- China pushes the yuan as currency for oil and gas deals, challenging the dollar’s lead in commodity markets
- TotalEnergies, ADNOC and others took payment in yuan for LNG sales to China for the first time last year
- Yuan payments talk boosted after sanctions cut Russia off from USD 300 billion of sovereign assets in West
- A petroyuan looks unlikely as yuan has not caught on with international investors due to tight Beijing controls
China advanced its petroyuan ambitions last year as Beijing stepped up efforts to tie more of its enormous oil and gas trade to its own currency, known as the renminbi or yuan. China’s state energy giants struck a handful of deals in 2023 to buy and sell LNG using yuan – a promising start that Beijing will look to build on as it pushes to expand the overseas influence of the Chinese currency and chip away at the dominance of the US dollar.
With an enthusiasm that comes from the top – Xi Jinping told Arab Gulf leaders in late 2022 that China wanted to buy more oil and gas in yuan – Chinese NOCs worked hard last year to demonstrate the renminbi as a viable settlement currency for energy trade. Most recently, PetroChina International, the trading arm of China’s biggest NOC, notched a milestone in late October when it used yuan for the first time to pay for a global shipment of crude oil. The cross-border transaction for 1 million barrels from an undisclosed seller used a digital form of the yuan on the Shanghai Petroleum and Natural Gas Exchange (SHPGX), according to PetroChina International.
The sale came six months after PetroChina International and Abu Dhabi-based ADNOC closed their first yuan-priced LNG trade in April 2023, again via the SHPGX. “The internationalisation of the renminbi is really a national priority, so definitely we would like to do more deals transacting in Chinese currency,” Zhang Yaoyu, global head of LNG and new energies at PetroChina International, tells LNG Business Review. “I think the [ADNOC] deal was a nice experiment. It was a small deal. We are in talks potentially to explore opportunities for longer-term deals.”
“The yuan pricing of commodities represented by the oil trade channel is an important starting point for the internationalisation of the yuan,” Guan Tao, chief economist at BOC International, an investment arm of the Bank of China, tells LNG Business Review.
Yuan push in LNG
PetroChina’s landmark trades were among a number of similar yuan-denominated LNG deals over the course of 2023 between China’s NOCs and foreign energy companies. The first took place in March, when China National Offshore Oil Corporation (CNOOC) paid for a 65,000-tonne cargo from TotalEnergies using yuan through the SHPGX, which executed the trade. The landmark trade showcased a new channel for international commodity traders to participate in the Chinese market, and was quickly followed up by the PetroChina International-ADNOC purchase in April.
Then in August, Singaporean LNG trading company Pavilion Energy used yuan to pay for an LNG cargo sold by CNOOC, according to the SHPGX. Pavilion bought a 65,000-tonne cargo to be delivered by CNOOC in October from an unnamed north-eastern Asian country, according to the SHPGX.
The deal was Pavilion’s first publicly reported purchase of LNG in yuan from a Chinese NOC, and also represented the first time that China’s currency was used to settle the sale of an LNG cargo on the SHPGX platform to a country other than China. The trade followed an agreement between Pavilion, a wholly-owned subsidiary of Singapore’s prominent investment company Temasek, and CNOOC to settle their future LNG trades in yuan.
Finally, in mid-October France’s Engie received yuan for selling a 65,000-tonne LNG cargo to CNOOC, according to the SHPGX.
The handful of sales highlight how LNG is becoming the latest commodity to be settled in yuan as China ramps up efforts to increase how much of its energy trade is completed in the currency. This comes against the backdrop of Beijing’s push for 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 “dedollarisation”.
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 saw six new countries join the existing five this month, including influential petrostates like Saudi Arabia, the UAE and Iran.
“We’re seeing increasing trade in global commodity markets denominated in yuan. That re-denomination in yuan is going to be a long-term trend,” says Jinny Yan, chief China economist at ICBC Standard Bank.
“The relative stability of the renminbi is something that Chinese corporates are starting to see … [they] are likely to start to look at the global foreign exchange (FX) volatility, how to navigate this, how to manage the risks around FX, how to increasingly re-denominate some of their exposures directly into yuan.”
The US dollar has been the world’s reserve currency since WWII, playing an outsized role in global trade. The currency’s dominance is such that it was not until last year that the yuan finally unseated the dollar as China’s most popular currency for settling cross-border transactions.
Clamor to move away from the greenback picked up in 2022 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,” China’s foreign ministry said in February 2023.
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 2023. “Who was it that decided that the dollar was the currency after the disappearance of the gold standard?”
Russia’s economic isolation following its invasion of Ukraine 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.
And when Xi visited Moscow in March 2023, 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 supplied 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, Sibur Holding, Russia’s largest integrated petrochemicals company and LPG exporter, confirmed in May 2023 that 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.
“Renminbi internationalisation serves the objective needs of China’s economic development and reform and opening up. It is a natural and successful process driven by policy support and market. It has never been aimed at replacing other currencies,” says Guan from BOC International.
“The internationalisation of the renminbi is not linear, but develops in waves, twists and turns,” Guan adds. “All parties must be mentally and physically prepared for this. To promote the internationalisation of the renminbi in an orderly manner, we must not only continue to increase policy support, but also strengthen the cultivation of market demand. We must be low-key and pragmatic, talking less and doing more.”
At the same time China could struggle to win more international support for the petroyuan and trading commodities in renminbi as companies presently have little use for the currency. Solving this lack of demand would require structural overhauls to China’s currency that Beijing would find unpalatable for now. As it stands, the yuan is not yet fully convertible, is fixed daily, prone to intervention and subject to capital controls.
“If you hold such a large reserve of the Chinese currency, what are you going to do with it?” says Zhang from PetroChina International. “Does the market provide enough inbound investment opportunities for those people who hold large reserves of the Chinese currency? That’s something we can’t resolve. We have to rely on our financial institutions to come onboard for that.”
Despite the inroads China made last year in establishing the petroyuan, reports of the dollar’s demise have been greatly exaggerated. 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.
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 4.61% of transactions worldwide in November 2023 compared with 2.00% two years ago, according to data from the Society for Worldwide Interbank Financial Telecommunications – more commonly known as SWIFT. The dollar maintained the lion’s share at 47.08%, up from 37.63%.
The continued strength of the dollar 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 dedollarisation 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 LNG Business Review.
“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 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.” - JX