Xi Jinping wants the renminbi to become a reserve currency, with US economist Kenneth Rogoff predicting this week that such an eventuality would happen in the next five years. This is never going to happen. The simple reason is that, on current trends, the world will no longer need a reserve currency.

To see how the new international system will operate, consider the example of trade between China and Indonesia. The two countries’ central banks will agree a deal in their local currencies, swapping, say, 100 billion yuan for 250 trillion rupiah. Now, let’s imagine that China’s BYD exports electric cars to Indonesia and invoices the importer in renminbi. The importer — or rather its bank — goes to Bank Indonesia with rupiah and buys the renminbi it needs to settle its accounts payable. Meanwhile, Chinese importers of Indonesian coal do the reverse, buying rupiah from the People’s Bank of China to pay their import bills. Every so often, the two central banks will compare their books and settle their outstanding balance in whatever assets they have agreed to use.

The first thing to note is that this bilateral trade occurs entirely without using the US dollar. At no stage is anyone in America informed of the underlying transactions, which take place entirely in local currencies. The second thing to note is that importers and exporters both settle directly in their own local currency. Companies can close their foreign currency accounts with international banks, redeploy the employees who processed their international payments, and fire the lawyers who dealt with problems in their international transactions. And the third thing to note is that because China is the biggest exporter in the world, the role of the renminbi will increase massively.

But because it is only the bilateral balances that get settled, the system will not require a reserve currency. These balances can probably be settled in gold; because the world cannot have a deficit with itself, there will be enough gold to go around.

What if a country’s central bank finds itself sitting on excess US dollar reserves that it no longer needs? It could swap these reserves with the central bank of a third country which may need US dollars. For example, the Bank of Japan could provide US dollars to the Reserve Bank of India. In return, it will receive rupees, which eventually might be used by Mitsubishi to build power plants in India.

As for the world at large, this means that all central banks will be equal. The US budget deficit will have to be financed by US savers: there will be no more imperial privilege.

Countries with surpluses will be able to choose which countries they want to establish swaps with. This means deficit countries will no longer be able to live above their means forever. If a country’s central bank starts printing money to finance the national deficit, its currency will collapse immediately. This could be very bad news for the euro.

This implies that the world will split into monetary zones, each with a dominant central bank at the centre organising and monitoring the swaps. There will be fears of a major slowdown in trade between these zones, and the real question will be how to settle trade between them. Most probably this will be done in gold. Another consequence will be that the centralised system controlled by the US will be replaced by a decentralised system under the control of no one in particular. A centralised system is by nature fragile, whereas a decentralised system is anti-fragile.

With oil purchases settled in local currencies, countries will no longer need to hold reserves in US dollars. The central banks of oil-exporting countries will have to agree to swaps with the central banks of oil importers. If large oil or gas reserves mean an exporter has a structural surplus, it will have to create a savings entity — a sovereign wealth fund — to buy shares, bonds or real estate in oil-consuming countries. In this way, it will provide long-term capital to the countries to which it has been extending swaps.

In short, the global economic cycle dominated by the US is over. Each country or group of countries will have its own economic cycle, determined by local governments and central banks. As far as financial markets are concerned, a sensible diversification strategy between countries will become central to achieving satisfactory investment results. In this world, US stock market capitalisation as a share of global market cap should be no more than 40%. Most of the swaps will be settled among geographical neighbours through a regional financial centre, such as New York, London or Hong Kong.

As a result, the world will no longer need the IMF or the World Bank — or international banks at all. The world will no longer need SWIFT, as the working capital in US dollars required to operate this obsolete system will be free to go elsewhere.

This is an edited version of an article originally published in the Gavekal newsletter.