BEIJING: China's plan to expand the use of its currency for oil trade with six Middle Eastern nations will increase use of the yuan in global commerce among friendly nations and futures traders drawn by its stable exchange rate, according to market analysts.

While this could result in more yuan-for-oil deals, mainly so China can buy fuel without US intervention, experts say the change will not offset the use of the petrodollar or limit the yuan's use outside energy markets. will not increase significantly.

"In the past, China and the Middle East used the US dollar as their long-term currency," said Zhao Zijun, associate dean of the School of Finance of Renmin University in Beijing.

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“However, in the face of geopolitics and US sanctions in the financial sector, some countries are considering whether they can settle oil and gas accounts in other currencies.”

However, the number of yuan transactions should increase because China, the world's biggest buyer of oil, will require exporters to use its own currency, according to Zhao.

He believes that if the yuan exchange procedures are simplified and the Chinese currency is perceived as "safer" than the dollar, other parts of the world will catch on. Candidates include Hong Kong, Singapore and several European countries.

Chinese President Xi Jinping proposed increasing yuan-denominated oil and gas settlements within three to five years with the six Gulf Cooperation Council states at a China-Arab summit last week.

As the world's biggest producer, China will invest more yuan in the Middle East, according to a research note released by China International Capital Corporation CICC on Tuesday. The country consumes about 15.4 million barrels of oil per day on average, second only to the United States.

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"We believe that streamlining oil trade in [yuan] will also help internationalize the yuan," the CICC said.

"Cross-border yuan payments have played an important role in expanding trade between China and Arab countries," Mao said.

According to Song Seng Wun, an economist at CIMB Private Banking, future oil trading as part of a government-to-government agreement will be similar to China's current yuan settlements for Malaysian palm oil and rubber.

In June, China and the Bank for International Settlements established a yuan reserve pooling system with the Malaysian, Indonesian, Singaporean and Chilean central banks, as well as the Hong Kong Monetary Authority. According to Deng Weishen, economist at UBS North Asia, more central banks will participate in the future.

In October, the yuan overtook the US dollar as the most traded foreign currency on the Moscow Exchange for the first time.
“The US dollar remains the dominant trading currency, but it is a clear insurance policy that is not solely dependent on the US currency,” explained Song.

According to him, China wants to use its currency more to ensure oil supplies in case it is economically targeted by the US as part of their long-running trade and political disputes. Following the invasion of Ukraine, the United States and its allies, for example, kicked Russia out of the SWIFT interbank payment system in March.

Song explained, "The Middle East is just an extension of what we see happening everywhere."

According to Danny Ho, an economist and chief executive of DMI energy consulting company in Taiwan, buyers of oil futures may prefer to pay in yuan because the currency does not fluctuate in time with the movements of world markets which can affect exchange rates. Let's determine. Dollar's

The yuan could rise by 2% either way, around the daily reference rate set by the People's Bank of China.

According to Ho, oil traders who buy futures in which the price of a barrel is set for a year or more will view the yuan as a "hedge" against risk.

In particular, he said, they would like to avoid a repeat of April 2020, when West Texas Intermediate crude prices plummeted.
However, the yuan will not replace the petrodollar as Middle Eastern exporters find that investing in the US dollar is the easiest way to do so. According to Ho, it is still widely used outside China by importers in Western countries and Asia.

There is still a lot of work to be done before we can say the petro-renminbi is there, according to Chen Zhiwu, chair professor of finance at the University of Hong Kong.

Some experts believe the increased use of the yuan to buy Middle Eastern oil and gas could propel the currency into other industries. According to Zhao, trading partners can use the yuan to invest in stocks or buy more goods from China.

However, analysts predict that the currency's global profile will remain low because China wants to keep in control of its foreign exchange rate.

By preventing exchange rate volatility, a fixed rate guarantees income for domestic traders, particularly exporters of manufactured goods, and contributes to the stabilisation of the Chinese economy.

In Singapore, Jayant Menon, a visiting senior fellow with the ISEAS-Yusof Ishak Institute's Regional Economic Studies Programme, said, "I don't think they're terribly concerned or enthusiastic about easing controls."

According to Nick Marro, lead Asia-Pacific trade analyst for The Economist Intelligence Unit market research firm based in Hong Kong, the viability of using the yuan as a reserve or hedging instrument depends on the demand for Chinese goods abroad.

Even with an increase in yuan oil trade, he asserted, "we probably won't see meaningful progress in renminbi internationalisation at the global level" under the current currency restrictions.

Given that an increase in yuan-denominated trade flows has partially been accelerated by geopolitical urgency, the best example to watch may be what occurs between Russia and China, he suggested. 

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"However, when we discuss, say, China's trade relations with Saudi Arabia, those same dynamics aren't present."
Chinese officials still view the internationalisation of the yuan as a political "prize," Chen said, but they lack the will to relax restrictions.
It makes perfect sense, as I can see, that they would like to depend less on the dollar, Chen said.

"From an economic perspective, it is hard for me to see that the [yuan] would be a big international reserve currency or even a trade currency in the near future," he continued.