China Expands Yuan Safety Net While U.S. Defends Petrodollar, U.S.-China Hegemony Contest Spills Into Currency Swap Frontlines

China Targets Fed-Style Liquidity Framework
U.S. Moves to Reinforce Middle East Dollar Defense Line
U.S.-China Power Rivalry Expands Into Currency Swap Battleground

The United States and China are escalating their competition for dominance over the global liquidity supply system. China has begun openly pursuing the status of a global liquidity provider through permanent yuan swap lines and international payment networks, while the United States has responded by reviewing expanded dollar swap arrangements with Middle Eastern allies. As China mounts a direct challenge to Washington’s long-standing role as the supplier of emergency liquidity during global financial crises and geopolitical shocks, the center of gravity in U.S.-China rivalry is increasingly shifting from semiconductors and tariff wars toward competition over liquidity infrastructure itself.

Former PBOC Vice Governor: “Fed Monopoly Over Global Bailouts Must End” — Currency Swaps Prove Their Role as Financial Lifelines

According to the South China Morning Post (SCMP) on May 26, Zhu Min, former deputy managing director of the International Monetary Fund (IMF) and former vice governor of the People’s Bank of China (PBOC), recently argued at the “Tsinghua PBCSF Global Finance Forum” in Chengdu that “China should leverage its currency swap agreements with other countries to become the global lender of last resort during financial crises.” The remarks signaled Beijing’s ambition to move beyond expanding yuan trade settlement and position itself as a central pillar of global finance capable of supplying emergency liquidity to countries in distress.

Zhu’s concerns extend far beyond the expansion of yuan settlement. Underlying his argument is the view that only nations capable of supplying genuine alternative liquidity during crises can secure strategic influence within the international financial order. At present, the role of lender of last resort in the global financial system remains effectively controlled by the U.S. Federal Reserve (Fed). During both the 2008 global financial crisis and the 2020 COVID-19 pandemic, the Fed acted as the world’s financial backstop by supplying dollar liquidity through permanent swap arrangements with major central banks.

Zhu emphasized that China should elevate its expanding swap framework into an alternative liquidity supply model capable of rivaling the Fed’s architecture. He argued that the swap agreements China has signed with countries around the world have already established a powerful institutional foundation that would allow Beijing to serve as a lender of last resort during future international financial emergencies. “The time has come to answer whether China can also become a lender of last resort,” Zhu said, adding that countries with yuan swap arrangements have already demonstrated the effectiveness of the system by rapidly drawing yuan liquidity during domestic financial crises to prevent disruptions in international payments.

In practice, currency swaps function as local-currency liquidity facilities in which countries deposit their own currency and borrow the counterpart’s currency. At the same time, they also supplement IMF-led rescue operations by providing financial bailout support to developing economies facing debt crises. As part of this financial expansion strategy, China had established currency swap agreements with 32 countries worldwide as of the end of last year. The network includes not only Global South emerging economies but also South Korea. Seoul and Beijing extended their won-yuan currency swap agreement for another five years last November. The deal totals approximately $55 billion, with both governments describing it as a mechanism to promote trade and investment, stabilize financial markets, and provide liquidity support for financial institutions operating in each country.

The agreement is increasingly viewed less as bilateral financial cooperation and more as a reflection of intensifying currency bloc competition. South Korea remains a core U.S. security ally and a major investor in the American economy, yet it is excluded from Washington’s permanent dollar swap network. Seoul and Washington previously established temporary swap arrangements during the global financial crisis and the pandemic when the won-dollar exchange rate surged sharply, but the two countries have never signed a permanent swap agreement. The Fed’s standing dollar liquidity swap lines remain limited to the Bank of Canada (BoC), Bank of England (BoE), Bank of Japan (BoJ), European Central Bank (ECB), and Swiss National Bank (SNB). China, meanwhile, continues to maintain long-term yuan swap arrangements not only with South Korea but also with advanced Western economies, steadily building institutional touchpoints within the global financial safety net.

United States Aggressively Pursues Expanded Swap Lines

China’s expanding swap diplomacy has also begun reshaping Washington’s approach to dollar liquidity operations. Last April, U.S. Treasury Secretary Scott Bessent stated that many allied nations had requested financial assistance in dealing with the fallout from the Iran war, adding that Washington was discussing expanded permanent swap lines with countries in the Middle East and Asia. He noted that “many of the countries requesting swap arrangements have stronger fiscal conditions and larger foreign exchange reserves than several nations that already maintain permanent swap lines with the United States.” He added that Washington highly values the proactive risk management posture demonstrated by allied nations seeking additional financial safeguards even during stable market conditions. The U.S. Treasury possesses the authority to establish swap arrangements separate from the Fed through direct purchases of foreign currencies.

