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The Petroyuan and Renminbi Internationalization: Probing Gulf-China Relations

Middle East & North Africa

An eastward shift in the gravity of the global economy has provoked a significant restructuring of the economic relations between Gulf oil producers and China. As of 2010, China had ascended to become the subregion’s leading trade partner, one of its major foreign investors, and an irreplaceable contractor for mega infrastructure projects. More recently, China has also grown into one of the Gulf’s favored investment destinations.

Animating these developments is the confluence of China’s Belt and Road Initiative (BRI) and the Gulf’s strategies for economic and geopolitical diversification. Concerning the former, nearly every state in West Asia (inclusive of the oil producers) officially joined the BRI; during the 2010s, twelve countries from the subregion also signed strategic partnership agreements with China. Of these agreements, it is worth noting that Saudi Arabia’s, Iran’s, Egypt’s, Yemen’s and the UAE’s were comprehensive in scope.[1] As for the diversification driver, over the past decade especially, the Gulf regimes came to recognize two things: First, diversification in and beyond the oil sector is to hinge on engagements with China. Second, that the American “security guarantee” is not as reliable as it once was.

At this stage, the Gulf-China relation runs deep enough to render each party internal to the other’s economic constitution.[2] What is more, theirs is a relation that is reshaping the global economy: Indeed, it is no exaggeration to say that the China-Gulf dyad became a significant pillar of China’s plans to revise the international (neo)liberal order which has governed the post-Cold War era.

This paper specifically considers how deepening trade and investment relations between China and Gulf oil producing countries underpin the former’s efforts to transcend the petrodollar regime which has hitherto served as a pillar of the international monetary system. Identifying spaces where the oil producers are not only responsive but actively involved in China’s construction of an institutional infrastructure for renminbi (RMB) internationalization, it shines a light on one of the main pivots of 21st century global affairs.

The Birth of Petroyuan and the Internationalization of RMB

China began calling for the reform of the international monetary system in earnest after the financial crisis of 2007-2009. In parallel, it criticized the global energy system as being unfair, unbalanced, highly financialized, and unreflective both of China’s normative structure and its status as an industrial superpower.[3] At the heart of both critiques was the oil dollar benchmark. In substance, the benchmark—a legacy of agreements established between the United States and Saudi Arabia in the 1970s—designated the US dollar as the exclusive currency for oil invoicing and elevated the US economy into the principal destination for oil export revenue recycling.[4] The consequence for the international monetary system was to maintain the dollar’s status as the key international currency of the post-Bretton Woods period despite the United States’ severing the direct convertibility of dollars into gold in 1971 and despite the country’s growing fiscal and external imbalances. For China, the effects of the benchmark (and of the result hegemony of the dollar) were dual: It imposed limits on the country’s price-making capacity in the oil sector and left energy policy exposed to changes in American monetary policy. The real world impact of this was felt during the financial crisis. According to a former chairman of the Export–Import Bank, in driving up prices for oil imports, the United States’ adoption of quantitative easing in 2007 precipitated financial losses equivalent to $18.4 billion for China.[5]

Mindful of the vulnerabilities which derived from the dollar-oil nexus, China worked in the intervening years to build alternative arrangements. March 2018 witnessed this effort’s first yield when an RMB-denominated oil futures contract was released on the Shanghai International Energy Exchange. The trading of the contract marked an end to oil’s exclusive pricing in US dollars and inasmuch as future contracts function as reference prices for physical commodity trading, announced a first move in China’s attempt to reduce exposure to a financialized and dollarized global commodities market.[6] The contract also demonstrated China’s capacity to furnish a meaningful alternative for players in the oil market. Indeed, the futures contract broke new grounds in a number of ways: First, by way of its relation to an RMB-denominated gold futures contract traded in Hong Kong since 2017, the oil futures contract in question is fully convertible to gold.[7] Second, in being based on the medium-sour crude that is produced (mainly) in the Gulf region and exported primarily to Asia— deliverable crude oil grades come from the UAE, Oman, Qatar, Yemen, Iraq, and China’s Shengli oil field, with Iraq being the major source—this futures contract also aligns better with the realities of Gulf-Asia trade than does equivalent futures priced in Brent or Texas crude.[8] Third, the futures contract’s dependability is enhanced by the fact that China’s state-owned oil companies have an extensive upstream presence in the oil sector of the Gulf.[9] Fourth, finally, the contract helps fill the lack of a regional oil benchmark in the Asia-Pacific region and, as a result, has stood to lower the premium at which Asian oil has traded in international markets.[10]        

