View from China: For the US dollar, a subtler shift than a ‘petroyuan’ order is underfoot

Pic.: sindonews.com

Talk of a dollar collapse or ‘petroyuan’ order arriving amid the Iran war misses the mark. The larger shift is subtler and no less consequential, ‘The South China Morning Post’ writes.

In the span of a few days earlier this month, developments that usually sit in separate policy compartments began to converge.

Abu Dhabi’s crown prince arrived in Beijing as President Xi Jinping used the visit to set out China’s four-point position on the Iran war. Pakistan, now central to keeping US-Iran diplomacy alive, said no date was fixed for the next round of talks. Washington escalated pressure on buyers of Iranian oil and the banks handling related funds. Reports circulated of yuan use in connection with payments tied to passage through the Strait of Hormuz.

These developments raise a question that has hovered over global energy markets for years but now looks harder to dismiss: is a “petroyuan” taking shape?

The starting point is the right one: the petrodollar remains deeply entrenched. The dollar still dominates official reserves, international payments and foreign exchange turnover. US dollars make up nearly 57 per cent of disclosed global official reserves while the yuan accounts for less than 2 per cent. The dollar’s structural advantages – deepest pool of safe assets, unrivalled financial liquidity and overwhelming presence in foreign currency markets – do not disappear because one regional war has exposed new strains.

The petrodollar has never been just the invoice currency of oil cargoes. It is a system linking energy pricing, cross-border finance, reserve accumulation and security. Gulf producers earn dollar revenues, recycle part of that into dollar assets and operate within a regional order underwritten by American military power. That arrangement gave the dollar strategic depth. It tied the world’s most important commodity to the world’s most important reserve currency and then wrapped both inside a security bargain.

That bargain is no longer as solid as it once looked.

The Shanghai oil futures contract offers a yuan-denominated benchmark. China's CIPS interbank cross-border payments system is steadily expanding as a venue for yuan settlements. China and the UAE are also experimenting with more direct payment connections, including central bank digital currency mechanisms. None of this can transform the yuan into a competing global currency. But the infrastructure for a more narrow energy settlement scheme, centered on China, is no longer a figment of the imagination.

The war in Iran has given this scheme greater strategic relevance. With Washington signaling that buyers of Iranian oil and the banks handling the related settlements could be punished, using the dollar becomes not only expensive but also dangerous. Settlements in other currencies are transforming from political aspirations into a practical workaround. Reports of the yuan's use in payments related to the Strait of Hormuz are important for the same reason. Even if these operations are limited, opaque, or random, they will still move the discussion from the realm of abstract rhetoric about de-dollarization to the realm of practical application in wartime. And this is a qualitatively different event, very different from the attention-grabbing but largely symbolic talk of setting oil prices in yuan.

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