China buys more than 25% of Saudi oil exports.
Chinese-Saudi talks on selling oil in yuan.
If Saudi Arabia were to sell its oil to China in yuan, it would be a victory for China,
which will anyhow actively seek to undermine the US dollar’s global dominance.
Then, Will the US dollar lose its dominant status in global finance?
The status of the US dollar, including as the world’s reserve currency, depends on
its dominance in global markets, especially the oil market, where 80% of sales are done
in US dollars.
If Saudi Arabia were to break the tradition of pricing its oil in dollars, as it is contemplating
doing, others could well start to price oil in yuan or other currencies, then it will
negatively affect the US dollar’s status and potentially the entire US economy.
This question has been asked for decades, probably as early as when the old Bretton
Woods system of fixed exchange rates was thrown off the gold standard at US$35 for an ounce
of gold by the Richard Nixon White House in the early 1970s.
But the question had concerned mainly economists and politicians while being literally academic
for most people.
While this has been a demonstration of America’s financial prowess and that of its Western
allies, many pundits consider weaponizing the global financial system and the US dollar
amounts to abuse and will lead more countries, including friendly ones, to seek alternative
systems.
Now the question is What has China wanted to do for the last 2 or 3 decades?
China’s ambition to become a global superpower is well-known and the past two decades have
been instrumental in the country’s rise as the world’s second-largest economy, behind
the US.
China’s fast pace of development has threatened the US dominance in global financial markets,
with the most recent offensive being the launch of a China digital currency.
China’s digital yuan has once again come into the limelight owing to the Russia-Ukraine
war, with analysts saying Russia could adopt the yuan as a reserve currency even as the
world sanctions it.
The renminbi, or Chinese yuan, is being used by China to assert its dominance in global
markets, especially in the past 20 years as the country has been trying to internationalize
the currency.
The goal has been to create a stable international monetary environment for China’s economic
development with minimal risk of geopolitical issues.
So, What Did China thinks about financial and emerging markets?
China has been innovating in financial markets, Particularly experimenting with blockchain
and fintech, which has attracted investment in yuan-denominated instruments.
China digital currency, or e-CNY, takes cues from cryptocurrency but is centralized and
controlled by the government.
USD supremacy is linked to the US providing financial resources to generate external demand
for US goods and services.
Beijing is now attempting the same with the Belt and Road Initiative and funding infrastructure
in emerging markets.
Will China leave cryptocurrencies behind?
However, RMB internationalization and adoption as a reserve currency has been slow due to
a lack of deliverability.
For this, China is using technology to bypass the current dollar-based international financial
system altogether.
A couple of years ago China announced the digital renminbi, or the digital yuan, a currency
taking cues from cryptocurrencies such as Bitcoin and Ether.
China has banned Bitcoin and has marketed the digital yuan, or e-CNY as it is popularly
termed, as the state-issued digital currency pegged 1:1 against the fiat currency.
The e-CNY will replace the amount of cash in circulation and will have the same value
as the RMB.
The central bank will issue the digital yuan to commercial banks, which will then distribute
them to citizens.
Based on how it is structured, the digital yuan seems like a payment option that can
potentially threaten third-party payments apps such as Alipay and WeChat Pay.
However, there is a fundamental difference – e-CNY can be used for transactions without
the internet — meaning that it will function like physical currency stored on a user’s
phone or any other electronic device.
“Digital wallets are carriers that offer the IT infrastructure to support the use of
this currency,” said Mu Changchun, the director-general of the digital currency research institute
at the People’s Bank of China.
This is in line with China’s ban on private virtual currencies issued by any company.
Presently, WeChat Pay and Alipay do not allow cross-platform payments, but the e-CNY offers
more flexibility as it allows users to pay for any service anywhere.
In early April, Beijing launched the beta version of the digital yuan app for iOS and
Android, allowing users in 23 Chinese cities to pay for services using e-CNY.
This is the first public beta of the currency and Chinese citizens can sign-up to use it
through seven traditional commercial banks and two online banks report China Briefing.
Digital yuan was first launched in April 2020 on a trial basis with select users in four
cities.
The solution now has 1.2 billion users with 750 million daily active users.
So, Is the dollar going to be threatened?
The digital yuan will slowly supplant the dollar when buying things from China — the
manufacturing hub of the world.
At present, foreign investors do not have access to digital yuan unless they are domiciled
in the cities where the beta is available.
In theory, if China decides to decouple the digital yuan from its traditional banks, foreigners
may get a chance to hold the digital currency in their wallets without having a bank account
in China.
While the operations of the digital yuan are currently limited to the mainland, there is
a possibility it will make inroads in cross-border payments, which is where a threat to the USD
will ensue.
Last year, China said it was exploring cross-border payments using the digital yuan.
If China decides to settle trade using the digital yuan, it won’t need the hefty USD
reserves and will be shielded from any potential sanctions from Washington.
A cross-border digital payments system means China is setting the stage for fuller yuan
convertibility, which would accelerate the use of the currency in foreign exchange settlements.
However, China is still a long way from dethroning the US dollar.
If China is willing to trade in digital yuan, the counterparty must accept digital yuan.
China will have to build a payments infrastructure to facilitate the use of its digital yuan
and incentivize its use.
If Saudi Arabia were to break the tradition of pricing its oil in dollars, as it is contemplating
doing, then others could well start to price oil in yuan or other currencies.
This can negatively affect the US dollar’s status and potentially the entire US economy.
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