Given the value presented, the RMB-denominated oil futures contract received swift market acceptance, including by two of the biggest commodities traders (Glencore PLC and the Trafigura Group) in the world. Within a year, in fact, it was the third most actively traded crude oil future in the world and its trading volume, equivalent to 14% of the global market, reached roughly half that of the futures contracts for Brent Crude, a remarkable ascent to say the least.[11] To attract more foreign participation, the Shanghai International Energy Exchange since started delivering oil for oversea clients—principally, to South Korea, India, Singapore, Malaysia, and Japan[12]—and launched a crude oil options contract for deepening risk management options. By 2021, this helped attract sixty-eight overseas brokerages from twenty-three countries to the exchange. Those currently trading derivatives contracts there include western financial powerhouses like JP Morgan, Goldman Sachs, BNP Paribas, and Société Générale.[13] Motivated in the final instance to increase monetary autonomy over real economic activities, moreover, China has not stopped with energy derivatives alone.[14]

Beyond oil, the Shanghai exchange now offers twenty-three varieties of RMB-denominated futures and options trades. Cross-border RMB settlement for major commodities hit RMB 1.5 trillion during the first nine months of 2023, a fifty percent jump compared to the whole of 2022.[15] Clearly, there is momentum for China’s efforts to assert price making power over essential commodities.

Limits of the Petroyuan?

Be that as it all may, there are many who argue that the prospects of either the petroyuan in particular or dedollarized commodities markets more generally remain limited by China’s regulated capital account and shallow financial markets. As this school of thinking goes, oil producers will avoid invoicing oil in RMBs at scale because China’s non-liberalized capital account and underdeveloped financial markets leave them without sufficient investment opportunities for recycling revenues into China.[16] Implicit in the argument, then, is the assumption that there it is the American way or the highway: The only path to the internationalization of a currency is to put in place a financial market with the same characteristics as the neoliberal model of the United States.

This argument comes up short on two fronts. In the first instance, empirically speaking, China has, as a point of fact, experimentally adopted targeted liberalization of financial markets and implemented an innovative management to the monetary trilemma [17]: As a result, its capital markets evince variegated levels of openness and grant different levels of access based on the nature of the actor (domestic vs. foreign; speculator vs. long-term investor) and the location of the capital flow (onshore vs. offshore sectors).[18] At the time of writing, there are five schemes in place—two for the onshore sector, three for the offshore—allowing overseas holders of RMBs access to Chinese financial centers and opportunities to invest in the mainland. Due to the flows of foreign investment facilitated, these schemes are partially responsible for Chinese financial markets now being the largest in Asia and second largest in the world.

In the second instance, those dubious on the petroyuan’s prospects unduly discount China’s weight in the real global economy and the effects this will inevitably have for currency internationalization. China is presently generating 29% of global manufacturing output and is a top tier contractor in global infrastructure projects. Additionally, the country is also a major source of, and destination for, global investment. With so much economic activity now running through China, Beijing and its many economic partners alike retain an interest in increasing the use of the RMB, at least to the extent that it covers their cross-border transactions. Nowhere is the mutuality of this interest more easily observed than in the Gulf.

Material foundations for oil trade in RMB in China-West Asia relations

Table.1 China-West Asia oil producing countries economic relations
Trade relations 2021
Imports (share of total)18,928,820,317,314,813,69,22
Exports (share of total)1942,428,7727,412,742
Chinese Investment and construction contract 2005-2023, Stock $billion
Construction contracts4321,8419,2232,6512,318,515,7
Source : Observatory of Economic Complexity, and China Global Investment Tracker.

 As Table (1) makes plain, the scale of China’s trade and investment relations with each of the Gulf’s major economies is rather staggering. They have certainly matured to the extent of constituting material grounds for pricing oil in RMB.

