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\u2019s 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\u2019s favored investment destinations.<\/p>\n\n\n\n
Animating these developments is the confluence of China\u2019s Belt and Road Initiative (BRI) and the Gulf\u2019s 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\u2019s, Iran\u2019s, Egypt\u2019s, Yemen\u2019s and the UAE\u2019s were comprehensive in scope.[1]<\/a> 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 \u201csecurity guarantee\u201d is not as reliable as it once was.<\/p>\n\n\n\n At this stage, the Gulf-China relation runs deep enough to render each party internal<\/em> to the other\u2019s economic constitution.[2]<\/a> 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\u2019s plans to revise the international (neo)liberal order which has governed the post-Cold War era.<\/p>\n\n\n\n This paper specifically considers how deepening trade and investment relations between China and Gulf oil producing countries underpin the former\u2019s 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\u2019s construction of an institutional infrastructure for renminbi (RMB) internationalization, it shines a light on one of the main pivots of 21st<\/sup> century global affairs.<\/p>\n\n\n\n The Birth of Petroyuan and the Internationalization of RMB<\/em><\/strong><\/p>\n\n\n\n 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\u2019s normative structure and its status as an industrial superpower.[3]<\/a> At the heart of both critiques was the oil dollar benchmark. In substance, the benchmark\u2014a legacy of agreements established between the United States and Saudi Arabia in the 1970s\u2014designated 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]<\/a> The consequence for the international monetary system was to maintain the dollar\u2019s status as the key international currency of the post-Bretton Woods period despite the United States\u2019 severing the direct convertibility of dollars into gold in 1971 and despite the country\u2019s 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\u2019s price-making capacity in the oil sector and <\/em>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\u2013Import Bank, in driving up prices for oil imports, the United States\u2019 adoption of quantitative easing in 2007 precipitated financial losses equivalent to $18.4 billion for China.[5]<\/a><\/p>\n\n\n\n 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\u2019s 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\u2019s exclusive pricing in US dollars and inasmuch as future contracts function as reference prices for physical commodity trading, announced a first move in China\u2019s attempt to reduce exposure to a financialized and dollarized global commodities market.[6]<\/a> The contract also demonstrated China\u2019s 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]<\/a> Second, in being based on the medium-sour crude that is produced (mainly) in the Gulf region and exported primarily to Asia\u2014 deliverable crude oil grades come from the UAE, Oman, Qatar, Yemen, Iraq, and China\u2019s Shengli oil field, with Iraq being the major source\u2014this futures contract also aligns better with the realities of Gulf-Asia trade than does equivalent futures priced in Brent or Texas crude.[8]<\/a> Third, the futures contract\u2019s dependability is enhanced by the fact that China\u2019s state-owned oil companies have an extensive upstream presence in the oil sector of the Gulf.[9]<\/a> 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]<\/a> <\/p>\n\n\n\n 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]<\/a> To attract more foreign participation, the Shanghai International Energy Exchange since started delivering oil for oversea clients\u2014principally, to South Korea, India, Singapore, Malaysia, and Japan[12]<\/a>\u2014and 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 Soci\u00e9t\u00e9 G\u00e9n\u00e9rale.[13]<\/a> Motivated in the final instance to increase monetary autonomy over real economic activities, moreover, China has not stopped with energy derivatives alone.[14]<\/a><\/p>\n\n\n\n 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]<\/a> Clearly, there is momentum for China\u2019s efforts to assert price making power over essential commodities.<\/p>\n\n\n\n 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\u2019s 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\u2019s non-liberalized capital account and underdeveloped financial markets leave them without sufficient investment opportunities for recycling revenues into China.[16]<\/a> 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.<\/p>\n\n\n\n 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]<\/a>: 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]<\/a> At the time of writing, there are five schemes in place\u2014two for the onshore sector, three for the offshore\u2014allowing 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.<\/p>\n\n\n\n In the second instance, those dubious on the petroyuan\u2019s prospects unduly discount China\u2019s weight in the real<\/em> 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.<\/p>\n\n\n\nLimits of the Petroyuan?<\/strong><\/h3>\n\n\n\n
Material foundations for oil trade in RMB in China-West Asia relations<\/strong><\/h3>\n\n\n\n