Dollar is still king, but for how much longer?
- Recent deal between China and Saudi Arabia is a small but important step as world wakes up to the consequences of denominating almost all global trade in the American currency
The increasingly close relationship between China and Saudi Arabia has taken another significant step forward. The central banks of both countries have agreed on their first currency swap worth a maximum of 50 billion yuan (HK$55 billion) over the next three years.
In immediate terms, the pact will foster bilateral commerce denominated in both the yuan and the riyal. In the longer term, it augurs a petroyuan future as the two countries are already the most important trading partners of each other.
In a global political economy long dominated by the petrodollar, this could be the beginning of a seismic shift. It has been a very long time coming.
Almost a year ago, President Xi Jinping made a historic visit to Riyadh, followed by Hong Kong Chief Executive John Lee Ka-chiu in February. A flurry of deals followed.
The Shanghai Stock Exchange and its Saudi counterpart have started collaboration on cross-listings, including exchange-traded funds (ETFs), financial technology (fintech), environmental, social and governance (ESG) and data exchange.
China, Saudi Arabia central banks sign currency swap accord to foster trade
The Hong Kong Monetary Authority, the city’s de facto central bank, and the Saudi Central Bank have enhanced ties covering the latest technologies in regulatory supervision and monitoring, and in financial fields such as tokenisation and new payment systems.
However, the latest currency swap pact will be the most important. It means trade can be conducted in local currencies, instead of defaulting to the US dollar. This may be seen as a challenge to US dollar dominance. Perhaps in the longer term, it is. But there is a good economic reason.
The current US federal interest rate of 5-plus per cent has pushed the dollar to historical levels against most other currencies, making trade denominated in the dollar more expensive.
There are obvious advantages for two big trade partners like China and Saudi Arabia to be able to utilise a local-currency option, which will help relieve pressures from having to trade in a more expensive currency.
Global “de-dollarisation” may take a while yet, but the trend already reflects cracks in a global economy long used to US currency settlements.
The yuan may or may not pose a challenge to dollar hegemony, but its internationalisation continues apace – to the benefit of both the Chinese and global economies.