Indeed, taken in a regional comparative context, it is West Asia, the Gulf included, which has seen its economic orientation tilt most to the east following the rise of China in the 1990s.[19] Over the past three decades, regional exports to the USA and the European Union have more than halved in relative terms, whereas the share of China went from 1% to 13%.[20] By consequence, for the past fifteen years, China has stood as the single largest trade partner for West Asia as a whole—and for each and every one of the major oil exporters. As was mentioned earlier, China is also today a massive investor in the Gulf as well as the country from which the Gulf sources the contractors for many of its biggest infrastructure projects. For a sense of scale, consider that Saudi Arabia and the UAE are presently the second and third largest destinations for overseas contract for Chinese firms. Even in Iraq, Chinese companies managed to win infrastructure-related contracts worth a total of $21.2 billion between 2018 and 2022, which amounts to 59% of the total sum awarded by the Iraqi state during those years. (In 2022, data suggests Chinese firms won 87% of the contracts awarded[21]).

Flipside of the same coin, the Gulf’s presence in the Chinese economy has grown by leaps and bounds over the past twenty years.[22] Between 2003 and 2015, total Gulf foreign direct investment (FDI) in mainland China tipped $27 billion, which is more than the GCC countries’ aggregate stock of FDI in the United States.[23] For Saudi Arabia and Kuwait, China has been the biggest recipient of FDI for nearly a decade running, and the trend is accelerating.[24] In the late 2010s, Sinopec and the Kuwait Petroleum Corporation established a joint venture now presiding over the Zhanjiang Integrated Refinery and Petrochemical Complex, China’s largest petrochemical port. As part of its own joint ventures, meanwhile, Saudi Arabia invested in three important petrochemical complexes in China between 2023 and the first quarter of 2024 alone. At this stage, mainland China is also the country where Saudi Basic Industries Corporation (SABIC)—the third largest petrochemical firm in the world—generates the most of its revenues.[25]

These deepening sinews of trade, investment and finance pertain to RMB internationalization inasmuch as the Gulf now clearly has an interest in being able to invoice a significant portion of its oil exports in RMB. After all, the subregion has regular bills for Chinese imports coming due, regular contracts with Chinese construction firms to pay, and growing investment interests in China. In this context, the reductions in transaction costs and associated currency exchange-related risk that would come from selling more oil in RMB are substantial.

China, for its part, is certainly willing to go further down this road. For a few years now, it has asked the Gulf’s oil producers to consider using RMB in conducting their bilateral energy trade, most recently at the China-Arab states summit of 2022. Iraq and Saudi Arabia have expressed an intent for setting up the appropriate processes, while Iran, sanctioned by the US Treasury, has reportedly been trading oil in RMB for some time.[26] Of note as well, UAE recently delivered the first LNG deals settled in RMB, a transaction made between China CNOOC and Total Energy. Set in global terms, these developments do appear to signal and instantiate a broader historical trend of oil market de-dollarization: In 2023, non-dollar denominated oil transaction broke the all-time record, representing an estimated 20% of all transactions.[27]

When it comes to the Gulf and China, steps are also being taken toward laying down the broader infrastructure for a non-dollar based economic relation. Some of these steps were planned out in China’s Arab  2016 Policy Paper, which detailed an agenda premised upon ‘monetary cooperation between central banks’, ‘the expansion of cross-border currency clearing and currency swap arrangements’, an ‘increase [in] financing insurance support’, and ‘improvements and reform [to] the international financial system.’[28] Eight years later, the major oil producers countries are actively participating in the RMB internationalization’s experimental institutional workarounds: For instance, they are participating in China’s Qualified Institutional Investors (QFIs) program and in its Bond Connect and Bond Direct schemas. They are settling trade in RMBs and arranging local currency swap agreements. They have established RMB clearing centers.[29] They have issued of RMB-denominated debt[30], and developed a multi-arrangement cross-border payment system based on central banks’ digital currencies. The Dubai Exchange has even released an RMB-denominated gold futures contract.

Table.2 China-Gulf states Swaps Lines, 2023
CountrySaudi ArabiaUAEQatar
Amount (RMB Billion503535
Source : PBC (2023) and Media reports

All in all, more and more Gulf-China transacting is being done in RMB, as can be gleaned from a review of SWIFT data. Nearly a decade ago, it was already the case that more than 80% of the direct payments made between the UAE and China/Hong Kong were in RMB[31], while Qatar’s use of RMB was amounting to 60% of all its payments to China and Hong Kong.[32] SWIFT payments between Iran, Oman, Saudi Arabia and China likewise record sizable RMB flows[33], and the Iraqi Central Bank has announced that bilateral trade will soon be conducted in the yuan.[34] Taken as whole, the biggest regional increase in the number of financial institutions using RMB for payments took place in the Middle East and Africa between 2013 and 2019.[35] Through the aforementioned Qualified Institutional Investors (QFI) program, Gulf oil exporters have become significant RMB investors in Chinese financial markets, too. Before China lifted quota regimes for QFI, the UAE and Qatar had been allocated 4.1% and 2.5% of quotas granted to Qualified Foreign Institutional Investors in China, respectively. With RMB 5 billion, the Abu Dhabi Investment Authority topped the list of investment quotas (only the Monetary Authority of Macao had an equal quota).[36]

Where do we go from here?

