China’s push for trade in yuan has downsides for Gulf states

Al-Monitor Pro Members

Sebastian Castelier

Business journalist covering Gulf economies

May 30, 2023

“Don't kiss your dollars goodbye just yet,” the International Monetary Fund’s managing director Kristalina Georgieva warned on Wednesday during the Qatar Economic Forum in Doha. Beijing struck its first-ever yuan-settled energy deal involving Emirati liquified natural gas in the first quarter of 2023. Paying for the import of Gulf fossil fuels in yuan is at the top of China’s list to lay the foundations for a greater global adoption of its currency, officially known as renminbi. But should the practice become more common, Gulf countries would ​​get “most of the downsides.” Yet a global surge of interest in de-dollarization — with a 600% increase in discussions on Twitter and Reddit in the first three months of 2023 — is offering Gulf countries an opportunity to display yuan-settled trade to warn the United States.

Scenario 1: China does not aim at currency dominance

China’s willingness to push for more yuan-settled trade with Gulf oil exporters is indirectly linked to whether or not it wants to play a more central role in the currency sphere and eventually take on the role of global reserve currency. Analysts are divided. “In order to have a reserve currency, you have to have an environment in which foreigners want to deposit their excess savings, and to do that you have to give up control of your capital account, something China is determined not to do. You have to give up control of your trade account, and China has to run surpluses in order to balance the weakness in domestic demand,” Michael Pettis, a professor of finance at China’s Peking University, told CNBC. The leading expert on China's economy added that the yuan becoming a major global currency would force China to “go through a major transformation of its economy and run from a persistent surplus economy to a persistent deficit economy.” In other words, rebalancing to a more consumer-led economy, which is questionable, Liao said.

Scenario 2: Gulf trade won’t move the needle alone 

Gulf fossil fuel exports to China — a landmark in global energy markets — were only worth $186 billion last year. That is about 0.7% of the world’s merchandise trade, estimated by the World Trade Organization at $25.3 trillion in 2022. Also, the dollar’s dominance extends beyond trade. The greenback’s reserve currency status made it the currency of choice for investors and central banks to park wealth and trade surpluses. Gulf countries are exposed to dollar assets through holding of US treasuries — a total of $215 billion as of February 2023 for Saudi Arabia, the UAE and Kuwait — and sovereign investments. North America accounts for 45-60% of the UAE’s largest sovereign wealth fund’s total exposure, compared to a 5-10% developed Asia exposure.

Sebastian Castelier has been reporting on GCC countries since 2016, with a focus on how the oil-rich region navigates the long-term energy transition economically, socially and politically. He has been a contributor to Al-Monitor since 2019 and writes for various publications, including Haaretz, Al Jazeera, The Independent and Le Temps, among others.