The Iran War Likely Has Hurt Beijing’s Ambitions for the Yuan

Commentary

Fighting in the Persian Gulf has upset government and business calculations the world over. The belligerents—the United States, Iran, and to a lesser extent Saudi Arabia and other petro states in the area—have, of course, had to rethink strategies that seemed reasonable only a few weeks ago.

But the oil interruptions imposed by the fighting, the price increases, and the associated political, military, and economic threats have forced reconsiderations from Europe to Japan, and especially in Beijing. Much remains uncertain and will stay that way for a while. One thing, however, is clear. Events of the past year, especially this war, have set back Beijing’s plans for the yuan to continue to edge out the U.S. dollar as the world’s premier currency, what bankers and economists refer to as the “global reserve.”

For some time now, Beijing has worked hard to promote the yuan internationally. Its Belt and Road Initiative across Asia, Africa, and into Europe and the Americas usually denominates loans in yuan and demands payments in that currency, not in dollars. China has set up international lending facilities in yuan as an alternative to the largely dollar-based World Bank and International Monetary Fund.

Beijing’s Cross-Border Interbank Payments System challenges the near-monopoly in financial settlements currently exercised by the dollar-based Society for Worldwide Interbank Financial Telecommunication system. Many Chinese trade agreements, even those outside the Belt and Road Initiative, are denominated in yuan rather than the dollar. These and other less prominent initiatives have eroded the dollar’s otherwise complete dominance in international trade and finance. Chinese leader Xi Jinping has made no secret of his desire to see the yuan eventually supplant the dollar as the world’s dominant currency.

Because energy is central to every aspect of international economics, Beijing has focused much of its yuan-promotion efforts on oil. Beijing has made arrangements with Saudi Arabia and other oil producers that bypass the usual dollar-based transactions. It took advantage of Washington’s sanctions on Iranian oil to purchase what Iran has to offer at a discount and to do so in yuan through Chinese financial channels. The arrangements benefited both parties at Washington’s expense. Iran got around U.S. sanctions, while China got oil cheaply.

If yuan payments were less convenient to Iran than dollars would have been, Iran bought enough from China to make the yuan useful, nonetheless. Both parties were happy to do what they could to disadvantage the United States: for Iran, by getting its otherwise sanctioned oil to market, and for China, by finding yet another way to substitute yuan for dollars.

Raising the yuan’s profile in the oil patch was especially attractive to Beijing because Washington and the dollar have, for decades, enjoyed something of an informal agreement with the oil producers of the Arabian Peninsula. That arrangement, often referred to as the “petro-dollar” system, enshrined the dollar as the currency of choice for all trading in oil. It formed after the 1973 oil embargo by the Organization of Petroleum Exporting Countries was lifted. In it, Washington promised to extend a security umbrella over Saudi Arabia and these other oil producers on the condition that they price oil in dollars, that transactions settle in dollars, and that oil revenues are invested in dollar-denominated assets. This arrangement was not the only way the dollar secured its position as the global reserve currency, but it became a major support for the dollar’s special status.

While Beijing would like to see this arrangement unravel, events in and around the Persian Gulf recently have done the opposite. Very early on in the hostilities, Beijing might have felt that it had the edge. While Iran controlled the Strait of Hormuz, China was one of the only countries getting oil out of the Persian Gulf, and all of it was within yuan-based arrangements.

Washington’s blockade has, however, reversed that advantage. More fundamentally, Washington has shown that it will uphold its part of the petro-dollar system, not in pursuing the war but in helping defend Saudi Arabia and the other oil producers from Iran’s attacks. Set against Washington’s renewed influence in Venezuela, China has lost two areas where it had worked hard to exercise control and elevate the yuan.

Matters today are fluid, to say the least. American failure or embarrassment—and there are ample possibilities for that—would erode the dollar’s stature, both in global oil markets and generally. Beijing may yet devise a riposte to the setback it has suffered in its yuan promotion campaign.

But as things stand now, the dollar has gained against the yuan in the battle for global primacy, making it look like Xi’s dream of yuan primacy will wait a lot longer than Beijing thought and maybe never happen.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.