Saudi Arabia Reviews Yuan Payments for Crude Oil Exports to China... Is Dollar Hegemony Shaken?

As the US Reduces Crude Oil Imports from Saudi Arabia, China Emerges as Saudi's 'Largest Customer'
Some View It as a Pressure Tactic with Low Likelihood of Materialization

[Image source=AP Yonhap News]

[Asia Economy Reporter Kim Hyunjung] The Wall Street Journal (WSJ) reported on the 15th (local time) that Saudi Arabia is discussing allowing yuan-denominated payments for some of its crude oil exports to China. If these discussions materialize, it is anticipated that the US 'dollar hegemony,' which has strengthened its geopolitical influence as the world's energy market's key currency country, could be shaken.

WSJ cited sources familiar with the matter, stating that "Saudi Arabia is consulting with China on yuan-denominated oil payments, a topic discussed for over six years." Furthermore, Saudi Arabia is considering allowing yuan-denominated crude oil futures trading, known as 'Petroyuan,' through its state-owned oil company Aramco, signaling a move closer to China.

◆From Competitor US to Largest Customer China= At a time when the US is transforming from Saudi Arabia's largest customer to a competitor, China has become the largest buyer, purchasing more than 25% of Saudi oil exports. According to the US Energy Information Administration (EIA), US crude oil imports from Saudi Arabia plummeted from 2 million barrels per day in the 1990s to less than 500,000 barrels per day by the end of last year. In contrast, China purchased 1.76 million barrels per day of Saudi crude oil last year, followed by Russia at 1.6 million barrels per day.

Simultaneously, China is supporting Saudi Arabia's development of ballistic missiles and nuclear programs, and has made large-scale investments in projects of interest to Crown Prince Mohammed bin Salman, including the development of the NEOM new city, demonstrating a pro-Saudi stance.

In this context, yuan-denominated oil payments are seen not merely as an expansion of payment currency options but as a political message from Saudi Arabia to the US. Particularly, Saudi Arabia perceives that the US has not sufficiently supported it in the Yemen civil war, and tensions have escalated as the Biden administration attempts to restore the Iran nuclear deal.

Last year's US withdrawal from Afghanistan also had a negative impact, and relations worsened further when President Biden, during his 2020 election campaign, pointed to the Saudi royal family as behind the 2018 murder of Saudi journalist Jamal Khashoggi. Recently, the White House attempted but failed to arrange a call between President Biden, Saudi Crown Prince Mohammed bin Salman, and UAE Crown Prince Mohammed bin Zayed Al Nahyan.

On the 5th (local time), the U.S. Department of the Treasury designated China as a currency manipulator. This is the first time in 25 years since the Clinton administration in 1994 that the U.S. has designated China as a currency manipulator. On the 6th, an employee at the KEB Hana Bank Counterfeit Response Center in Euljiro, Seoul, is organizing U.S. dollar and Chinese yuan bills. Photo by Moon Honam munonam@

◆Riyal Pegged to Dollar... Also Seen as a Pressure Tactic= Saudi Arabia trades 6.2 million barrels of crude oil daily in dollars. If it allows yuan payments for over a quarter of its oil exports to China, the impact on the international oil market would be significant. Approximately 80% of global oil sales are settled exclusively in dollars, a system that has solidified the US 'petrodollar' regime since the Nixon administration in 1974, reinforcing the influence of the US as the key currency country.

If other oil-producing countries follow Saudi Arabia in adopting yuan payments, the US dollar hegemony could be undermined. Gal Luft, an economist at the Institute for the Analysis of Global Security, said, "The oil market, and more broadly the entire global commodity market, acts as insurance for the dollar's key currency status. Removing that brick will cause the entire wall to start collapsing."

However, there are also forecasts that discussions between Saudi Arabia and China will not materialize. This is because yuan payments have often been used as a pressure card in conflicts with the US. A senior US government official said, "The likelihood is not very high," adding, "(Yuan payments) have been a recurring theme Saudi Arabia often brings up." Witold Bahrke, senior macro strategist at Nordea, the largest bank in Northern Europe, also stated, "Attempts to call the end of the dollar over the past few years have failed," and "This will likely be another failed attempt."

This outlook is further supported by the fact that Saudi Arabia adopts a fixed exchange rate system pegging the Saudi riyal to the dollar, meaning yuan payments could negatively impact the overall national economy.

This content was produced with the assistance of AI translation services.