Amid a shift away from the US dollar, how long before China’s yuan is a real challenger in a multipolar world?
- A new monetary order is emerging as America’s global influence declines, and nations increasingly seek out other currencies amid worries about US deficits
- And while the dollar will remain important for many years, the consequences of a long-term decline should not be overlooked as China rises
At an event I attended at Chatham House recently, the three panellists struggled to disagree on their long-term outlook for the US dollar. The settled consensus among most market participants is that any shift in the monetary order away from the dollar – de-dollarisation – will happen gradually and take decades, as past currency transitions have done.
But, consider the following developments. Petroyuan futures, the yuan-denominated oil contracts launched last year in Shanghai, now sit behind the benchmark Brent and WTI crude oil futures in terms of trading volume.
Earlier this year, Britain, France and Germany created the special purpose vehicle Instex, or Instrument in Support of Trade Exchanges, to permit payments to Iran despite US sanctions. Last year, Russia shifted US$100 billion worth of dollar-denominated reserves into renminbi, euros and yen.
The increasing weaponisation of US economic sanctions is driving countries to seek refuge from the long arm of US financial authority.
No country wants its main bank to be fined billions of dollars — as occurred to France’s BNP Paribas in 2015 — for not adhering to another state’s foreign policy. As if to underline the growing doubt in the current monetary order, European Commission President Jean-Claude Juncker said at the last State of the European Union address: “It is absurd, ridiculous, that European companies buy European planes in dollars instead of euro.”
All this is happening while the US shale revolution continues. By 2025, the US is set to overtake Saudi Arabia as the world’s biggest oil exporter. This means the US is buying less crude oil at the same time the Chinese are buying more, increasing the opportunity for oil exporters to accept other currencies. Earlier this year, Saudi Arabia quashed rumours that it would do so to protest against potentially hostile US legislation. Any change of mind would be a big spur to de-dollarisation.