This report assesses the extent to which the renminbi (RMB) could displace the dollar as the reference currency for Sino-Gulf hydrocarbon trade over the coming years. While RMB-internationalization has been a long-held objective of Chinese authorities, they have been largely unsuccessful in displacing the dollar as the de-facto international trade currency, largely due to domestic financial constraints that have prevented reforms. This has dampened the appetite of global exporters to China to be paid in RMB, resulting in the Chinese currency’s inability to grow its share of international payments. For Gulf hydrocarbon exporters, reluctance to accept renminbi against oil has also been driven in consideration of the strategic partnership with the United States and the latter’s role as the security guarantor for the Gulf: oil for yuan could set a global precedent, undermining the dollar’s role, negatively affecting the US economy, and possibly jeopardizing the security relationship.
However, the past few years have witnessed major developments which could upend the status quo: GCC hydrocarbon exports are increasingly concentrated in Asia; doubts are growing on the sustainability of US monetary policy and by extension the dollar; and more importantly, barriers to RMB internationalization are being gradually lifted, through a combination of structural reforms and a change in China’s economic landscape. As GCC policymakers are increasingly finding themselves caught in the middle of a tug of war between the two major superpowers, they must tread carefully. Yet China’s insistence to pay for oil in RMB is likely to grow and hence, they should prepare for this eventuality. While this would likely upset the United States and potentially undermine the dollar to some extent, we argue that the US would nevertheless maintain its role as the Gulf’s security guarantor, given this serves first and foremost its own interests. As such, in the context of a waning security rationale for the continued existence of the petrodollar and a declining faith in the US dollar, GCC States may not have much to lose from switching to renminbi-denominated oil trade, provided the right risk-mitigation mechanisms are in place.
To prepare for such a scenario, GCC policymakers should:
- Review their foreign reserve strategy in light of expected global trade flows, in particular against global hydrocarbon demand scenarios.
- Closely monitor the pace of China’s financial reforms and measures taken to stimulate RMB internationaliza-tion, in particular with regards to relaxing barriers to capital flows and the
development of cross-border financial regulations - Develop hedging strategies to minimize impact of a potential USD devaluation that could be triggered by RMB-denominated oil trade
- Assess implications on the dollar-peg and determine how Gulf currencies could be realigned towards a basket of currencies beyond the dollar
