Recently reported remarks by a senior Saudi official that the Kingdom might be receptive to using the Chinese currency for crude oil settlements raised the prospect of a possible increase in non-dollar oil trade between the Kingdom and other Gulf Arab oil producers.
On September 9, the South China Morning Post quoted Saudi Arabian Minister of Industry and Mineral Resources Bandar Alkhorayef as saying in an interview in Hong Kong that the Kingdom was “open to new ideas”, including using the Chinese yuan for crude oil settlements.
Pivotal developments
In March 2023, the United Arab Emirates sold its first LNG cargo to China in renminbi. Saudi Arabia has not publicly said whether it has sold any crude oil to China in the Chinese currency. However, it is possible since Riyadh and Beijing signed a three-year currency swap deal worth $7 billion that same year. There is no indication so far that this is the beginning of a trend to switch from the petrodollar to the petroyuan for oil sales, even if China is the largest importer of crude oil from the Middle East.
Talk of so-called de-dollarization in favor of the Chinese currency gained traction after the UAE and Saudi Arabia were invited to join the BRICS, an intergovernmental organization set up by Brazil, Russia, India, and China as a counterweight to the mainly Western industrial powers.
To date, only Abu Dhabi has joined formally, while Riyadh has not yet taken the final step to join. All eyes will be on the next BRICS summit, which will take place in Kazan in western Russia, from October 22-24, to see if Saudi Arabia will sign up.
The rise of non-dollar trade
A policy brief by the European Council on Foreign Relations in May this year noted that some research suggests that a portion of Saudi Arabia’s oil exports to China are already settled in the Chinese currency, citing Asia Society estimates based on data from the Bank of China.
Relations between the Gulf Cooperation Countries (GCC) and China extend beyond the oil and gas trade, and the flow of Chinese investments into the region has grown considerably in recent years. In 2020, China displaced the EU as the GCC’s largest trading partner, and bilateral trade has since grown exponentially.
According to the GCC’s statistical data, bilateral trade between the six GCC countries and China rose to $360 billion in 2021 from $283 billion in 2014, with the balance in favor of China. This burgeoning trade and inward investments into the GCC has provided Beijing with some leverage on an economic level but not on the diplomatic or security fronts, where the U.S. still dominates.
China is the world’s largest crude oil importer and traditionally sourced its oil from the Middle East. Saudi Arabia was, for long, the number one supplier of oil to China. However, it has slipped to second place after Russia, which has surged ahead of the Middle Eastern exporters since the Ukraine war by offering discounted oil to China and India, as sanctions locked it out of other major markets. It would, therefore, benefit the Gulf Arab exporters to make some concessions to Beijing to retain their share of the Chinese market.
The challenges of de-dollarization
However, there are limitations. Except for Kuwait, the currencies of the other five GCC states are pegged to the U.S. dollar, which dictates their monetary policies, making disengagement difficult. Oil and gas are priced in U.S. dollars, so any change in currency means the seller would take on foreign exchange risk.
So why has talk of “de-dollarization” resurfaced? According to David Lubin, senior research fellow at Chatham House, the most visible reason people are questioning dollar dominance is the increasing use of the dollar as a weapon, most obviously in the aftermath of Russia’s invasion of Ukraine. Speaking during a webinar on the subject on September 18, he noted that the central banks of Iran, Afghanistan, Libya, and Venezuela have also had their foreign exchange reserves frozen by the United States.
“So this growing sense that the dollar is being weaponized is one reason why dollar dominance is coming under increasing question as more countries might want to escape the risk of having their dollar assets sanctioned or their foreign exchange reserves sanctioned,” he said.
Dollar loses ground
There is a correlation with China’s emergence as the world’s second-largest economy. But that in itself is not enough to challenge the U.S. dollar’s dominance as the the Chinese currency is not a convertible currency and is bound by Bank of China capital controls. Furthermore, as Lubin notes, it is the dominant military power that tends to print the global currency.
During the last two decades, the U.S. dollar has lost some ground. Today, almost 60 percent of global foreign exchange reserves are invested in U.S. dollars, down from 70 percent in 2000. But the loss was against other convertible currencies of allied countries like the Japanese yen and the pound sterling, not against the Chinese currency, he explained.
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A threat to dollar dominance
This doesn’t mean that the U.S. dollar is untouchable, but as Lubin put it, it is “sticky” and difficult to dislodge. In Lubin’s view, the long-term threat to dollar dominance may come from technology. He mentioned mBridge in particular. It’s an initiative within the Bank for International Settlements involving the central banks of China, Hong Kong, Saudi Arabia, the UAE, and Thailand. It is designed to facilitate the exchange of local currencies on an international platform in digital format, bypassing the SWIFT system.
One possible scenario would be for mBridge to be incorporated into the BRICS, as current rotating president Russia has suggested it might be. The one policy issue that unites the nine current members of the BRICS grouping is a “common desire to escape dollar dominance,” he said. So, it’s not inconceivable to imagine a migration of the mBridge platform as the countries involved are either current or future members of BRICS.
The ties that bind the GCC to the U.S. dollar are not that easy to unravel, at least not in the near future and certainly not at this point in time when geopolitical risk is at a premium in the Middle East. For now, it would seem to be a bridge too far.
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