Key facts:
Saudi Arabia to accept yuan in oil trade, challenging dollar dominance
China is moving forward with its strategy to increase the use of the yuan in global transactions.
Although the dollar’s dominance remains firm globally, the changes highlight that a process of transformation of the global financial system is underway, in which China and its national currency, the yuan, have been playing an important role. Now, the Asian nation would take a key step by securing new agreements with Saudi Arabia.
As Bandar Al-khorayef, Saudi Arabia’s Minister of Industry and Mineral Resources, points out, his country is “open to new ideas,” including the use of the yuan in oil trade deals.
What the senior official is talking about is a broader adoption of what is already in China. They are calling as petroyuan which itself is short for the use of the yuan in cross-border crude oil settlements.
The move is strategic if one takes into account that, last June, Saudi Arabia decided not to renew the pact established with the United States in 1974. That agreement was the one that contributed, to a large extent, to The dollar became the world’s reserve currencyas previously reported by CriptoNoticias.
In what was a historic event, in 1974, the petrodollar was established as a US strategy to preserve the dominance of the dollar. At that time, the Nixon administration established an agreement with Saudi Arabia to The country would only sell oil in exchange for US dollars. In return, the US pledged military support and arms sales to Saudi Arabia, and offered preferential terms on Treasury bonds.
This agreement contributed to the creation of the Organization of the Petroleum Exporting Countries, which controlled 80% of the world’s crude oil reserves and channeled its profits into U.S. Treasury bonds, allowing the U.S. to run large deficits to fund social programs and the military-industrial complex without devaluing its currency.
Now in a strategic move China is seeking to boost the yuan’s reach in international trade in general. a plan This was highlighted in 2022 when Chinese President Xi Jinping met with Gulf Cooperation Council (GCC) leaders in Saudi Arabia to discuss deepening ties between his country and those in the Gulf.
The first item on the agenda at that time was to increase trade exchanges between China and the GCC, with the former pledging to “constantly and in large quantities import crude oil from the GCC” as well as increase imports of natural gas.
Since then, it has signed a series of agreements, including with the member countries of the Shanghai Cooperation Organization (representing 40% of the world’s population) to increase trade with each other, using their local currencies.
At this first China-GCC summit, President Xi urged the Gulf monarchs to “make full use of the Shanghai Oil and Gas Exchange as a platform to conduct oil and gas sales using the Chinese currency.” And then, earlier this year, Saudi Arabia suggested it might accept Chinese yuan instead of US dollars for the oil it sells to China.
Shortly after, the yuan overtook the dollar for the first time in China’s cross-border trade. In 2023, the Asian country processed a record of nearly $600 billion worth of yuan to fulfill cross-border payments and receipts.
De-dollarization is decades away
Joyce Chang, global head of research at JPMorgan, holds that although the use of alternative currencies other than the dollar is increasing, It takes a long time for a real de-dollarization. In this regard, he adds that “it is likely to take decades to achieve a significant erosion of the dollar’s dominance.”
Chang also says that the dollar’s dominance is consolidated by structural factors such as robust capital markets and strong rule of law. However, he warns that this ongoing transformation, driven by the desire for greater control and independence of the dollar, is an underappreciated risk that investors should monitor closely.
Cross-border transactions are shifting due to sanctions against Russia and China’s push to strengthen the yuan, which is leading to greater diversification in commodity markets. Therefore, the analyst points out that while the dollar’s demise may be exaggerated, The changing landscape of global finance requires careful navigation. This is because the changes could affect long-term investment strategies.
