THE RENMINBI COULD CHALLENGE THE DOLLAR

by Dániel Szakács

China’s long-term plan is to make the renminbi, like the dollar, an increasingly widespread currency in international payments. While Brazil and Russia have begun to move away from the dollar, a similar, but much slower, trend is underway in Saudi Arabia, where oil exports to China may be paid for in renminbi in the near future.

Saudi Arabia is currently in active negotiations to have part of its oil sales to China in renminbi. This initiative is a move that could break the dominance of the US dollar in the global oil market and would be a clear sign of a shift by the world’s largest crude exporter towards China and the Asian market.

Should Saudi Arabia actually trade with China in Chinese currency, the economic impact would be significant. On the one hand, it would strengthen the Chinese currency against the dollar and, on the other, it would increase China’s international eco- nomic influence. At the same time, Saudi experts warn the Saudi leadership that such a major decision should not be taken prematurely as it would cause significant damage to the Saudi economy. This is because Saudi Arabia’s currency, the Saudi riyal, is pegged to the dollar.

It is worth noting that economic relations between China and Russia have also strengthened in recent months. A spokesman for the Russian finance ministry said the renminbi was playing an increasingly important role in the state asset fund, which doubled its renminbi share to 60 per cent in December.

While Russia’s use of the renminbi does not signal the end of dollar supremacy, it could herald the beginning of a more fragmented regime that could ultimately blunt the ability of the United States to weaponize financial sanctions.

The author is a junior international expert at the Magyar Nemzeti Bank, the central bank of Hungary