In 2025, China recorded the largest merchandise trade surplus in history – roughly $1.1 trillion more in exports than imports – based on Chinese manufacturers' global competitiveness. The alarm this has provoked in the United States and Europe over the fate of their own industries has dominated the debate. Far less attention has gone to another question: where is all this Chinese capital going? A trade surplus does not simply disappear. Every dollar China earns abroad and does not spend on imports must be reinvested abroad – the question is through which channel.
For two decades from the early 2000s, much of China's surplus was recycled into US Treasuries. But that has changed: Chinese capital no longer flows automatically to the US. The largest destination for China's capital in recent years has been Hong Kong – though much of it flows through the territory rather than settling there, using Hong Kong as a conduit to other foreign markets.
In the years ahead, more countries are likely to compete for access to Chinese capital rather than resist it. At the European level, this almost happened in December 2020 when the EU and China concluded the Comprehensive Agreement on Investment, which would have opened a return channel for Chinese surplus capital into Europe – including partnerships that would have shored up Europe's industrial competitiveness through a new energy system with lower energy costs. The deal was shelved at the last moment, but the logic that produced it has not gone away: Spain and Hungary are already building long-term national strategies that position Chinese capital as a funding engine for European reindustrialization, and others are likely to follow.
In recent weeks, China announced several significant steps to address the barriers that hold back adoption of the renminbi by global investors.
1. Chinese government bonds can now be quickly converted into cash - making them far more attractive to hold. Through a new repo facility, foreign investors will be able to use their Chinese government bond holdings as collateral to borrow short-term renminbi cash. This mirrors the US Federal Reserve’s repo facility, which lets foreign central banks swap US government bonds for dollars. Previously, Chinese government bonds were difficult to liquidate quickly, making them relatively unattractive to hold for global investors who need to be able to move in and out of positions.
2. Global investors can now protect themselves against losses on Chinese bond holdings - removing a key barrier to owning them. A new Hong Kong-based futures market for Chinese government bonds will allow global investors to hedge interest rate risk in their Chinese bond holdings without needing mainland China market access. The absence of such a hedging mechanism was a key reason for underweighting Chinese bonds in global investment portfolios.
3. More support for two-way capital flows - a necessary step in making the renminbi a currency global investors can comfortably hold. China has increased the quotas under its Qualified Domestic Institutional Investor program, allowing more Chinese capital to flow into foreign markets. Enabling outward capital flows is a classic step in the internationalization of a domestic currency because it creates a two-way market and reduces the perception of a one-way trap.
4. More support for the offshore renminbi, which is freely traded outside China - making it easier for global investors to transact in the currency. Six major state-owned banks have been authorized to conduct transactions in offshore renminbi - a currency market distinct from the onshore renminbi, freely traded in financial centers such as Hong Kong and Singapore - directly from the mainland. Previously, such transactions had to be routed through these offshore hubs. This is likely to increase the pool of freely traded renminbi in global markets.
Analysis of the internationalization of the renminbi should go further than reflecting on “de-dollarization” - although foreign demand for US dollars could indeed decline as the renminbi becomes a more credible alternative. More importantly, the internationalization of the renminbi is likely to begin in Asia, where central banks and sovereign wealth funds have the most to gain from diversifying into renminbi assets, something Chinese government statements in recent years have made explicit. The infrastructure to support that vision is now being put in place, and global investors would be unwise to ignore it.
One way in which the 2026 war in Iran will be remembered – if the situation does not escalate further – is that the largest oil supply disruption in history triggered a far smaller oil crisis than expected. A key reason, besides the US withdrawing from the conflict without achieving its objectives, is China's oil reserves. When the war broke out, China stopped importing oil and began drawing on those reserves, which relieved pressure on global oil markets. This matters because it demonstrates that stockpiling and diversification of key commodities – a topic that has received intense attention since COVID – can be very effective.
The EU has identified diversification of key commodities as a political goal, just like the US and China, but compared to them has the longest way to go. For its energy needs, Europe has infamously traded its dependency on Russian gas for a dependency on American liquefied natural gas – which is also more expensive, a cost that continues to weigh on European industry’s “existential” situation. This shows that the war in Ukraine did not produce any serious diversification in European energy supply. For its metals needs, the challenge is greater still. Last week, the G7 announced a 60% target to cap dependency on rare earth imports from any single source – meaning China, which holds a market share of up to 99% in some metals. But how the mining and processing of these materials will scale up, short of major investment projects spanning multiple decades, remains the central question. It is telling that Reuters recently reported on China's vast ecosystem of rare earth laboratories and university programs – and could not identify a single comparable education program outside China.
