Why Saudi Arabia Won’t Abandon Dollars for Yuan
There are numerous articles mentioning that Saudi Arabia may use the yuan, China’s domestic currency, for its oil exports.
How much does Saudi Arabia export to China? According to the Organisation of Economic Co-operation and Development, the kingdom’s main exports are to China ($45.8B), India ($25.1B), Japan ($24.5B), South Korea ($19.5B), and the United States ($12.2B). Exports of crude oil reached $145 billion in total.
Saudi Arabia is the world’s largest oil exporter at $145 billion, and China the largest buyer at $204 billion, with 2019 figures.
Saudi Arabia’s public accounts are exemplary. From a 4.8 percent deficit, the kingdom expects a surplus in 2022, and its ratio of public debt to GDP (gross domestic product) is 30.8 percent, one of the lowest in the world.
Does Saudi Arabia need to use the yuan at all? No. Its foreign currency reserves including gold stood at $472.8 billion in 2020 despite the pandemic-led slump in exports and oil demand. Is it under any pressure to change currency? Even less so. Its reserves comfortably cover its external debt, giving it an enviable level of stability compared to other OPEC (Organization of the Petroleum Exporting Countries) nations that have large trade and fiscal deficits.
What would Saudi Arabia gain from using the yuan? Not higher exports to China. China needs its oil imports more than Saudi Arabia needs China’s domestic currency. There is no real evidence that exports to China would fall if Saudi Arabia continued to use the US dollar.
Yuan utilization in global transactions is very limited. Considering figures compiled by the Society for Worldwide Interbank Financial Telecommunications, Bloomberg noted that “activity in the renminbi, as the currency is also called, rose to its second-highest level ever in 2021.” However, that means a stubbornly modest 2.7 percent of the market versus the 41 percent of the dollar, which has held the top slot for decades. The euro is used in 36.6 percent of global transactions, the British pound in 5.9 percent—more than double the use of the yuan despite the United Kingdom’s being a much smaller economy—and the Japanese yen is used as much as the yuan at 2.6 percent.
More importantly, despite the large increase in importance of the Chinese economy globally, the yuan’s importance as a currency has barely improved from its high in 2015, when it reached the fourth spot.
Why is the yuan only used in 2.7 percent of global transactions despite being 14 percent of the world’s GDP, and what happened in 2015?
The yuan is the only currency issued by a global economic leader that has capital controls and fixed pricing. As such, any holder of the Chinese currency faces the constant threat of an abrupt devaluation and the inability to use the currency freely in payments.
And that is exactly what happened in 2015. The Chinese central bank announced an aggressive devaluation.
The yuan is not an alternative to the US dollar because of capital controls, fixed pricing, and, even worse, because the monetary policy of the People’s Bank of China is even more aggressive than that of the Federal Reserve. The expansion of money supply in China has been multiple times that of the United States for two decades, with significantly lower global demand for the yuan.
It is also worth noting that even the large Chinese oil companies favor the US dollar for international transactions. Looking at the open interest in the Shanghai Commodity Index, the so-called petroyuan index, we can see that use of the yuan in global oil transactions is extremely limited.
China’s apparently large gold reserves stand at less than 0.3 percent of its money supply (M2) and its undoubtedly large US dollar reserves, $3.35 trillion, barely cover its foreign exchange liabilities.
If oil and commodity producers in other countries, particularly Latin America, have accepted China’s currency in the past, it has been due to the large debt commitments they acquired with the Asian giant, not for practical reserve currency–use reasons.
Any commodity producer that accepts the yuan instead of the US dollar must know that capital controls and price fixing are very important threats, and there is no real indication that the People’s Bank of China is going to change any of those.
The reality is that the yuan has all the negative elements of fiat currencies—massive printing, lack of real support, central bank incentive to erode purchasing power—and none of the benefits of the dollar, the euro, and the pound—the free-floating pricing, legal and investor security, and an open financial system.
Saudi Arabia might use some yuan in its oil exports, but the reality is that no fiat currency with capital controls is a real alternative to other fiat currencies and that the advent of central bank digital currencies makes this difference more significant. Central bank digital currencies are surveillance disguised as money, and the risks of massive printing, erosion of purchasing power, and control of transactions are much larger than under traditional currencies.
Saudi Arabia could flee to gold or cryptocurrencies to escape the money-printing machine. But it will hardly replace a heavily printed but open and secure fiat currency, the US dollar, with a closed and less secure one.