The volume of trade, and the scope for using the renminbi for international payments, could grow as more countries diversify out of US dollar risk. Countries including Iran, Venezuela and Indonesia are already settling some of their China oil trade in renminbi. Note that Russia’s fourth largest oil producer, Gazprom Neft, has been settling all its crude oil sales with China (one-third of its total sales) in renminbi since 2015. If both Saudi Arabia and Russia work further with China, the amount of renminbi-denominated oil trade processed via CIPS could rise sharply. Russia adopted China’s CIPS (Cross-Border Interbank Payment System) for trading oil, bypassing SWIFT. The state visit furthered China’s 2018 initiative to shift more trade in oil to the renminbi from the US dollar.įollowing US-led sanctions over the Ukraine war, Russia sought to increase its use of the renminbi, boosting the Chinese currency and the already bourgeoning Sino-Russian trade (see Exhibit 1). China is the world’s biggest energy consumer, while Saudi Arabia is the world’s second-largest oil producer and the top oil exporter. President Xi Jinping visited Saudi Arabia last December during the first China-Arab States Summit and the China-Gulf Cooperation Council Summit. It could also eventually disrupt the USD-dominated SWIFT (Society for Worldwide Interbank Financial Telecommunication) global payments system. This system would enable the renminbi to become an independent asset class over time and build out both the renminbi’s internationalisation and China’s own capital markets. A gold-backed petro-yuan does not require full renminbi convertibility to function, so it allows China to simultaneously retain control of its capital account and boost the internationalisation of the renminbi. Gold, however, is a key factor in the further development of a petro-yuan system. More players choosing to trade oil and other products with China in renminbi could help the Chinese currency reach critical mass internationally over time. If Saudi Arabia decides to trade its oil with China in renminbi rather than US dollars, it would add momentum to the ‘petro-yuan’ trading already happening between China and Russia.
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