     Looking ahead, it would be naïve to neglect the influence that politics and power will have on the Gulf-China relation—and on the movement toward invoicing more oil exports in RMB. Some project that as long as US military power remains strong in the region the Gulf will respect the oil dollar benchmark because of their dependency on the US “security umbrella.”[37]

     And yet, while the Gulf’s political and security ties with Washington are certain to affect the petroyuan’s prospects, it would be equally naïve to consider these ties either permanent or impervious to shifts in the organization of the global economy. The orientation of both the world economy and the Gulf’s economies are tilting further east and with them, the balance of power. American capitalist imperialism, meanwhile, is overstretched, running into the reality of declining material capacities and all this entails for honoring traditional strategic objectives. The result of these historical processes has been to usher in an age of multipolarity, one which affords far greater autonomy to the United States’ regional partners. In West Asia, some of these partners have seized the moment by “diversifying international partnerships.”[38] As this pertains to China and the Gulf, one has witnessed within the past few years alone Beijing mediate Riyadh-Tehran normalization as well as Saudi Arabia, Iran, Egypt and the UAE accede to the BRICS. As discussed at length in this paper, one has also witnessed the Gulf participate actively in RMB internationalization, despite the knock-on effects implied for the US dollar’s international profile.

     That these structural conditions might one day yield the emergence of a petroyuan—braced by the Gulf-China relations—strikes as imminently possible Overall, the regional order is in a state of fluidity and uncertainty at the political level will govern the immediate future. Major oil producers now have deep relations with rival international powers. It remains to be seen how they will navigate this contradictory new reality and balance their respective interests.

[1] Egypt initially signed a strategic partnership with China in 1999 before upgrading the arrangement in 2014.

[2] Adam Hanieh, Money, Markets and Monarchies: The Gulf Cooperation Council and the Political Economy of the Contemporary Middle East (Cambridge University Press: 2018).

[3] Maha Kamel and Hongying Wang, “Petro-RMB? The oil trade and the internationalization of the renminbi”, International Affairs 95:5 (2019): 1131–1148.

[4] David E. Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets (Cornell University Press: 1999).

[5] Li Ruogo, Reform of the International Monetary System and Internationalization of the Renminbi (World Scientific Publishing: 2016).

[6] Salam Alshareef, “The shifting geo-economy of the Gulf and China’s structural power: The decline of the petrodollar and the rise of the petroyuan?” Competition & Change 27:2 (2023): 380-401.

Johannes Petry, “Same Same, but Different: Varieties of Capital Markets, Chinese State Capitalism and the Global Financial Order”, Competition & Change 24:1 (2020).

[7] John A. Matthews and Mark Selden, “China: the emergence of the petroyuan and the challenge to US dollar hegemony”, The Asia-Pacific Journal: Japan Focus 16:22 (2018): 1–12

[8] SIEE (2020) Crude Oil Futures Trading Handbook 2020. Shanghai International Energy Exchange. Available at: www.ine.cn/upload/20200415/1586917782215.pdf (accessed 10 June 2024).

[9] Salam Alshareef, “A contender state’s multiscalar mediation of transnational capital: the belt and road in the Middle East”, New Political Economy 29:1 (2024): 75-89.

[10] Tracy Liao, Edward Morse, and Anthony Yuen, “China’s New Crude Oil Benchmark: Long in the Making, but Still Imperfect” Oxford Energy Forum 113 (2018).

[11] Shen Hong, « China’s oil futures give New York and London a run for their money », Wall Street Journal (March 27, 2019).

[12] INE (2021b) SHFE Endeavors to Improve its Energy Derivatives Series. Available online (accessed 10 June 2024).

