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Abu Dhabi, UAEWednesday 12 December 2018

China's Xi wants yuan to be standard currency in energy trades

China has been negotiating with Saudi Arabia to accept payment in the Chinese currency yuan, rather than the US dollars

China wants to see yuan become main international trade currency rather than dollar. Thomas White / Reuters
China wants to see yuan become main international trade currency rather than dollar. Thomas White / Reuters

Flushed with success from the latest National Congress of the Chinese Communist Party, and confident that China's political and economic credibility is strengthening even as that of the US erodes, China's president Xi Jinping appears set on undermining "dollar hegemony" in denominating energy and other international trades.

Heavily dependent on oil and gas imports from the Middle East and elsewhere China has been negotiating with Saudi Arabia to accept payment in the Chinese currency yuan, rather than the US dollars in which energy and other commodities are normally traded, says the prominent economist Yuqing Xing referring to reports from international hedge funds and others.

"This could be a big blow to the US and to the dollar because all oil is traded in dollars," the professor of economics at the Graduate Resarch Institute for Policy Studies (Grips) in Tokyo tells The National." China has also been pushing Russia to do the same Once Saudi agrees, the rest of the Arab countries will follow," adds Prof Xing.

Yuan are of limited use in financing international transactions compared to the dollar, although use and acceptability of the Chinese currency is growing. To counter this, Beijing authorities have reportedly told oil producers that yuan can be used to finance purchases of gold on the Shanghai gold exchange, which in turn can provide dollar payment.

China's motives in seeking to make the yuan more internationally acceptable have to do with more than simply dethroning the dollar, although that appears to be a factor in Mr Xi's drive to elevate China to equal global economic status with the US. China's huge foreign currency reserves - US$4 trillion a couple of years ago - sank well $3tn recently as Beijing relaxed control on capital outflows.

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Chinese companies - including key state-owned enterprises - are anxious to acquire overeas companies in pursuit of high tech and other assets and if ways can be found to finance such M&A deals in yuan (possibly using the gold purchase option) this could prevent a drain on the country's forex reserves.

Meanwhile, as Prof Xing notes, Mr Xi's enormous One Belt One Road, or Obor, project for linking some 68 countries across and beyond the Eurasian continent with a complex network of transportation, energy and communications links will provide another way to deployg RMB more widely in financing international transactions.

"Xi's commitment to Chinese foreign aid [now] is all in Chinese yuan," notes Prof Xing. "There is not a single dollar involved." He cites the example of the China-founded Asian Infrastructure Investment Bank (AIIB). "In the first phase the AIIB was financed in dollars. At that time, the Chinese government was very confident because China had 4tn yuan of reserves. Now we realise that 4tn yuan is not enough because 1.6tn yuan moved out within a year."

These are "big financial commitments that would definitely accelerate capital outflows from China but as a sovereign government you must keep your promise. So now I think the Chinese government is changing its strategy into denominating all new commitments in yuan."

Despite such problems, China's president " may emphasise more his Obor project because it is a means of outreach, says Prof Xing. And, "Chinese companies can invest around this One Belt One Road [nexus] using yuan".

That may change the tradtional [pattern] of Japanese overseas acquisitions using dollars.

"Instead, Chinese companies can join the infrastructure projects around Obor. Then they don't need dollars and Chinese companies can borrow or get financial support from the China Development Bank or China Export Import Bank in yuan. I think this might be the policy direction for the future rather than promoting [Chinese] overseas investment in general," Prof Xing adds