China pushes faster on de-dollarisation [Gas in Transition]

China has stepped up efforts to settle more of its enormous oil and gas trade in its own currency – known as the renminbi (RMB) or yuan – as Beijing increasingly flexes its muscles in global commodities trade to chip away at the dominance of the US dollar, one of the most visible and enduring signs of American power worldwide.

In August Singapore’s LNG trading company Pavilion Energy used yuan to pay for an LNG cargo sold by state-owned offshore specialist CNOOC, according to the Shanghai Petroleum and Natural Gas Exchange (SHPGX). Pavilion paid CNOOC for a 65,000-tonne cargo that will be sourced from an unnamed northeastern Asian country and delivered in October, according to the SHPGX, which executed the trade.

The deal was Pavilion’s first publicly reported purchase of LNG in yuan from a Chinese oil and gas major, and the latest commodity trade involving China to be settled in yuan as Beijing steps up efforts to increase how much of China’s energy trade is completed in the currency.

The move follows an agreement between Pavilion, a wholly-owned subsidiary of Singapore’s prominent investment company Temasek, and China’s leading LNG trader CNOOC to settle their future LNG trades in yuan. CNOOC was China’s top LNG importer in 2022, acquiring 26.69mn t that represented 42% of the 63.44mn t shipped to the country that year. Pavilion meanwhile has a gas and LNG portfolio equivalent to 8mn t/year and in fiscal year 2022/23 traded and delivered 6mn t/yr of LNG.

The Pavilion-CNOOC transaction also represented the first time the yuan has been used to settle the sale of an LNG cargo on the SHPGX platform to a country other than China. It occurred against the backdrop of Beijing’s push to boost the role of the yuan to compete with the US dollar, with China’s leaders seeking the support of a widening spectrum of countries to accelerate so-called “de-dollarisation”.

Beijing’s recent efforts to bring more countries closer to its sphere of influence prompted a recent reshaping of the increasingly powerful BRICS group – which includes Brazil and Russia, two major commodity exporters to China. A landmark expansion of the non-Western geopolitical bloc will see six new countries join the existing five next January, including influential petrostates like Saudi Arabia, the United Arab Emirates (UAE) and Iran.

Yuan on the up

US-China decoupling and resulting trade frictions are undoubtedly shaping the evolution of commodities trade around the world. The Pavilion trade follows a steady drumbeat of announcements for arranging more yuan payments to settle international trade. On a visit to Riyadh in December 2022, Chinese President Xi Jinping told Arab Gulf heads of state that China wanted to buy more oil and gas in yuan.

Sure enough, CNOOC and TotalEnergies struck a yuan-priced LNG deal through the SHPGX in March, with the French supermajor exporting a 65,000-t cargo from the UAE in May. The trade showcased a new channel for international commodity traders to participate in the Chinese market and paved the way for the Pavilion-CNOOC sale in August.

A similar agreement was also reached between PetroChina and Abu Dhabi’s state-owned oil and gas company ADNOC – the companies making their first yuan-priced LNG trade in April, again via the SHPGX. The two NOCs followed this up in early September when PetroChina’s international unit signed an LNG supply agreement worth $450-550mn with ADNOC’s gas and LNG subsidiary, established at the start of this year. The announcement did not disclose volumes or duration.

Down with the dollar

The US dollar has been the world’s reserve currency since the Second World War, playing an outsized role in global trade. The currency’s dominance is such that it was not until March this year that the yuan dethroned the dollar for the first time as China’s most popular currency for settling cross-border transactions.

Clamour to move away from the greenback picked up last year after Washington’s muscular use of sanctions on Russia after it invaded Ukraine locked Moscow out of the dominant dollar-denominated global financial system – much to the shock of large reserve-holding countries such as China and emerging economies from the so-called Global South.

