At present, the world is in the midst of an intense phase of global trade and tariff disputes. In principle, such disputes should be analyzed from a trade perspective. However, many scholars also argue that behind these trade and tariff conflicts lies a monetary dimension — and, by extension, the very nature and role of the international monetary system itself.

The United States now faces a series of choices and dilemmas. On the one hand, it seeks a more competitive dollar exchange rate to boost the repatriation of manufacturing and improve its trade balance. It also hopes to ease the excessive burden of the dollar's international responsibilities, while continuing to use the dollar as a geopolitical tool for sanctions. On the other hand, the US wants to maintain the dollar's dominant role as the global reserve currency — both in international trade settlements and in global financial markets. This creates two inherently contradictory goals. For one, the US hopes for a weaker dollar — one with fewer obligations. It also wants to preserve low borrowing costs and maintain the greenback's supremacy in the international monetary system, including its use as a sanctioning instrument when needed. Many analysts have pointed out that it is unrealistic to achieve both goals simultaneously. The dollar will inevitably have to make trade-offs — gaining in some areas while losing in others — and may be forced to cede part of its dominant position in the global monetary order. In my view, it is not entirely impossible for the US to achieve both objectives at once. The key question is whether any other currency in the international monetary system dares and is capable of challenging the current status quo. Such a challenge need not be explicit — gradual substitution of the dollar in certain practical applications could be enough to shape a new landscape for the international monetary system. So, who might step in to fill the gap left by the dollar? There are four main possibilities.

The euro The euro is the second-largest currency in the IMF's Special Drawing Rights basket after the US dollar, and the European Union or eurozone has the economic strength of a mature economy. However, the euro faces its own challenges. The relationship between the EU and the eurozone still needs to be clarified. The European Central Bank's relevant functions appear constrained by certain limitations, lacking sufficient authorization. A true reserve currency must be backed by a fiscal counterpart, yet the euro lacks a unified fiscal authority and corresponding debt instruments. Furthermore, the eurozone's capital market integration has yet to yield a clear solution. Under such circumstances, the euro will need to strengthen its internal foundations before it can meaningfully step into the dollar's role.

The renminbi

Initially, the renminbi, also known as the yuan, was not intended to play a major role in the international monetary system. China, as a developing country with a relatively underdeveloped financial sector, focused for over a decade on promoting the use of the renminbi in cross-border trade and investment — always respecting the voluntary choice of market participants rather than imposing its use.

Following the outbreak of the 2008 global financial crisis, when the US Federal Reserve primarily targeted economies such as Europe and Japan in its currency swap operations at the time, some Asian countries, such as South Korea and Malaysia, began turning to China for support after experiencing foreign exchange liquidity shortages. China responded by promoting local currency swaps, first with the Korean won and the Malaysian ringgit. Since then, the internationalization of the yuan has been propelled forward. However, the People's Bank of China, the country's central bank, maintained a low-key stance at the time. After all, China neither lacked US dollars nor intended to replace the dollar's status. It was merely responding to market demand.

By 2014, renminbi internationalization was formally placed on the policy agenda, and in 2016, the Chinese currency successfully joined the IMF's SDR basket, becoming one of its five constituent currencies alongside the US dollar, the euro, the British pound sterling and the Japanese yen. Over the years, the renminbi has been advancing amid volatility — ranking second in global trade finance and third in trade settlement — yet its overall progress has been relatively slow. For instance, its share in global financial transactions and foreign exchange reserves still ranks only sixth.

If the US adopts more protectionist trade and tariff policies, the yuan could gain a greater role. Currency diversification itself would help advance reform of the international monetary system. However, this also requires China to push forward with domestic reforms, especially monetary reforms, including greater capital account convertibility and freer use of the renminbi, as the IMF describes it, by reducing unnecessary controls.

The main concern about this move is potential capital outflows. Whether China can decisively allow the yuan to assume a greater international role depends largely on the analytical framework we adopt. Different frameworks yield different conclusions. Through strengthened research and discussion, and by drawing on domestic and international experiences and lessons, we should be able to refine our analytical framework and strive to achieve greater consensus.

SDRs

Another potential option are SDRs, which refer to an international reserve asset created by the IMF in 1969. If none of the five currencies in the SDR basket has the capacity to individually challenge the dollar's dominance, could a basket of currencies collectively play that role? Expanding the use of SDRs would align with China's advocacy of multilateralism and recognition of a multipolar world. A diversified international monetary system would, in fact, be safer, more stable and more resilient — because even if one or several component currencies fluctuate, the overall volatility of the basket would remain limited.

Some may argue that SDRs are not a true currency — merely a unit of account — since they have no issuer and the IMF does not function as a global central bank. That argument sounds quite reasonable, but success depends on human efforts. If we never attempt change, SDRs will remain a bookkeeping unit forever, and the IMF will never evolve into a central banking role. If we seize the moment and keep pace with the times, however, circumstances can change.

If the international monetary system is to undergo change, it requires an opportunity. The 2008 global financial crisis, triggered by the US subprime mortgage crisis, presented a valuable chance for reform, but at the time, the US did not clearly define its stance, making it difficult to advance reforms. Today, as the greenback faces structural dilemmas, we must seriously consider whether this could be another window for change. Will the US continue to insist on a dollar role that exceeds its economic size and national strength, or will it allow some wiggle room?

Even as a mere unit of account, SDRs can be significant. For example, reserve currencies should remain stable. If everything is measured against the dollar as the 100 percent reference standard, then any exchange rate fluctuation will appear solely as the fluctuation of other currencies against the greenback — even when the volatility may actually stem from the US dollar itself. When the US currency undergoes major adjustments, using it as the sole reference distorts the perception of stability of other currencies.

Moreover, the predominance of the dollar as a benchmark affects risk management tools, such as derivatives, which are mostly dollar-denominated. Should the US dollar, as the benchmark, encounter issues or flaws, numerous aspects of risk management — from measurement to behavior — will become distorted.

Similarly, for financial institutions engaged in international business, dollar-based balance sheets require converting all non-dollar transactions into dollars, introducing further bias and distortions.

Thus, the international monetary system has room for SDRs to assume a greater role — but much depends on how US authorities perceive the dollar's future, and whether the world can seize the moment to build consensus. This is a topic well worth serious discussion.

Digital currencies

Finally, a fourth and increasingly discussed possibility is digital currency. From a developmental perspective, cryptocurrencies and digital currencies are often categorized into two types — digital assets and stablecoins. Cryptocurrencies are widely regarded as lacking the functions of money, while stablecoins are considered equivalent to currency. Yet whether stablecoins are genuinely "stable" remains a subject for debate. Even if stability is achieved, stablecoins still lack the weight to function as a member of the international monetary system capable of partially replacing the dollar. This is because they must first establish themselves in payment facilitation, but they have not yet become independent currencies. Consequently, stablecoins must be pegged to a specific currency, such as the US dollar, thereby expanding rather than replacing the greenback's domain. However, broad "dollarization" remains controversial and is something many countries seek to avoid.

In sum, advancing reform of the international monetary system and enabling other currencies to partially substitute for the dollar depends in large part on reaching international consensus and finding the right timing and momentum for reform — including how the US itself weighs the costs and benefits of maintaining the dollar's dominance.

The writer is former governor of the People's Bank of China. The article is based on the author's presentations at a closed-door session of the 2025 Tsinghua PBCSF Global Finance Forum and No 459 CF40 Bi-Weekly Roundtable themed "Opportunities and Prospects for Renminbi Internationalization".

The views do not necessarily reflect those of China Daily.