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Chinese President Xi Jinping's visit to Saudi Arabia earlier this month marks the beginning of a new monetary era, in which the dollar will lose its role as the world's reserve currency. That's what Credit Suisse credit analyst Zoltan Pozsar writes in a new analysis titled 'War and Commodity Encumbrance'. He sees an increasingly strong alliance of non-Western countries, which together strive for a new monetary system in which different currencies and raw materials will play an important role. Oil-producing countries are increasingly seeking cooperation with Russia and China. What are these countries up to? And what does this mean for the Western world?
In his new analysis, credit analyst Pozsar elaborates on what he described earlier this year as 'Bretton Woods III'. At the time, he concluded that the international monetary system would be fundamentally changed by Western financial sanctions against Russia. Since then, developments have accelerated. Russia has made agreements with several countries to pay for gas in rubles, while China is now actively promoting the yuan as an alternative to the dollar.
Earlier this month, Xi Jinping released a visit Saudi Arabia to discuss enhanced cooperation in the energy sector. He was also invited by Saudi Arabia to the China-Gulf Cooperation Council (GCC), a meeting with representatives of several Gulf states. There, Xi Jinping spoke of a new paradigm to be rolled out in the next three to five years. He said there, in the presence of representatives of all the Gulf States, that next:
"Over the next three to five years, China is ready to cooperate with the GCC countries in the following key areas: First, establishing a new paradigm of energy cooperation in all dimensions, with China will continue to import large quantities of crude oil from GCC countries in the long term and purchase more LNG. We will strengthen our cooperation in the upstream sector, engineering services and [downstream] storage, transport and refining. The Shanghai Petroleum and Natural Gas Exchange platform will be fully utilised for RMB settlement in oil and gas trading. We could start a currency swap collaboration and advance the m-CBDC Bridge project."
China is already the main buyer of oil from Saudi Arabia and wants to further strengthen ties with the Kingdom. And as the above excerpt shows, China has big plans to further develop the energy sector in the coming years. Not only by investing in exploration, production, transport and storage of oil and gas in the Middle East, but also by facilitating payment in Chinese yuan. For example, with the setting up of currency swaps and, in the long term, the use of central bank digital money, such as the digital yuan. This makes it easy for banks worldwide to transact in yuan with Chinese banks.
According to credit analyst Pozsar, this marks the end of the petrodollar and the beginning of the petroyuan, because China currently has more to offer for Saudi Arabia than the United States. For example, China imports large quantities of oil from the Gulf region, while the Americans produce a large part of their oil themselves. China is also willing to invest in the Kingdom, for example with regard to technology and infrastructure.
It has been possible to trade oil contracts in yuan since 2017, but to date they have only had a marginal share of the total oil trade. That may change in the coming years, as China reaches an agreement with more trading partners on payment in yuan. For example, since the war in Ukraine, China has been able to import oil from Russia at a discount and pay for it in Chinese yuan. China is also already buying oil at a discount from other sanctioned countries, such as Iran and Venezuela. The latter also accepts payment in yuan.
If oil-producing countries in the Gulf region also go yuan accept, then that can be a Game Changer energy market. This region accounts for about 40% of the world's proven oil reserves. It will boost the value of the yuan, just as the value of the Russian ruble skyrocketed when Putin announced that gas will have to be paid for in this currency from now on. More countries will accept the yuan as a form of payment, as it allows them to import products from China or oil from different oil-producing countries.
This new paradigm seems less favorable to the Western world. If oil-producing countries in the Middle East can process more oil into end products themselves with Chinese investments, this could be at the expense of refineries in Europe, for example. The added value that European countries now create by processing crude oil into fuels could then increasingly benefit the oil-producing countries. European countries will then be more expensive and will become less competitive. Energy-intensive industries may leave Europe and move to China, as BASF has recently pointed out. private.
China now has good ties with both Russia and Saudi Arabia, the two largest oil producers within OPEC+. If both countries accept the yuan, it will also affect the United States. Less demand for dollars to settle for oil means it will become more expensive for the U.S. government to finance its deficits. As a result, interest rates and therefore inflation in the United States - and possibly also in Europe - will remain high in the coming years, according to Pozsar.
