanded access to SWIFT’s dollar transaction data, asserting long-arm jurisdiction. Under pressure, SWIFT reluctantly complied, eventually expelling Iran from the network. In response, Europe attempted to create an alternative messaging system for Iran, but its transaction volume remained minimal.

SWIFT faced two major decisions regarding Russia—first during the 2014 Crimea Crisis, when Europe was against Russia’s expulsion, and later in the 2022 Ukraine Crisis, when Europe favoured Russia’s removal. After 2014, believing that Europe would not fully align with the U.S., Russia significantly reduced its U.S. dollar reserves and shifted toward holding euros, yen, even pounds and gold. However, following the Ukraine conflict, the U.S. and Europe imposed unprecedented sanctions.

However, SWIFT did not immediately expel all Russian institutions. The first batch of exclusions included seven banks. To this day, Russia’s largest oil and energy bank remains unaffected. Over time, the number of sanctioned Russian institutions increased to 11, though reports suggest that some may now be reinstated.

As long as the U.S. and Europe maintain trade relations with Russia, completely expelling Russian institutions from SWIFT would disrupt proper financial settlements, making it impractical unless full diplomatic and economic ties are severed.

On the other hand, in sanctioning Russia, the U.S. also applied secondary sanctions to countries conducting business with sanctioned Russian entities. As a result, major Chinese banks with extensive international operations hesitated to engage in transactions with Russia, fearing that a small portion of Russian business could jeopardise their much larger global operations. For these banks, their officials who had engaged in Russian transactions could even face arrest when travelling to countries that enforce sanctions on Russia.

Consequently, only local Chinese banks with no international exposure continued handling transactions with Russian counterparts.

If a complete break occurred, the situation might become easier to manage, as there would be no more opportunity costs. Technically, developing an alternative to SWIFT would be relatively easy, but the real challenge remains: who will use these systems, and how can their neutrality be ensured?

I believe China should develop a key global financial infrastructure similar to SWIFT, designed to mitigate risks and prevent monopolies from a global governance perspective. This system should not be limited to BRICS countries nor function as China’s own exclusive platform. Instead, it should be open to participation from financial institutions worldwide—just like SWIFT—including those from Western countries like the U.S., with the Chinese government guaranteeing its neutrality.

If China's understanding of fiat money remains at its current level, a crisis is inevitable. When the 2008 financial crisis occurred, it was considered a "once-in-a-century crisis," comparable to the Great Depression of the previous century. After the G20 united to stabilise the market, it didn't seem as severe. However, the root causes of the crisis were never addressed. The risks continue to accumulate. When the crisis eventually erupts, it could be even more severe.

Therefore, to truly understand the nature of money, especially fiat money, China must drive fundamental changes in the global monetary system. This includes reforming the international monetary framework to make it more open, fair, and efficient, to reduce the risks of currency and financial wars.

Q&A

Q1: The current exchange rate of USD to CNY is around 7.28. Do you think the exchange rate will go higher or lower?

Wang Yongli: I focus on fundamental research, so I don't provide too much analysis of market transactions. However, certain patterns can be observed. The exchange rate of currencies reflects the economic and purchasing power comparison between the two countries.

First, after the pandemic, the U.S. economy has remained particularly strong compared to the rest of the world, with overall macroeconomic data still looking solid. The main concern is nonfarm payroll employment. As Trump returns to office, there is concern about whether his policies—such as government layoffs and the expulsion of illegal immigrants—could negatively impact employment figures.

Second, another concern is whether inflation in the U.S. will rise again, potentially prompting an interest rate hike. Before the election outcome was clear, the USD/CNY exchange rate remained below 7.1. However, it recently climbed to 7.28 and may retreat to around 7.23 today. On November 13, the U.S. dollar index surpassed 107, marking its highest level this year.

Additionally, U.S. trade tariffs on China could further pressure the RMB exchange rate. In response, China has implemented several measures. After the U.S. announced a 50-basis-point rate cut in September, China quickly followed up with a stimulus policy on September 24, resulting in a short-term economic rebound. China’s approach remains highly adaptive.

China has also introduced a 10 trillion yuan fiscal debt restructuring plan and will continue adjusting policies as needed, ensuring that policy tools are not exhausted all at once.

