Wed. Oct 5th, 2022

Prof. ST Hsieh

Director, US-China Energy Industry Forum

626-376-7460

[email protected]

March 19, 2022

The following article makes a good argument for Saudi and China plan to trade oil by Yuan and ditch the US dollars. Continued news coverage also make the Saudi-China deal more real than fact: it will take a long while to compplete the deal. The Ukraine war has rocked the global energy market, any movement such as trading oil in yuan will further destabilize the global energy market. And it is not good news for oil exporter and/or oil importer. Most likely, if any deal were to be made, the timing would be after the Ukraine war is settled and Europe recovers peace.

Further, US will not stay in the sideline, after all US is determined to compete with China for global supremacy based on the strength of US dollar so US will defend the dollar with full force. The rift between Saudi and US is basically because of the Democratic position. If Republican is in charge again, Saudi and US could be friend again without any delay. Or we can say that the current unpleasant relationship between the two nations can be attributed to Biden vs MBS, the Crown Prince of Saudi. It is personal rather than substance. MBS will lead Saudi for the foreseeable future, and he has no reason to be an antagonist to the US. After all, Biden will leave office in 2024 and gone: it is less than 2.5 years away.

The real risk for US dollars is not from China and/or Saudi, as the economist pointed: “Another factor could be the Saudis don’t anticipate the dollar to be as stable moving forward, especially if the US increases its money supply in response to economic challenges.” In fact, it is not “another factor” but the only factor. If the US could manage the domestic challenges and maintain stable polices, there is no one would like to plot against the US dollars. The sharply divided society and extreme politics in the US are the real threat to US dollars being the global currency. And only US can save the US dollars.

An economist explains why Saudi Arabia and China are looking to ditch the dollar in a new oil deal — and where Beijing could target next as it spreads yuan adoption

Phil Rosen Sat, March 19, 2022, 5:15 AM

  • Reports of a Saudi oil deal priced in China’s currency could signal unease with reliance on the US dollar, according to an economist.
  • “A potential deal in yuan is a sign that the world is looking for some counterweight to the US dollar,” Aleksandar Tomic told Insider.
  • China plays an outsized role in Africa, which is the most likely place where it could displace the dollar, he said.

A potential yuan-based oil deal between Saudi Arabia and China could signal more unease with reliance on the US dollar, while also serving as a preview of how Beijing could advance its currency in other parts of the world.

The Wall Street Journal reported recently that Saudi Arabia is in talks to sell oil to China and be paid in yuan, after trading crude exclusively in dollars for nearly 50 years. Both countries could benefit from a demotion of the dollar’s status on the world stage, according to Aleksandar Tomic, an economist, professor and associate dean at Boston College.

“While any deal would be symbolic, the Chinese are not alone in the search for a non-dollar reserve currency,” Tomic told Insider. “Other countries’ need for dollars exposes them to the US financial sector, and consequently gives the US political leverage.”

Some analysts have downplayed the chances of a yuan deal, pointing out that the Saudi riyal is pegged to the dollar, helping shield its economy from volatility.

But the effectiveness of the West’s sanctions against Russia has been a wake-up call for countries seeking to reduce their reliance on the US, while other regimes worry that they could be next if they cross Washington, Tomic said.

“A potential deal in yuan is a sign that the world is looking for some counterweight to the US dollar,” he said.

One reason Saudi Arabia is considering an oil deal in yuan is because it would create exposure to a currency other than the dollar, and affords the country a yuan-based hedge. Another factor could be the Saudis don’t anticipate the dollar to be as stable moving forward, especially if the US increases its money supply in response to economic challenges, Tomic said.

Meanwhile, China has long pushed for the yuan to supplant the dollar, and the collapse of major financial institutions in Russia means chances are higher now than ever for a sea change, he said. Plus, the international response to Russia’s invasion of Ukraine also looms.

“An extreme view would be that it reduces China’s vulnerability to sanctions that the West may impose should China do something that the US and its allies oppose,” Tomic added.

But two things that must happen for China’s yuan to establish itself as a reserve currency. First, global faith in the dollar would have to wane. This could happen if the Federal Reserve fails to get inflation under control, or if it veers from its usual predictability, Tomic said.

Second, China would have to prove the long-term stability of the yuan to win the trust of other nations. But China devalues its currency occasionally to boost exports, and countries won’t want to hold a currency like that, he noted. So Beijing would have to commit to more responsible policy.

Still, China maintains global ambitions for the yuan, and Africa is the most likely place where it could displace the dollar, Tomic said. China plays an outsized role in African economies as the continent’s largest bilateral creditor and source of foreign investment.

And China already has considerable infrastructure in place in Africa, which isn’t as contested a market as Europe is, he explained.

But for China to supplant the dollar as a global reserve currency, its economic standing would have to rise while the US’s fell.

“If the US doesn’t do anything unpredictable, then other countries will continue to trust its currency,” Tomic said. “Challenges to the dollar have come before, but none have taken hold because when things turn volatile, the US tends to be stable. So the dollar persists.”

Read the original article on Business Insider

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