Petrodollar vs Petroyuan: Can China overthrow US in the global oil market?

We are all well aware that all international trade is carried out in dollars. That trend might be seeing a change in recent times with more countries trying to push trade in their currency. The Indian rupee is also making great strides in this matter, with now 18 countries — Russia, Singapore, Sri Lanka, Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Seychelles, Tanzania, Uganda and the United Kingdom — being allowed to trade in Indian currency and give up dollar as cross-border transaction mode. Amid these talks and the ongoing Russia-Ukraine war , there is now buzz around the petroyuan. In fact, China has been increasingly pushing the yuan as a currency for oil deals, challenging the dollar’s lead in commodity markets and trying to weaken US hegemony. But what exactly is a petroyuan? How does it compare to a petrodollar? And why is China pushing more countries to use the petroyuan? We take a closer look and give you all the answers. Petroyuan explained Just as there is a petrodollar so is there a petroyuan. For the unaware, petrodollars are crude oil export revenues denominated in US dollars. The term gained currency in the mid-1970s when soaring oil prices generated large trade and current account surpluses for oil exporting countries. Oil sales are denominated in dollars because the US dollar was — and remains — by far the most widely used currency. It is important to note here that petrodollars are not a distinct currency; they are simply US dollars accepted as payment by an oil exporter. [caption id=“attachment_12346172” align=“alignnone” width=“640”] In an attempt to compete with the petrodollar, China came up with the petroyuan. It is intended to be used for oil trading. Reuters[/caption] In an attempt to compete with the petrodollar, China came up with the petroyuan. It is intended to be used for oil trading. In fact, in 2017, the People’s Bank of China and the Central Bank of the Russian Federation agreed to carry out oil transactions in the Chinese currency through the platform of the Shanghai Oil and Natural Gas Exchange, the first step towards converting the yuan into a petrocurrency. In late March, the global trade of crude oil recognised a new entrant to the marketplace. A product denominated in the Chinese yuan renminbi (CNY, RMB) known as the “petroyuan” was launched on the Shanghai International Energy Exchange (INE). Also read: What Xi Jinping’s historic third term as president means for China, India and the world Rise of petroyuan Since being introduced many of China’s major oil suppliers began accepting oil payments in yuan. Russia, Iraq, Indonesia and a few other countries also have engaged in non-dollar trades. China has for some time been buying increasing amounts of oil and liquefied natural gas from Iran, Venezuela, Russia and parts of Africa in its own currency — petroyuan. In March of 2022, Saudi Arabia was in talks with Beijing to price some of its oil sales to China in yuan. According to a report in the Wall Street Journal, the talks with China over yuan-priced oil contracts have been off and on for six years but accelerated in 2022 as the Saudis grew increasingly unhappy with decades-old US security commitments to defend the kingdom.

In December last year, China’s president Xi Jinping said in Riyadh that Beijing and Gulf nations should make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade. China and states of the Gulf Cooperation Council (GCC) are natural partners for cooperation, Xi said in a speech at the China-GCC summit, according to a Reuters report. “China will continue to import large quantities of crude oil from GCC countries, expand imports of liquefied natural gas, strengthen cooperation in upstream oil and gas development, engineering services, storage, transportation and refining, and make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade,” he said. These comments led to Credit Suisse analyst Zoltan Pozsar writing in a note to his clients, that this marked “the birth of the petroyuan”. According to Pozsar, “China wants to rewrite the rules of the global energy market”, as part of a larger effort to de-dollarise the so-called BRIC countries of Brazil, Russia, India and China, and many other parts of the world after the weaponisation of dollar foreign exchange reserves following Russia’s invasion of Ukraine. As recently as February this year, Iraq too agreed to allow trade from China to be settled directly in yuan instead of the US dollar. [caption id=“attachment_12346222” align=“alignnone” width=“640”] Saudi Crown Prince Mohammed Bin Salman shakes hands with Chinese president Xi Jinping during the China-Arab summit in Riyadh, Saudi Arabia in December 2022. Beijing has been pushing for the Kingdom to switch over to petroyuan. File image/Reuters[/caption] Purpose behind the move to petroyuan But why the move from petrodollar to petroyuan? For the Chinese, who are today the world’s top oil importer, they see this move as only logical. But beyond that, moving away from the petrodollar is a strategic priority for countries like China and Russia. Both aim to ultimately reduce their dependency on the dollar, limiting their exposure to US currency risk and the politics of American sanctions regimes. As experts state — such a move would chip away at the US dollar’s role as the world’s reserve currency, spurring “de-dollarisation.” Also read: Russia-China stitches ‘alliance’: What this means for US hegemony A few hurdles in the way However, the move from petrodollar to petroyuan has its own struggles. In Saudi, officials have been sceptical as switching millions of barrels of oil trades from dollars to yuan every day could rattle the Saudi economy. Additionally, doing more sales in yuan would more closely connect Saudi Arabia to China’s currency, which hasn’t caught on with international investors because of the tight controls Beijing keeps on it. Another reason why China’s ambitions to price oil in yuan is tough is the currency itself. CNBC explained in a report that the yuan is not yet fully convertible, it’s fixed daily, prone to intervention and subject to capital controls. “My biggest reservations are the role of the Chinese central government, potential state intervention and favouritism toward Chinese companies,” John Driscoll, director of JTD Energy Services in Singapore and a former oil trader whose career spans nearly 40 years, told CNBC. But things are moving in China’s favour and the petroyuan is being accepted across the world. As Gal Luft, co-director of the Institute for the Analysis of Global Security, a Washington based think tank focused on energy security told CNBC, “Game changer it is not — at least not yet. “But is another indicator of the beginning of the glacial, and I emphasise the word glacial, decline of the dollar.” With inputs from agencies Read all the  Latest News ,  Trending News ,  Cricket News ,  Bollywood News , India News  and  Entertainment News  here. Follow us on  Facebook ,  Twitter  and  Instagram .