Prof. ST Hsieh
Director, US-China Energy Industry Forum
March 17, 2022
It is a hot issue as the US and China are officially competing for global supremacy, money talks. Petrodollar, of course is in the spotlight. The new factor is that US has achieved energy independence and it is already exporting LNG and crude oil to the global market. Under the pressure of countering global climate change the days of crude oil are numbered. Starting with Trump Administration, US also has fully leveraged the strength of US dollars and sanctioned as many as the US likes. Even EU has been looking for alternative trade mechanism bypassing the greenback. The ongoing Ukraine war and the US led unprecedent economic sanction against Russia forces Russia and her trading partners to do business without the greenback.
Further, US greenback has already been under pressure for the excessive and increasing national debt: the US monetary policy is not sustainable. We also should understand that RMB is the only alternative for greenback, if there is a new global economic order after the ending Ukraine war then it is entirely possible for a new global financial system such as bitcoins will have to be integrated into the future system.
Why it matters if Saudi Arabia sells oil in Chinese yuan instead of US dollars
Not for the first time, China is attempting to buy oil in yuan rather than dollars, and now it may have found a willing seller. Saudi Arabia, which sells a quarter of its exports to China, is considering making these sales in yuan, the Wall Street Journal reported.
These negotiations, which have surged and ebbed over the last half-decade, are not likely to fructify soon. For one, Saudi Arabia pegs its riyal to the dollar, so any damage inadvertently dealt to the dollar will hurt its own currency. But the US’ geopolitical hegemony is based so significantly on the petrodollar—with 80% of global oil transactions denominated in dollars—that the question is ever-present. What would the world look like if the petroyuan became the oil industry’s currency of choice?
The US’ economic dominance was built on the petrodollar
The dollar’s robust status as a reserve currency owes much to the strength of the US economy. But it also derives from the dollar’s ample liquidity, which is partially a result of countries maintaining pools of dollar reserves to buy oil.
That link was forged in the early 1970s, not long after president Richard Nixon decoupled the dollar from gold. In 1974, Washington and Riyadh struck a deal by which Saudi Arabia could buy US treasury bills before they were auctioned. In return, Saudi Arabia would sell its oil in dollars—not only enlarging the currency’s liquidity but also using those dollars to buy US debt and products. The political economist David Spiro, in his book The Hidden Hand of American Hegemony, described how Saudi Arabia convinced other OPEC nations to invoice oil in dollars, rather than in a basket of different currencies.
If the yuan displaces the dollar to a sufficient degree in the annual $14 trillion global oil trade—although what that sufficient degree would be is difficult to say—countries will have to maintain yuan reserves instead. (At the moment, 2.48% of the world’s reserves are held in yuan, compared to 55% for the dollar, according to IMF data.) Oil producers receiving yuan would have to spend it on Chinese debt and imports, further strengthening China’s economy, but if the world was particularly awash in yuan, other trade might start to be yuan-denominated: metals, say, or soybeans.
The effect on both China and the US would be profound. To preserve the yuan’s new role, China would have to ensure political stability and financial transparency, of the kind the US promised in the 20th century. The US’ abilities to issue dollar debt and earn dollars for exports would decline, so its economy would shrink. In this situation, the dollar’s weakening may trigger a vicious cycle: capital flight away from the dollar and towards the yuan, debilitating the dollar further.
These events, experts say, are unlikely to transpire. Analyzing these contingencies, though, is a useful reminder of how much of our modern moment—from the success of sanctions to the progress of green energy—is predicated on the strength of the US dollar.
George Lei, Maria Elena Vizcaino and Ye Xie
Tue, March 15, 2022, 12:09 PM
(Bloomberg) — The Chinese yuan reversed earlier declines following a report by Dow Jones that Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in the currency.
The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, Dow Jones reported, citing people familiar with the matter. The offshore yuan erased a loss of as much as 0.3%, and traded slightly stronger at 6.39 per dollar.
The outbreak of the Ukraine war and the swath of sanctions imposed on Russia as a result has brought to the fore questions about alternatives to U.S. currency-based markets, and the yuan is one in particular focus in light of China’s relationship with Russia. Saudi Arabia’s relationship with the U.S., meanwhile, has been buffeted by various issues ranging from Yemen’s civil war to potential negotiations around Iran’s nuclear program.
“Many sovereigns, including U.S.-aligned countries, have realized owning massive amounts of dollars lead to an illusion of stability,” said Victor Xing, principal at Kekselias Inc. “In any moment, a political decision could lead to that dollar reserve being frozen or seized. The Saudis could be anticipating this shift, and pricing crude in yuan would increase their trade surplus in yuan and reduce dollar holdings in an organic way.”
The bump for the yuan comes at a time when Chinese assets more broadly have been under some strain. The renminbi has come under tremendous selling pressure over the past couple days amid a rout in the country’s stocks. The offshore yuan fell more than 1.1% against the dollar in the three days through March 14, its worst such drop in a year. The offshore yuan’s 200-day moving average at 6.4116 per dollar remains key near-term support for the currency.
There was no indication from the Dow Jones report on the likelihood of Saudi Arabia making such a switch nor how much of its sales might be denominated in yuan if it were to change. It does, however, signal that the conversation around alternatives to the greenback is very much a live debate.
“Perhaps it’s more of a sentiment boost to the potential for wider use of the renminbi,” said Sacha Tihanyi, head of emerging-market strategy at TD Securities in Toronto. “I see ‘some’ of its oil, so I’m not sure how relevant it is.”