Context-

Some observers suggest that the era of the petrodollar is nearing its end, with the Chinese yuan poised to take its place. However, several factors indicate that such a transition is far from imminent. The Chinese yuan's closely monitored nature and the lack of freedom for holders to maneuver pose significant hurdles. Meanwhile, the U.S. dollar continues to exhibit strength and charm, underpinned by the country's robust economic and political influence. 

Recent Push for De-dollarization 

• Concerns about Dollar Credibility: Countries are increasingly moving towards de-dollarization due to concerns regarding the credibility of the US dollar and the sustainability of the US economy.
• Unsustainable US Debt: The US debt has reached $31 trillion, with a budget deficit exceeding 16%, which many experts deem unsustainable.
• Risk of Global Collapse: The dominance of the dollar in international trade and finance means that a collapse of the US economy could trigger a global economic collapse.
• Bilateral Trade Outside the Dollar: Over 90% of trade between China and Russia is now conducted outside the US dollar.
• Russia’s Ruble Mandate: Russia has mandated the use of rubles for selling oil and gas to Europe, reducing the demand for dollars.
• China’s Belt and Road Initiative: Through its Belt and Road Initiative (BRI) project, China is converting $385 billion of debt into yuan, promoting the use of its currency.
• Saudi Arabia’s Yuan Oil Sales: Saudi Arabia’s decision to sell oil to China in yuan represents a significant blow to the petrodollar system.

Global Economic Shifts

Over the past decade, a notable shift towards autarkical economic and political policymaking has emerged in both Western and Eastern countries. This shift marks a fundamental departure from the previously globalist attitudes these nations exhibited. In this context, a growing group of commentators has forecasted the end of the U.S. dollar's reign as the world’s reserve currency. They argue that the Chinese yuan will usurp this coveted position, based on two fundamental premises:

1. Waning U.S. Influence: The perceived decline in the U.S. economy's influence on the world stage, characterized by fewer favorable political and economic pacts and a decrease in the number of goods and services traded globally using the U.S. dollar.
2. Rising Chinese Influence: The increase in China's economic and political influence among its neighboring states and other developing countries, primarily through initiatives like the Belt and Road Initiative (BRI).

U.S. Economic and Political Influence

• The myth of De- Dollarisation. Despite claims of waning influence, the U.S. continues to play a pivotal role on the global stage. The Russo-Ukraine War serves as a prime example, where the U.S. emerged as a key ally and supporter of Ukraine, representing the West alongside European allies. In contrast, China has largely remained neutral, fearing rebuke from Western counterparts.
• Still Prefered Currency: Furthermore, the natural expansion of global economies leads to increased trade among themselves, resulting in a relative decline in the total share of trade conducted in U.S. dollars. However, this should not be interpreted as an inherent weakness of the U.S. dollar. The dollar continues to be the preferred currency for investment, as evidenced by the influx of investment funds to U.S. shores in 2022-23 following the Federal Reserve's interest rate hikes. This period saw central banks worldwide adjusting their interest rates in line with the Federal Reserve, underscoring the significance of U.S. monetary policymaking.

The Petrodollar vs. The Petroyuan

• In recent years, numerous headlines have proclaimed the imminent end of the petrodollar and the rise of the petroyuan. China has indeed sought to enhance its geopolitical influence by forging economic and political deals with various allies and offering investment through the BRI. However, this strategy has been plagued by poor economic management and exploitative agreements, leading to what is now known as "debt-trap diplomacy."
• Countries like Sri Lanka, unable to repay loans to China, have reported feeling pressured by these agreements. This volatility and unsustainability do not bode well for China’s long-term diplomatic efforts. Additionally, domestic challenges such as the zero-COVID policy and a real estate collapse have strained the Chinese economy. The heavily monitored nature of the Chinese yuan, with limited maneuverability for holders, remains a significant obstacle to its potential as the world’s reserve currency.

Saudi Arabia's Strategic Maneuvers

• The American shale oil revolution and the push for U.S. energy independence have led traditional oil-producing allies like Saudi Arabia to seek alliances with other countries, including China, to reduce their exposure to U.S. oil demand. However, it is noteworthy that the Saudi government and wealth funds continue to prefer U.S. treasury bills and American high-tech imports, such as artificial intelligence. This preference underscores the continued attractiveness of the U.S. as an investment destination and trade partner.

The Future of the U.S. Dollar

• Despite the challenges and the evolving global economic landscape, it is difficult to envision a world where China, with its heavily restricted markets and lower-quality exports, surpasses the U.S. as a better investment prospect and trade partner. The U.S. dollar remains the currency of choice for global investments, backed by a stable and robust economy.

Roadblocks for the Yuan

• China faces numerous critical roadblocks in its quest to displace the U.S. dollar as the world’s reserve currency. The Chinese yuan’s restricted maneuverability and the country’s economic challenges are significant hurdles. While it is possible that over time these obstacles may be overcome, and a new currency or group of currencies may assume greater global importance, such a currency would need to be freely tradable, and supported by a stable economy. It must ensure that users can utilize it without concerns about its inherent value or the stability of the issuing country.

Conclusion

The debate over the end of the petrodollar and the rise of the petroyuan is complex and multifaceted. While China has made significant strides in expanding its global influence, the U.S. dollar continues to hold sway due to the robust economic and political foundations of the United States. The transition to a new global reserve currency, if it happens, will be a gradual process with numerous challenges to overcome. For now, the U.S. dollar remains the dominant force in global finance.

Source- The Hindu