Editor's note: Tian Huifang is a senior research fellow at Institute of World Economics and Politics, Chinese Academy of Social Sciences. The article reflects the author's opinions and not necessarily the views of CGTN.

The international monetary system has been dominated by the U.S. dollar for a long time. However, in recent years, the excessive interest rate hike policy of the Federal Reserve, the geopolitical risks caused by trade wars, and the rise of the U.S. debt level have seriously damaged the credibility of the U.S. dollar as an international reserve and settlement currency, significantly increasing the risk of U.S. dollar dependence globally.

Many countries have advocated the establishment of a diversified, stable and predictable international monetary system to adapt to the new normal of the global economy. In September 2022, the Shanghai Cooperation Organisation (SCO) Summit held in Samarkand adopted a roadmap to gradually expand the share of local currency settlement among member states, aiming to reduce potential financial risks and promote regional cooperation. As an important cooperation platform in Eurasia, it is of great significance to increase the share of local currency settlement within the SCO framework.

Expanding the local currency settlement share and promoting the diversification of settlement currencies are beneficial supplements to the current international monetary system, and are conducive to improving the stability and sustainability of the global financial system. International reserves and settlement currencies are the medium and token of global wealth flow and exchange, and should serve global fair trade, promote capital flow, and maintain global economic security. The abuse of currency status by the United States to achieve its political and military goals has greatly affected the credibility of the U.S. dollar and created uncertainty in the global financial system. 

Promoting financial cooperation such as local currency settlement and currency swaps, and expanding new international settlement mechanisms have become an inevitable trend. Expanding the local currency settlement share within the SCO is an important practice to maintain the correct development direction of the international monetary system, help curb the disadvantages and negative effects of the U.S. dollar centralization, and inject positive forces into international financial governance.

Further, implementing local currency settlement will deepen the long-term trade cooperation between the world's important oil producing and consuming countries, and inject stability into the global oil market. The current international oil market is facing a lot of uncertainty. The slowdown in global economic growth momentum, high inflation, frequent extreme weather, and ongoing geopolitical conflicts have increased the energy security risks in multiple countries, and the stability of global energy supply chain has also encountered great challenges. 

With the world's richest oil and gas resources and the world's largest energy consumption and import market, the SCO countries are an important force in ensuring the stability of global energy prices and supply chains. Bulk commodities such as oil and natural gas have natural advantages in conducting local currency settlement.

In recent years, major oil consuming and importing countries have explored the use of local currency for oil trading. Much of Europe's gas trade is mostly priced in euros; Middle East crude oil futures on the Tokyo Commodity Exchange are priced and settled in Japanese yen; trading of West Texas Intermediate and Brent crude oil futures on the Indian Commodity Exchange is denominated and settled in Rupee; China has also launched Renminbi-denominated crude oil futures, and reached agreements with Russia, Saudi Arabia, Brazil and others to settle in local currency. 

Energy cooperation is a key focus of the SCO economic cooperation. Conducting local currency settlement in oil and gas will provide stable expectations for regional trade, and is a pragmatic choice under the highly uncertain global economic outlook.

In addition, local currency settlement helps to strengthen trade connections and financial cooperation among the SCO member states and enhance the level of economic integration within the region. The new version of the "Programme of Multilateral Trade and Economic Cooperation between the SCO Member States", formulated in 2019, identified connectivity, trade finance, digital economy and innovation cooperation as the key areas of cooperation in the new era. 

From 2017 to 2021, the average annual growth rate of trade among the SCO member states was as high as 31.5 percent, and the total trade volume of the SCO member states exceeded $776 billion in 2021, with huge trade potential. The implementation of local currency settlement will increase international settlement channels for bilateral trade, greatly promote the convenience of trade, and reduce foreign exchange transaction costs and exchange rate risks. 

Local currency settlement can also create more cooperation opportunities and development space for the SCO member states, gradually realize the free flow of goods, capital, services and technologies, and promote economic integration within the region.

However, diversifying currency settlements will not be easy. The internationalization of currency requires certain conditions, including currency stability, liquidity, trust, and so on. For the smooth implementation of cross-border currency settlement, the SCO members should respect and trust each other, and strengthen their willingness to cooperate.

At the same time, it is necessary to strengthen information exchange and supervision cooperation to limit the impact of large-scale cross-border foreign currency flows on local financial markets and economic stability. It is also necessary to enrich the types of investment hedging instruments, deepen the offshore finance market, and ensure the steady and healthy development of the SCO currency settlement system.