The 50-year Petrodollar era between Saudi Arabia and the United States has ended. The emergence of the Chinese yuan as a challenger to the dollar’s dominance raises interest.
Reports from foreign media and industry sources on the 14th reveal that the Petrodollar agreement between Saudi Arabia and the United States expired on the 9th. This is due to Saudi Arabia’s decision not to renew the agreement.
In 1974, the two countries entered a Petrodollar agreement, using only dollars for oil payments, while the United States assumed responsibility for Saudi Arabia’s security.
Oil-producing countries in the Middle East, which supply oil globally, established the so-called Petrodollar recycling mechanism by reinvesting dollars in U.S. Treasury bonds and financial markets. This process further solidified the Petrodollar system, reinforcing the status of the U.S. dollar as a reserve currency and securing the power to control the global oil market.
However, President Joe Biden’s stance towards Crown Prince Mohammed bin Salman, blaming him for the 2018 murder of Saudi dissident Jamal Khashoggi, along with the withdrawal of U.S. troops from Afghanistan in 2021, strained relations between the United States and Saudi Arabia.
Amidst these developments, China’s new status as Saudi Arabia’s largest oil exporter brought the Petrodollar system to waver. In March last year, China introduced yuan for trade payments to Saudi Arabia.
More than 80% of the world’s oil is traded in dollars. Should Saudi Arabia allow the use of yuan in oil transactions with China, the yuan will rise internationally. China accounts for a quarter of Saudi Arabia’s annual oil exports.
With escalating conflicts with the United States, China aims to globalize the yuan in trade transactions. President Xi Jinping stated in his keynote speech at the China-Arab Gulf States Cooperation Council Summit held in Riyadh, Saudi Arabia, in December 2022, “We will use yuan for oil and gas trade.”
Saudi Arabia and China have recently been strengthening their close relationship. Following a summit between Chinese President Xi Jinping and Saudi Crown Prince Mohammed bin Salman in December 2022, they are expanding economic cooperation.
In November last year, the two countries signed their first currency swap agreement worth 50 billion yuan. A currency swap is a foreign exchange transaction in which two currencies are exchanged at a predetermined exchange rate. The first Saudi Arabian Exchange Traded Fund (ETF) in Asia was listed on the Hong Kong Stock Exchange in the same month.
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