•Today, nearly two billion people in 25 countries are suffering due to US sanctions.
•China’s oil futures market is vital in allowing both domestic and foreign investors .
Image: FILE
For about a decade now, the world has witnessed multitudinous attempts to dethrone the dollar as the reserve currency bolstered by the rise of crypto-currencies and expedited by China’s increasing convergence of interests with Russia.
China and Russia have been seeking to implement de-dollarization policies due to their growing frustration over the weaponization of the dollar that continues to rattle global commodity markets.
The Russia-Ukrainian crisis has brought to fore questions about alternatives to the US greenback, particularly in global trade and crude oil markets.
Today, nearly two billion people in 25 countries are suffering due to US sanctions.
This has motivated America’s economic rivals to diversify away from the greenback by employing de-dollarization mechanisms as the foremost anti-sanction measure.
Since 2013, China as a prospective de-dollarizer has formed an early network of Renminbi’s (Rmb) users by slowly allowing the Rmb to make headway in cross-border transactions, particularly through its Bilateral Swap Agreements (BSA).
China first partnered with the emerging markets of ASEAN nations and later expanded to Argentina, Indonesia, India, South Korea, Pakistan to name but a few.
Whereas BSAs have historically been utilized on two fronts as an intermediary; in the case with Argentina and Pakistan but also to safeguard against liquidity crunches; as in the case with Turkey - Beijing has used the trade agreements to internationalize yuan.
Overall, these Chinese investments stretching from Africa to Central Asia have given the Chinese unprecedented political leverage and over the years, made China’s goal of market diversification a reality.
One of China’s notable internationalisation agendas against the US dollar is the far-sighted measures such as the creation of a yuan-centred trading and investment system via the Belt and Road Initiative and the Asian Infrastructure Investment Bank with the highest number of beneficiaries being in Central Asia and Africa.
The renminbi’s inclusion in the International Monetary Fund-Special Drawing Rights in 2016 further, buttressed China’s initiatives and strategies for the Rmb to play a greater role in international finance and trading.
Additionally, the launch of yuan-priced oil contracts in 2018 with the Shanghai International Energy Exchange (INE) has created what widely came to be known as the “Petro-Yuan”.
Here, the Chinese targeted the crude oil market where it is still dwarfed by dollar-denominated international benchmarks of West Texas Intermediate (WTI) and Brent.
In 2015 China launched the Cross-Border Interbank Payment System (CIPS) its SWIFT equivalent of financial transfer system to boost international use of China’s currency in trade settlements.
With more investments in CIPS, this will accelerate a global economic realignment coupled with Russia’s SPFS, in the long run, might reduce reliance on the US dollar.
These Chinese strategic initiatives are primarily focused on the global commodity markets; oil being the world’s largest traded commodity, currently estimated to be worth $14 trillion.
China’s oil futures market is vital in allowing both domestic and foreign investors to hedge against or speculate on oil price movements, thus ensuring certainty and stability.
The pricing of oil future contracts in yuan is a smart move by China. Over the last six years, there have been talks between China and Saudi Arabia to price and receive some of its oil sales in yuan rather than in dollars.
With an intensifying de-dollarization trend across the world, this could signal the beginning of a new conversation around alternatives to the greenback.
Even though, both China and Saudi Arabia run a dollarized economy both the Riyal and the Renminbi are still pegged to the US. dollar.
On one hand, China is the world’s largest manufacturing nation, and the world’s second-largest economy by nominal GDP, which makes it's economy hard to topple as indicated during the US-China trade wars in 2018.
On the other hand, the US has for the last seventy-eight years instituted a strong dollar policy ensuring that the dollar remains the anchor of the international monetary system.
Whereas China’s leaders have taken major steps towards relieving the Dollar dependence on Beijing, the Russo-Ukrainian war presents an opportunity to test both China’s and Russia’s de-dollarization tools and how it could provide immunization against Western sanctions with an intention to revolt against the dollar and thus, creating a rise of a new financial world order.
The biggest hurdle to the internationalization of the yuan is its relative non-convertibility in most places around the world exacerbated by China’s state-run financial system.
Even without the yuan’s flaws as mentioned above, it is doubtful if the Shanghai crude oil future contracts will even make a dent in the dollar dominance alongside Brent and WTI.
Only time will tell if the emergence of Petro-Yuan succeeds or flops with projections indicating that the Chinese yuan will account for 5% to 10% of global foreign exchange reserve assets by 2030.
The yuan currently accounts for about 3% of global foreign exchange reserve assets, putting the yuan a distant third behind the US dollar and the euro.
The question experts are asking at a time when the world appears to be splitting into rival democratic and authoritarian blocs, over the longer term, will the weaponization of the dollar and the dollarized economies work against US interests? Will it boost international usage of other currencies such as the euro and yuan?
With recent developments, building and investment into alternative financial structures to SWIFT - both China and Russia have demonstrated to the world that the dollar's hegemony can be challenged but it is still too early to state if you can run the dollar out of town in the near future.
What is certain, however, is the fact that in the next decade or so, the international economy will be shared by three currencies; namely US Dollar, Euro and Renminbi.
The best China can do for the time being is to robustly internationalize the yuan before thinking of de-dollarizing as the Petro-Yuan venture with Saudi has shown.
Asaaska Labarakwe is a Public Policy Analyst: [email protected]