One of the countries that reportedly requested a swap line with the United States is the United Arab Emirates (UAE). UAE officials said last month that they were interested in such an arrangement as part of efforts to deepen trade and investment ties with Washington. U.S. President Donald Trump also confirmed the discussions during a phone interview with the media. In an interview with CNBC, Trump said regarding the UAE’s request for a swap line, “If we can help, we will.”

Washington’s growing willingness to expand swap arrangements appears rooted in mounting concern that the Iran war, through surging oil prices and economic strain on Gulf allies, is inadvertently strengthening China’s role and elevating the yuan’s international standing. According to monthly data from SWIFT, the global banking payment messaging network, the dollar’s share of international payment transactions rose from 49.2% in February to a record 51.1% in March. The increase reflected intensified demand for dollar assets as global financial markets became increasingly volatile and investors fled toward perceived safe havens.

Yet the broader reality suggests the strengthening of dollar dominance may be less absolute than the SWIFT figures imply. While SWIFT data show a rising share of dollar-based transactions, the Cross-Border Interbank Payment System (CIPS), which China promotes as an alternative to SWIFT, presents a different picture. According to Shanghai Securities News, daily transaction volume processed through CIPS recently reached a record high of approximately $1.7 trillion. Average daily transaction volume stood at roughly $86 billion in February before the Iran war began, then surged to approximately $128 billion in March and subsequently exceeded roughly $139 billion in April.

The sharp increase in CIPS transaction volume reflects growing yuan settlement in oil trade with major energy exporters. Although yuan settlement through SWIFT still accounts for less than 5% of global transactions, far below the dollar’s dominance, the inclusion of CIPS data suggests global yuan settlement activity is expanding rapidly. As of June last year, CIPS included 1,690 participating institutions across 121 countries. Iran, in particular, has conducted nearly all oil exports to China in yuan since U.S. sanctions imposed in 2018 effectively blocked dollar settlement. The ongoing Iran conflict has further accelerated the shift toward yuan-denominated transactions. Goldman Sachs projected that the yuan’s share of global oil settlement, which stood near 1% in 2021, would rise to 7% by 2025 with potential for further expansion. Iran has also threatened to impose transit fees on vessels passing through the Strait of Hormuz and has discussed collecting payments in yuan and digital assets.

Yuan Networks Expand as Dollar Safety Net Faces Pressure

Against this backdrop, Washington’s positive stance toward swap arrangements with Gulf allies extends beyond pure economic interests. The UAE, one of the countries requesting a swap line, reportedly warned U.S. officials that if dollar shortages emerge because of economic damage caused by Iranian attacks, it may consider using alternative currencies such as the yuan in oil transactions. For Washington, such a development would represent a major strategic alarm. The Iran conflict has increasingly raised concerns that the status of the “petrodollar” system, maintained for more than half a century, could begin to erode in earnest.

Analysts argue that if Washington ultimately strengthens alliance structures through swap agreements with Gulf nations, the move could carry strategic significance comparable to former U.S. Secretary of State Henry Kissinger’s secret 1974 agreement with Saudi Arabia. Following President Richard Nixon’s abandonment of the gold standard in 1971 and the oil price shock triggered by the 1973 Middle East war, Kissinger secretly visited Saudi Arabia to secure a confidential arrangement under which all oil transactions would be conducted in dollars in exchange for U.S. security guarantees.

At the time, Washington also encouraged Saudi Arabia to reinvest dollar revenues earned from oil exports into U.S. Treasury securities and other dollar assets. The agreement eventually expanded across Gulf oil exporters and became one of the core pillars underpinning the dollar’s reserve currency dominance for more than five decades. Since Middle Eastern oil formed the backbone of global industrial supply chains, dollar-based oil settlement significantly expanded global demand for the dollar while allowing petrodollar recycling to support stable issuance of U.S. Treasuries.

Bessent’s recent remarks positively evaluating swap agreements with Gulf states — including references to preserving the dollar’s dominance and reserve currency status while suppressing the spread of alternative payment systems — are increasingly interpreted as reflecting Washington’s growing anxiety over the accelerating internationalization of the yuan. As oil settlement and global liquidity supply mechanisms remain the central pillars of dollar hegemony, the U.S.-China rivalry is rapidly evolving beyond semiconductors and tariffs into a broader contest over currency swaps and control of international payment networks.