On 28 March, the Shanghai Petroleum and Natural Gas Exchange (SHPGX) made history by announcing the first-ever deal on importing 65,000 tons of liquefied natural gas (LNG) from the UAE, settled in the Chinese yuan currency. China National Offshore Oil Company (CNOOC) and French TotalEnergies finalized the transaction, and TotalEnergies confirmed that the LNG imported was from the Persian Gulf state.

China’s Global Times in a report the following day, cited the chairman of the SHPGX, Guo Xu as saying that the deal is:

“A meaningful attempt to promote multi-currency pricing, settlement and cross-border payment in international LNG trading. It also provides a new channel for international players to participate in the Chinese market, helping to build a new pattern of dual circulation in China.”

Beijing pushes yuan for energy trade

The yuan settlement of international LNG trading is a “major event in China’s market-oriented oil and gas reform, which will help promote the docking of international and domestic markets,” the report quoted experts as saying.

The development comes after Chinese President Xi Jinping announced in December 2022, during a landmark visit to Riyadh, that his country should make “full use” of the SHPGX as a platform to carry out yuan settlement of oil and gas trade.

This deal represents a departure from the decades-long practice of conducting global oil sales exclusively in US dollars. A prominent economist, who spoke to The Cradle, speculated that “the French either resorted to the yuan due to the acute shortage of Russian gas supplies to the European continent, or they have reserves in the Chinese currency that they want to use.”

The deal came as a surprise, as French President Emmanuel Macron typically does not take such steps without the approval of the US. As for the UAE, the move is part of a larger trend of Persian Gulf countries opening up to China in the aftermath of the US withdrawal from Afghanistan and the Biden administration’s shift in regional policies.

The yuan payment also follows the global polarization taking place over the Ukraine war and further demonstrates the reluctance of Persian Gulf states to align with western hostility toward Russia, China, and other US adversaries. According to the same economist, “The Emirati move cannot be separated from the changes taking place in the world. Abu Dhabi and Riyadh sense the global imbalance of power, and decided to expand the margins of their international relations.”

Yuan’s growing acceptance

Given the current global geopolitical shifts, the yuan is gaining increased acceptance as an international currency. Since President Xi Jinping assumed office, China has settled agreements with several countries in its local currency in an attempt to challenge the dominance of the US dollar in global trade.

As a result, the yuan has become the world’s fifth-largest payment currency, the third-largest currency in trade settlement, and the fifth-largest reserve currency. According to the Global Times, the yuan today accounts for 7 percent of all foreign exchange trades worldwide and has experienced the most significant expansion in currency market share over the past three years.

Experts have noted that “with the recovery of the momentum of China’s economic growth and the further opening of the financial market, the investment and hedging function of the yuan has gradually increased.”

In an article earlier this year for The Cradle, Pakistani analyst F. M. Shakil cited the Currency Composition of Official Foreign Exchange Reserves (COFER) report by the International Monetary Fund (IMF), which shows that:

“The percentage of US dollars in central bank reserves has decreased by 12 percent since 1999, while the percentage of other currencies, particularly the Chinese yuan, have shown an increasing trend with a 9 percent rise during this period.”

Shakil also noted that the “cumulative cross-border yuan settlement handled in Xinjiang (western China), the financial hub between China and Central Asia, exceeded 100 billion yuan ($14 billion) as early as 2013 and reached 260 billion yuan in 2018.”

He concluded that “dollar reserves are dwindling and the influence of the United States of America is receding in the global economy, which represents an opportunity for regional powers’ currencies and alternative payment systems.”

Rise of the petroyuan

Since 2009, Beijing has implemented a policy to reduce its reliance on the US dollar in commercial transactions. This policy includes settling the majority of its goods in foreign markets in its local currency, establishing mutual lines of credit with several central banks worldwide, and negotiating with West Asian and North African countries to conduct trade using the yuan. These efforts have started to show results recently, with a number of Asian governments partially adopting the Chinese currency.

Iraq is one of the countries that have partially adopted the yuan in trade. In February, the Iraqi Central Bank announced plans to allow direct settlement of trade from China in yuan to improve access to foreign currency and compensate for the dollar shortage in local markets, largely due to measures imposed by the Federal Reserve on money transfers leaving Iraq to prevent them from reaching Tehran and Damascus. Egypt also announced its intention to issue yuan bonds last August.

Russia has played a significant role in changing the course of the yuan by signing the Eastern Natural Gas Pipeline Agreement from Russia to China and converting the currencies of gas payments from the US dollar to the Chinese yuan and the Russian ruble.