While China’s leaders have not openly discussed the geopolitical risk of dollar dependence, Beijing has made clear its deep concerns about the vulnerability of the Chinese economy to the dollar’s supremacy and its desire to develop alternative systems to hedge against dollar risk. “The hegemony of the US dollar is the main source of instability and uncertainty in the world economy,” the foreign ministry said in February.

 The sentiment is shared by China’s peers in the BRICS group. “Every night I ask myself why should every country have to be tied to the dollar for trade?” Brazilian President Luiz Inácio Lula da Silva lamented on a visit to China in April. “Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”

“Why can’t an institution like the BRICS bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other BRICS countries?” Silva added.

Neither has the rhetoric been confined to China and the Global South. In April French President Emmanuel Macron suggested Europe should reduce its dependence on the “extraterritoriality of the US dollar”.

Russia’s economic isolation following its invasion of Ukraine in spring 2022 prompted Moscow to dramatically increase use of the yuan in trade with China, with the Chinese currency replacing the US dollar as the most-traded currency in Russia last year.

When Xi visited Moscow in March, Russian president Vladimir Putin said: “We support using Chinese yuan in transactions between Russia and its partners in Asia, Africa and Latin America. I am sure that these types of payment will grow between Russian businesses and their counterparts in third countries.”

Russian enthusiasm for yuan settlements has been reflected in the country’s energy sector. In September 2022 Russian gas giant Gazprom and PetroChina’s parent CNPC signed several agreements that included the use of each country’s currencies to pay for Russian gas supplies to China.

“The new payment mechanism is a mutually beneficial, timely, reliable and practical decision. I believe that it will make settlements easier, serve as a great example to other companies, and give a new impetus to our economies,” said Gazprom CEO Alexei Miller.

More recently in May, Sibur Holding, Russia’s largest integrated petrochemicals company and LPG exporter, confirmed it had started settling all financial transactions with China in yuan during 2022. “We trade with Vietnam in dong, in China last year we completely switched to yuan,” Sibur board member Pavel Lyakhovich told Russia’s state news agency.

 The same story is being repeated elsewhere as the dollar’s supremacy in global trade is being chipped away by fragmentation - particularly in developing countries - caused by the US-China rivalry.

Dollar is king

But reports of the dollar’s demise may be exaggerated as the greenback was involved in 88% of all foreign exchange trades in April 2022, compared with 31% for the euro, 17% for the Japanese yen and just 7% for the yuan, according to the Bank for International Settlements. The US Federal Reserve estimates that between 1999 and 2019 the dollar accounted for 96% of trade invoicing in the Americas, 74% in the Asia-Pacific region, and 79% in the rest of the world.

But while the yuan’s 7% share of forex trades was miniscule, it was nevertheless up from 2% a decade ago. The yuan has made inroads in international payments too, as it was used to settle 3.06% of transactions worldwide in July compared with 2.19% two years ago, according to data from the Society for Worldwide Interbank Financial Telecommunications – more commonly known as SWIFT.

The US maintained the lion’s share at 46.6%. As a currency used in trade finance, the yuan’s 4.57% share in July was second only to the dollar’s 83.94% and the euro’s 6.23%.

The development underscores how recent developments over the yuan’s global rise does not necessarily mean the dollar hegemony is over. While there has been an acceleration in yuan-denominated trade in the past year, the total remains minimal and the real key to a genuine shift away from the dollar depends on countries deciding to hold reserves in another currency.

“There’s a lot of discussion these days about de-dollarisation and whether the US dollar will lose its standing as the world’s sole reserve currency. The other side of the coin is often the internationalisation of the Renminbi,” George Magnus, an associate at the China Centre of Oxford University and former chief economist of UBS, tells NGW.

“The question is what exactly does the latter mean? Does it mean people are going to use the yuan more in international payments? Or does it mean it’s going to become much more of a global reserve currency on a par with the dollar and euro? There’s a world of difference between the currency you settle your trade in, and the currency you accumulate your balances in.”