Why China’s yuan-for-oil push in the Middle East is no threat to the US dollar
- Any shift towards yuan settlement will be gradual as most Middle Eastern currencies are dollar-pegged, the global market is too large and the yuan still not liquid enough
- The yuan’s increasingly international role needs to be watched but does not yet pose a clear and present danger to the dollar
There is much speculation over the implications of this statement on China’s objective of pushing yuan internationalisation to weaken the US dollar’s grip on global trade. Some perspective would help.
China has had ambitious plans for a greater international role for the renminbi since 2002, when policy steps were initiated. These accelerated after the 2008 global financial crisis.
The yuan makes up 7 per cent of all foreign exchange trades globally compared to the US dollar’s 88 per cent. Talk of the yuan imminently displacing the dollar as the world’s premier currency is clearly premature.
The yuan is being positioned as the alternative. The US dollar is currently the basis for the pricing and settlement of almost all of China’s oil imports. China would undoubtedly like to see greater use of the yuan in both aspects.
Saudi Arabia is reportedly considering accepting payment for its oil exports to China in yuan. Last year, China imported nearly US$44 billion of crude from Saudi Arabia and exported about US$27 billion of mostly manufactured goods to it. Saudi Arabia could choose to accept payment in yuan for some of its crude oil and use the yuan received to pay for its imports from China.
Other countries in the Middle East may also oblige China similarly. Any such shifts are likely to be marginal, as most Middle Eastern currencies are pegged to the US dollar and accepting payments in other currencies increases foreign exchange risk. A stampede out of the US dollar into yuan by the countries in the Middle East, even for settlement, is therefore unlikely.
China’s capital controls and the yuan’s lack of convertibility limit its usability as the global pricing currency. For now, the US dollar will remain the primary currency for pricing in the oil and gas trade.
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Given the significant inefficiencies in the prevailing system of wholesale cross-border payments, the future will most likely involve digital currencies. The internationalisation of the yuan will surely benefit over time.
Even if President Xi’s audience in Riyadh goes along with his stated goal of greater use of the yuan, its impact on the further internationalisation of the yuan will be gradual.
Global commodity and financial markets will demand much more from China – liberalised financial markets, yuan convertibility, and policy certainty and transparency – before they even consider ditching the US dollar.
The yuan’s gradually increasing international role does indeed need to be watched, but it does not yet pose a clear and present danger to the US dollar.
Dr P.S. Srinivas is a visiting research professor at the East Asian Institute, National University of Singapore