According to the latest data from the Russian Central Bank, the yuan has become a major player in Russia’s foreign trade, with its share of import settlements increasing from just 4 percent in January 2022 to 23 percent by the end of the year. The yuan’s share of exports rose from 0.5 percent to 16 percent in the same period.

During his trip to Saudi Arabia, the Chinese president encouraged Gulf Cooperation Council (GCC) countries to use the SHPGX for yuan-based energy deals. The visit also saw China and Saudi Arabia sign over $30 billion in trade deals, which some analysts believe marks the rise of the petroyuan.

According to US-based Credit Suisse analyst Zoltan Pozsar, Russia, Iran, and Venezuela – all allies of China – account for 40 percent of OPEC+’s proven oil reserves, with the GCC making up another 40 percent. If these three states alone settle their energy exports in yuan, the petroyuan is here to stay.

A response to US policy

In a January interview with Bloomberg, during the World Economic Forum in Davos, Saudi Finance Minister Mohammed al-Jadaan said that “the kingdom is open to trading in currencies other than the US dollar in order to improve trade.”

Interestingly, despite being a stalwart US ally for decades, Riyadh is deepening its ties with key trading partners, including Beijing, as China imported over 500 million tons of crude oil and over 100 million tons of natural gas, including 63.44 million tons of LNG, in 2022.

Middle East Briefing suggests that this shift towards national currencies in global trade “is partly due to Washington’s sanctions policy against Russia.” Riyadh is now “following an increasing trend of hedging against US dollar use in trade” amid concerns that the US may use its currency as a weapon for trade and sanctions.

The trend towards using national currencies in global trade chains has continued to mature, with recent developments, including the announcement of two large-scale investment plans in China by Saudi oil giant Aramco.

The first plan involves building an integrated refining and chemicals plant in Liaoning Province, while the second plan involves Aramco’s acquisition of 10 percent of the shares of Rongsheng Petrochemical Company.

Meanwhile, the emirate of Dubai has opened its door to dealing in the Chinese currency in its global financial center, and Brazil and China have agreed to ditch the dollar and use their local currencies in their commercial dealings. In addition, Brazil and Argentina have announced the start of work on launching a common currency in their commercial dealings, dubbed “Sur.”

The petrodollar under threat

Petrodollars refer to US dollars used to purchase crude oil following a 1974 deal struck between Washington and Riyadh. The agreement not only ensured the military defense of the kingdom through US guarantees but also secured a steady stream of foreign purchases of US Treasury bonds and debt, which is a strategy of recycling the petrodollars back to Washington through Saudi Arabia’s reserves.

This transformed the ability of oil-rich Arab states to weaponize their vast energy resources against malign western policies – into a powerful economic weapon for the Americans, who, overnight, became the masters of the oil market. Today, however, with China’s rapid steps to challenge this entrenched system, there is a global spotlight on the rise of the Petroyuan versus the decline of the Petrodollar.

Asia Financial describes China’s deal with TotalEnergies as a “step forward in China’s long-term battle to reduce the power and reach of US dollar hegemony,” adding that “further such moves appear to be in the winds.” Importantly, according to Viktor Katona, lead crude analyst at Kpler:

“While the dollar will likely remain the dominant global currency in the near future, the rise of a so-called petroyuan will gain momentum as China leverages its status as the world’s largest oil importer.”

Saudi Arabia is reportedly considering accepting payment for its oil exports to China in yuan. However, any such shift is likely to be marginal, as most West Asian currencies are pegged to the US dollar, and accepting payments in other currencies increases foreign exchange risk.

Researcher P.S. Srinivas opined last year that oil deals with countries in West Asia “do not constitute a threat to the US dollar,” and the likelihood of the yuan replacing the US dollar as the benchmark currency for pricing is even more remote due to China’s capital controls and the yuan’s lack of convertibility.

While the possibility of the yuan gaining greater prominence in the global oil trade cannot be ruled out, it is unlikely to replace the US dollar as the primary currency for pricing in the oil and gas industry in the short term.

Most West Asian nations continue to maintain a vested interest in preserving the strength of the dollar, and any shift towards accepting payments in other currencies is likely to be minimal, at first. In the next few years, it will be important to keep an eye on China’s slow but steady ascent to global economic dominance and the growing usage of the yuan in international trade.

(Courtesy: The Cradle, an online news magazine covering the geopolitics of West Asia from within the region.)