Overall, China’s priority will be managing excessive exchange rate fluctuations. However, the PBOC has shown increasing tolerance, moving away from strictly fixing the exchange rate at a specific level, as was done in the past. As long as the exchange rate remains within a manageable range, heavy intervention is unlikely, and external measures may be used instead. Given this approach, the RMB may face some pressure before the end of the year.

Q2: What do you think the impact of Trump’s second term will be on the hegemony of the U.S. dollar over the next few years?

Wang Yongli: As I mentioned earlier, the international status of a currency depends on comprehensive national strength and international influence. International influence is largely based on openness and integration into the global community. If a country isolates itself, its international influence is naturally affected.

Trump's first term was characterised by a form of personal heroism—"America First" was aimed not only at China but at all countries. He believed that all nations were taking advantage of the U.S., even allies, and that the U.S. was giving too many concessions. As a result, he demanded protection fees from other nations, which actually gave China many opportunities. If Trump maintains this approach, it could be a double-edged sword.

If Trump secures a second term, the impact could be far-reaching—not only for China but also for U.S. social governance and the core values of democratic nations. His presidency could bring about transformative changes, potentially as significant as the founding of the U.S. itself, when it became the first democratic nation governed by law without a king or emperor.

However, governing a major power is never easy. A second Trump term could introduce a new era, but it could also lead to disruptive turmoil. Even prominent U.S. economists warn that if Trump follows through on his campaign promises, inflation in the U.S. could surge, leading to severe societal divisions in the U.S. and global instability.

This is the choice of the American people, and I can only wish them well. As for China, it must adapt to global trends and remain focused on its own development—maintaining stability, staying open, and continuing to grow.

The post-WWII era has accumulated many contradictions, and every country faces immense challenges. However, I still believe that China has significant room for manoeuvre. With the right strategy, amid this global transformation, the world’s centre of gravity will shift toward the East—I am confident in this transition.

Q3: Earlier, you mentioned the U.S. financial sanctions on Russia due to the Russia-Ukraine war. If the U.S. were to impose sanctions on China’s foreign exchange reserves, what impact would it have on export foreign exchange collection for foreign trade enterprises?

Wang Yongli: The key question is whether the U.S. government would dare to freeze Chinese companies’ assets in the U.S., including China’s official reserve assets. This is a very serious issue because these assets were legally acquired. If the U.S. freezes or seizes China's legitimate property, it’s essentially declaring war on China.

The U.S. may freeze official assets first, but it is unlikely to target private assets, as this would cause significant damage to its commercial credibility. At the same time, China must be prepared. If anyone dares to freeze Chinese overseas assets, China should make it clear that this is an act of war and respond with equivalent foreign asset freezes. This reciprocal action would require sufficient foreign investment in China, but the problem now is that foreign investment is withdrawing, while Chinese capital is flowing out. This means China must accelerate market opening and attract foreign investment. There is still a great deal of work to be done behind the scenes.

There have been various explorations into alternative reserve strategies, such as stockpiling food, fertilisers, oil, natural gas, and gold. However, these physical commodities come with significant challenges—including limited shelf life, security risks, and relatively low total value as reserve assets.

Another proposed approach is foreign investments, credit expansion, and infrastructure development, effectively converting foreign reserves into bonds and leveraging them for influence. However, I believe this is merely wishful thinking detached from reality.

In the past, all foreign exchange and international business were handled by the BOC, so I’m very clear that without sufficient global influence, third countries can be easily swayed by the U.S. and Western nations to default on China’s debt.

In the past, China relied on the assets of developed countries for reserves because it believed their rule of law was relatively sound, ensuring that assets could not be arbitrarily frozen or seized. This highlights the importance of building strong international influence to safeguard financial security.

This is also why the U.S., leveraging its global dominance, has extensive overseas investments, with a significant portion allocated to high-risk assets, yielding very high returns—often 20-30%. In contrast, China’s overseas assets are primarily held in low-risk forms, such as bank deposits or sovereign bonds, resulting in lower returns, typically around 2-3%. As a result, while China’s overseas holdings are net assets, they generate negative net income annually due to the return gap between risk-heavy U.S. investments and China’s conservative approach.

This discrepancy is not simply a matter of strategy but a reflection of whether China’s comprehensive national strength and international influence are sufficient to support a more aggressive investment approach.

Part I of his speech

Wang Yongli clarifies China's issuance of USD-denominated Sovereign Bonds in Saudi Arabia

Can CIPS Replace SWIFT? Insights from Bank of China's Former Vice President