Change for the better

Donald Trump's reelection as the president of the United States in November 2024 has triggered broad unease over the future direction of the international monetary system, as it signaled that the unilateral "America First" approach of his first term would be further reinforced.

The policies rolled out by the new US administration have since added additional uncertainty to an already volatile global monetary landscape.

The current international monetary system continues to grapple with three major structural flaws: the inability to overcome the broader "Triffin dilemma", the growing spillover effects of US domestic economic policies and the intensifying weaponization of the US dollar.

The broader "Triffin dilemma" remains unresolved. To meet global liquidity and reserve demands, the US, as issuer of the world's primary reserve currency, must continuously supply dollar liquidity to the rest of the world. This has led to persistent US current account deficits and rising net external liabilities, weakening the dollar's credit foundation and prompting foreign investors to question its long-term sustainability.

The strong spillover effects of US domestic policies underscore the asymmetry in the current international monetary system. Monetary and fiscal policies formulated in line with US domestic conditions often exert global influence. During cycles of quantitative easing or interest-rate hikes, these policies can trigger capital-flow volatility and sharp exchange-rate fluctuations in emerging markets and developing economies.

The growing weaponization of the US dollar has intensified the risk of fragmentation in the international monetary system. The freezing of Russia's foreign reserves by the US and its allies, and the exclusion of Russian financial institutions from the SWIFT network, indicate that dollar-based financial tools are increasingly used for geopolitical purposes. This has shaken the credibility of the post-Bretton Woods framework and prompted many developing countries to reassess the security of their foreign reserves.

The US administration is systematically challenging the postwar international monetary order on four major fronts: imposition of "reciprocal tariffs", redesign of the global role of US Treasury securities, deliberate weakening of multilateral institutions and advancing a strategic digital-currency agenda. These moves could set off a new round of restructuring in the global financial system.

First, "reciprocal tariffs" challenge the international trade order based on the World Trade Organization and the principle of comparative advantage. The global "reciprocal tariffs" framework promoted by the US administration represents a fundamental denial of the WTO's most-favored-nation rule and the free-trade principles anchored in comparative advantage.

Second, the effort to redefine the role of US Treasury securities. The report by Stephen Miran, titled "A User's Guide to Restructuring the Global Trading System", proposes encouraging US trading partners to convert their short-term holdings of US Treasuries into ultra-long-term low-interest or zero-interest bonds, while relying on swap lines with the Federal Reserve to address potential liquidity shortages. Although this could temporarily ease the US' external debt burden, it would fundamentally undermine the institutional basis of US Treasuries as the world's primary "safe asset".

Third, weakening global multilateral institutions by shutting down the US Agency for International Development and pressuring the International Monetary Fund. The termination of USAID marks a highly consequential decision. It represents not only the US' voluntary relinquishing of its long-standing role as a global development-assistance leader, but also a structural weakening of the postwar global aid architecture.

Fourth, consolidating digital-dollar dominance through strategic Bitcoin reserves and accelerated development of US dollar-based stablecoins. By integrating decentralized crypto-assets, stablecoins and digital-finance infrastructure, the US administration aims to reinforce US monetary dominance in the digital age. Its support for dollar-based stablecoins positions them as a key tool for strengthening the international role of the dollar. Compared with the traditional dollar system built on the oil trade and the SWIFT network, dollar stablecoins create a blockchain-based "new dollar cycle", serving as an additional source of "digital dollar liquidity" alongside traditional markets.

The international monetary system is entering a period of transition, and the US administration's agenda is acting as a catalyst for reform. In this shifting landscape, the future system is likely to evolve toward a fusion of multipolarity, regionalization and digitalization. A multipolar currency configuration centered on the US dollar, the euro and the renminbi, along with a multilayered global financial safety net driven by regional mechanisms and a hybrid payment ecosystem where digital and traditional currencies coexist, is about to emerge.

The Recommendations of the 20th Central Committee of the Communist Party of China for Formulating the 15th Five-Year Plan (2026-30) for National Economic and Social Development call for steps to advance the internationalization of the renminbi, pursue greater openness of renminbi capital accounts, and build a homegrown, risk-controllable cross-border renminbi payment system. In the face of the shocks generated by the US administration, the trajectory of renminbi internationalization requires strategic adjustment — shifting from a "globalization-first" model toward a "region-first, globally linked" approach to strengthen the currency's international influence and enhance China's institutional voice in the global monetary system.

In pursuing a "region-first" strategy, the internationalization of the renminbi could advance on five key fronts.

First, it is important to build an Asian financial safety network by leveraging regional arrangements such as the Regional Comprehensive Economic Partnership and the Chiang Mai Initiative Multilateralization, reviving East Asian financial cooperation, and expanding local-currency swap and settlement mechanisms with the Association of Southeast Asian Nations and Central Asian partners.

Second, measures can be taken to promote local-currency settlement in international trade, encouraging the use of the renminbi for commodity-trade settlement among Belt and Road partners.

Third, offshore renminbi market infrastructure can be developed to expand clearing bank networks in major financial centers such as Hong Kong, Singapore and London to strengthen cross-border settlement capabilities.

Fourth, a regional renminbi bond market should be built, encouraging neighboring economies to issue "Panda bonds" in line with local conditions to help the renminbi advance as a reserve currency.

Fifth, the development of the digital renminbi should be advanced in a steady and orderly manner.

To advance the internationalization of the renminbi in the process of global linkage, China should advance a "new trinity" strategy as follows: expanding renminbi use in the cross-border trade of major commodities such as oil and minerals, increasing the supply of high-quality renminbi-denominated financial assets, and strengthening the interoperability between the Cross-Border Interbank Payment System and alternative payment frameworks to SWIFT.

It is also important to accelerate the rollout and expansion of the mBridge project — a multiple central bank digital currency platform — to enhance the renminbi's global clearing infrastructure, while maintaining a well-calibrated pace of capital-account opening and ensuring sufficient exchange-rate flexibility to reduce speculative behavior associated with renminbi internationalization.

Zhang Ming is the deputy director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences and a senior research fellow at the National Institute for Global Strategy at the CASS. Chen Yinmo is a lecturer at the Business School at Beijing Language and Culture University. The authors contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.