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China economy
OpinionComment
P.S. Srinivas
P.S. Srinivas

Macroscope | 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

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Chinese President Xi Jinping shakes hands with Saudi Crown Prince and Prime Minister Mohammed bin Salman on arriving at Al Yamamah Palace in Riyadh, Saudi Arabia, on December 8. Photo: Saudi Press Agency via AP
P.S. Srinivas
On December 9, President Xi Jinping said in Riyadh that even as China continues to import large quantities of crude and natural gas from the Middle East, it intends to “make full use” of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade.
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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.

China has permitted international investors into its capital markets, introduced a more flexible exchange rate regime, allowed offshore bond issuances, entered into bilateral currency swap agreements with about 40 countries, and launched the Cross-Border Interbank Payments System, an international yuan payments, clearance and settlement system.
Offshore yuan trading is now possible in all time zones with Hong Kong, London and Singapore as leaders. The International Monetary Fund included the yuan in the basket of currencies that determine the value of its currency, the special drawing rights (SDR) in 2016.
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Nearly two decades on, where does the internationalisation of the yuan stand? Based on the latest available data, the yuan accounts for less than 3 per cent of global foreign currency reserves and about 2 per cent of global payments (the US dollar’s shares are nearly 60 per cent and 42 per cent respectively).
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