There are numerous articles mentioning that Saudi Arabia may use the yuan, China’s domestic currency, for its oil exports.
Saudi Arabia is the world’s largest oil exporter, and China the largest buyer at $204 billion, at 2019 figures.
Saudi Arabia’s public accounts are exemplary. From a 4.8 percent deficit, the kingdom expects a surplus in 2022 and its public debt to GDP is 30.2 percent, one of the lowest in the world.
What would Saudi Arabia gain from using the yuan? Not higher exports to China. The Asian giant needs its oil imports more than Saudi Arabia needs its domestic currency. There is no real evidence that exports to China would fall if Saudi Arabia continued to use the U.S. dollar.
More importantly, despite the large increase in importance of the Chinese economy in the global landscape, its importance as a currency has barely improved from its 2015 high, when it reached the fourth spot.
Why is the yuan only used in 2.7 percent of global transaction despite being 14 percent of the world’s GDP, and what happened in 2015?
The yuan is the only currency from a global economic leader that has capital controls and a fixed pricing set by the People’s Back of China (PBOC). As such, any holder of the Chinese currency finds a constant threat from an abrupt devaluation and the inability to use the currency freely in payments.
And that’s exactly what happened in 2015. The Chinese central bank announced an aggressive devaluation.
The yuan is not an alternative to the U.S. dollar because of capital controls, fixed pricing and, even worse, because monetary policy is even more aggressive than that of the Federal Reserve. The expansion of money supply in China has been multiple times over that of the United States for two decades with significantly lower global demand.
It’s also worth noting that even the large Chinese oil companies favor the U.S. dollar for international transactions. Looking at the open interest in the Shanghai Commodity Index, the so-called petroyuan index, we can see that there’s an extremely limited use of the yuan in global oil transactions.
China’s apparently large gold reserves stand at less than 0.3 percent of its money supply (M2), and its undoubtedly large U.S. 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 U.S. dollar must know that capital controls and price fixing are very important threats, and there’s no real indication that the PBOC is going to change any of those.
The reality is that the yuan has all the negative elements of all fiat currencies—massive printing, lack of real support, incentive of the central bank to erode its purchasing power—and none of the benefits of the dollar, euro, or pound—the free float pricing, legal and investor security, and a widespread 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 the advent of central bank digital currencies makes this problem larger. Central bank digital currencies are surveillance disguised as money, and the risks of massive printing, erosion of purchasing power, and control of transactions is much larger than in traditional currencies.
Saudi Arabia could prefer gold or cryptocurrencies to escape the money printing machine, but would hardly replace a heavily printed but open and secure fiat currency, the U.S. dollar, with a closed and less secure one.
