World economies shifting away from using the dollar for trade

Analysts believe that China and other countries are gradually reducing their dependence on the dollar by using local currencies for cross-border trade, helping to create a multipolar international currency system. — China Daily

HONG KONG: Economies across the world are exploring the use of convenient currencies other than the US dollar for trading.

Analysts believe that China and other countries are gradually reducing their dependence on the dollar by using local currencies for cross-border trade, helping to create a multipolar international currency system.

At the end of March, the Shanghai Petroleum and Natural Gas Exchange (SHPGX) reported that China had imported liquefied natural gas (LNG) from the United Arab Emirates (UAE) using cross-border yuan settlement.

It was the first time that China – the world’s second-biggest importer of LNG –had used its currency for such a purchase, as the global commodities trade has long been based on dollar-denominated transactions.

Sergio Rossi, a professor of macroeconomics and monetary economics at the University of Fribourg in Switzerland, said the LNG deal with the UAE showed that oil exporting countries are keen on using currencies such as the yuan, rather than the dollar, at the international level.

This transaction might encourage other countries to switch from the dollar to their own currencies to pay for oil and gas imports, Rossi said. This could lead to the creation of regional clearing houses through which foreign transactions in commercial or financial markets could be settled, he added.

David Phua, partner at the international law firm King and Wood Mallesons, said it is “certainly conceivable “that a basket of currencies combined with precious metals such as gold and silver could become “increasingly important means over time of settling international commodity transactions”. He added this can lead to a more multipolar world in terms of international reserve holdings.

With extensive experience in negotiating and drafting long-term LNG sale and purchase agreements, Phua said it is “reasonably likely” that there will be more yuan-denominated transactions in the near future.

The China National Offshore Oil Corp, or CNOOC, has bought 65,000 tonnes of natural gas from TotalEnergies, which is based in Paris, through the SHPGX. The LNG was sourced from the UAE.

Guo Xu, the SHPGX chairman, told the media the deal is a meaningful attempt to promote multi-currency pricing, settlement and cross-border payment in international LNG trading.

Analysts said CNOOC’s LNG purchase based on the yuan heralds a new trend not only in the oil and gas industry but in global trade and finance.

Some analysts wondered how the United States would react to this trend. Decades ago, Iraqi leader Saddam Hussein and his Libyan counterpart Muammar Gaddafi sought alternative use of the dollar in energy trade, before they were accused of tyranny, toppled and eventually killed.

But times have changed. The sanctions levied against Russia by the United States since last year have shown how the greenback is being “weaponised”, observers said. The appropriation of Russian tycoons’ dollar-denominated assets, deemed to violate the very basis of capitalism, chilled many in business circles.

Even US Treasury secretary Janet Yellen admitted that US sanctions imposed on Russia and other countries have put the dollar’s dominance at risk.

In an interview with CNN on April 16, Yellen said: “There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar. Of course, it does create a desire on the part of China, of Russia, of Iran, to find an alternative.”

Phua said there is a perception that the dollar is being “weaponised “through US-led sanctions blocking or restricting a country’s ability to settle transactions in the greenback.

“One of the key features of a global reserve currency arguably should be its ‘neutrality’ and not it being used as a tool to advance a particular set of foreign policy objectives.

“Whether the dollar satisfies such a standard is a question at least open for debate, and this has been one of the motivators in encouraging a shift to a more diverse set of reserve currencies and/or means for settlement of international commodity transactions,” he said.

Deniz Istikbal, an economics researcher at the Foundation for Political, Economic and Social Research, a think tank based in Ankara, Turkiye, said the increased use of the yuan in trade and foreign exchange reserves is closely linked to the growing prominence of China.

In Malaysia, Prime Minister Datuk Seri Anwar Ibrahim said the nation is negotiating with China to enable bilateral trade to be settled in the yuan and the Malaysian ringgit. Anwar has also proposed establishing an Asian Monetary Fund.

“There is no reason why countries like Malaysia continue to rely on the dollar,” Anwar told the Malaysian parliament on April 4.

In March, China and Brazil agreed to drop the dollar as an intermediary currency, and will instead use the yuan and Brazilian real in bilateral transactions. Brazilian President Luiz Inacio Lula da Silva has likewise urged the BRICS nations of Brazil, Russia, India, China and South Africa to develop an alternative currency that can replace the dollar in foreign trade. — China Daily/ANN

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