Oil in renminbi: is this how China seizes power?

The report that China wants to tempt Saudi Arabia to settle oil deliveries in renminbi from now on attracted a lot of attention last week. If the country really wants to enforce a greater role in international payments, it would be better to focus on crypto initiatives.

The Chinese economy rivals that of the United States. In addition, the country is carrying more and more weight in geopolitical terms. China would like to see the renminbi also play a dominant role in the currency world. Since 2010, the country has been taking all kinds of measures to ensure that the currency becomes more important in international payments. This strategy has worked very well in the early years. Within a few years, the renminbi became one of the top five currencies in the world – after the dollar, euro, yen and pound. In 2016, the IMF even gave the currency a place in the basket of special drawing rights. Since then, however, the advance of the renminbi has stalled.

Flattening popularity
The share of the Chinese currency in international payments has fallen slightly to less than 2%. The share of global foreign exchange reserves has barely increased in recent years. China's policy of allowing the currency to move within a certain range against the dollar is a major reason for its declining popularity. Many parties prefer not to hold their money in a currency that is tightly controlled by the government. Slowly but surely, the country seems willing to loosen the currency reins a bit. Now the war in Ukraine offers a great opportunity to revive the ambition of the renminbi as a world currency. Business newspaper Wall Street Journal reported last week that talks are being held with Saudi Arabia to settle part of its oil sales in renminbi instead of dollars.

From petrodollars to oil renminbi?
It is not the first time that China wants to strengthen its position in the global foreign exchange market through the oil market. In 2018, for example, the country launched oil futures denominated in its own currency. The current talks may play a bigger role for the renminbi's position than the futures initiative. First, Saudi Arabia's relationship with the United States has deteriorated in recent years. The oil country is angry at the lack of US support for the civil war intervention in neighboring Yemen and the strong language in which President Joe Biden has condemned the murder of journalist Jamal Khashoggi.

Crypto Advantage
However, there are limits to what China can achieve in currency terms in the oil market, if only because many western countries much prefer to do business in dollars. On another level, the country is much more likely to enforce a dominant position in the currency world. In the development of the digital renminbi, the Chinese central bank is very far ahead of all crypto initiatives of central banks in the western world. The country also has an honor to uphold from a progressive point of view. China, for example, was also the country where paper money was first issued over a thousand years ago. It won't take another thousand years for China to return to the top of the world currency front, but for now the renminbi remains very clearly in the shadow of the dollar.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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