China wants it both ways with the yuan, and it may just succeed despite conventional economic wisdom. Many mainstream economists think the yuan faces insurmountable barriers to internationalising as a major currency because of domestic capital controls. They might be right technically, but Chinese policymakers may have different goals. Full convertibility means abandoning capital controls, something Beijing is unwilling to give up any time soon.

An increasing number of China’s trade partners and members of the Belt and Road Initiative are turning to yuan financing, covering both borrowings and payments.

Australia’s BHP, the world’s largest mining company, is the latest miner to use a yuan-based spot index to price some iron ore products. This came after sealing a deal with the China Mineral Resources Group. Last year, fellow mining giant Fortescue took out a 14.2 billion yuan (US$2.1 billion) loan from two Chinese state-run banks.

Such pricing and borrowing is becoming common thanks to China’s advantage as a dominant iron ore buyer. But it’s not just minerals and miners. Pakistan is the latest Belt and Road Initiative partner to issue “panda bonds”, yuan-denominated debt sold within China. The three-year bonds, focusing on sustainable development, are mostly guaranteed by the Asian Infrastructure Investment Bank and Asian Development Bank.

Last month, Portugal became the first euro-zone nation to issue an offshore yuan bond – also called a dim sum bond – raising about 1.99 billion yuan. It was also the first within the euro zone to sell panda bonds – debt sold strictly within China – back in 2019.

Meanwhile, Beijing’s Cross-Border Interbank Payment System (CIPS) is capturing a bigger chunk of transactions as an alternative to the dominant Swift payment messaging system.