[13] INE (2021a) Three Years on, SC Promoted the Development of Oil Market. Available online (accessed 10 June 2024).

[14] Christopher A. McNally, « The political economic logic of RMB internationalization: A study in Sino-capitalism”, International Politics 52:6 (2015): 704–723

[15] PBC. 2023. “RMB Internationalization Report.” The People’s Bank of China. Available online (accessed 10 June 2024).

[16] Christopher A. McNally, “Chaotic m´elange: neo-liberalism and neo-statism in the age of Sino-capitalism”, Review of International Political Economy 27:2 (2020): 281–301.

[17] Also called the impossible trinity, the monetary trilemma holds that it is impossible to have all three of the following at the same time: a fixed foreign exchange rate, free capital movement, and an independent monetary policy.

[18] Christopher A. McNally and Julian Gruin, “A novel pathway to power? Contestation and adaptation in China’s internationalization of the RMB”, Review of International Political Economy 24:4 (2017): 599–628.

[19] Jacopo Maria Pepe, Beyond Energy Trade and Transport in a Reconnecting Eurasia (Springer: 2018)

[20] Author calculation based on International Trade Center data

[21] Wil Crisp, “Chinese win 87 per cent of Iraq energy contracts.” Middle East Business Intelligence (2022).

[22] Adam Hanieh, “World Oil: Contemporary Transformations in Ownership and Control”, Socialist Register 59 (2023): 1-24

[23] Author’s calculations are based on US Bureau of Economic Analysis. One should note that GCC countries do maintain a large stock of portfolio investments in the United States.

[24] ICAC, Investment Climate in Arab Countries. Dahman, Kuwait: The Arab Investment & Export Credit Guarantee. (2017)

[25] SABIC. 2022. SABIC Annual Report. Available online (accessed 10 June 2024).

[26] Ryosuke Hanafusa, Shuntaro Fukutomi and Yuta Koga, “Iran’s Oil Exports Reach 5-Year High, with China as Top Buyer,” Nikkei Asia (2024). Available online (accessed 10 June 2024).

[27] Anna Hirtenstein, “”The Dominant Dollar Faces a Backlash in the Oil Market”, Wall Street Journal (December 28, 2023).

[28]  PRC. 2016. China’s Arab policy paper. Available online (accessed 21 June 2024).

[29] In addition, two RMB clearing centers that trade RMB for local currency without having to go through the dollar were established in Qatar in 2015 and the UAE in 2016 (PBC, 2021).

[30] The UAE and Qatar are the most active foreign issuers of offshore RMB-denominated debt, as four of their banks issued almost RMB 48.22 billion between 2019 and 2021 (Alshareef, 2023) .

[31] According to SWIFT reports, the UAE was the fastest-growing yuan clearing center in the world in 2018 (SWIFT, 2019)

[32] SWIFT (2016a) Renminbi Tracker, January 2016. Available online (accessed 10 June 2024).

SWIFT (2016b) United Arab Emirates Shows Stellar Growth in RMB Adoption. Renminbi Tracker. Available online (accessed 10 June 2024).

[33] Hector Perez-Saiz and Longmei Zhang, “Renminbi Usage in Cross-Border Payments: Regional Patterns and the Role of Swaps Lines and Offshore Clearing Banks”, International Monetary Fund (2023).

[34] Staff Writer, «Iraq to allow trade with China in yuan – state media”, Reuters *February 22, 2023).

[35] SWIFT. 2015. “Over 1,000 Banks Across the World Use RMB for Payments with China and Hong Kong.” Available online

SWIFT. 2019. “Renminbi Internationalization: An Inside Look into London’s Quest for the Renminbi FX and Payments in the Midst of Uncertainties.” RMB Tracker, September 2018. Available online

[36] SAFE (2020) Qualified Foreign Institutional Investors (QFIIs) with Investment Quotas Granted by the SAFE. State Administration of Foreign Exchange. Available online (accessed 10 June 2024).

[37] Bassa Momani, «Gulf cooperation council oil exporters and the future of the dollar”, New Political Economy 13:3 (2008): 293–314.

[38] Jeremy Wildeman and Michael Atallah, ““Never Going to Let You Go: The Middle East, Great Power Competition, and the Rise of China” in Kari Roberts and Saira Bano (eds.) The Ascendancy of Regional Powers in Contemporary US-China Relations (Springer International Publishing: 2023): 195-214