CNBC Interview on the Digital Yuan and De-Dollarization
The digital yuan has a role to play in reducing China's dependence on the US dollar.
De-dollarization is no longer theoretical
In my interview on CNBC, I discuss how the digital yuan can challenge the dollar's role in international trade. This is the central thesis of my book “Cashless” and with sanctions raging it seems far more likely today than it did when I finished writing a bit less than a year ago. The digital yuan isn’t a dollar-killer, but given time will have a real impact on reducing dollar-based trade with China and reducing off-shore dollar deposits.
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The main points in the CNBC article make the e-CNY's role clear:
• China’s digital yuan will challenge the dollar’s domination as the currency of choice in international trade as it will help to revalue trade with China to yuan.
• China's CBDC is a decade ahead of the US and EU efforts.
• Nations will see alternative payment systems like the digital yuan as part of a “risk management exercise” to reduce dollar dependence.
After talking about de-dollarization in my CNBC interview two days later Saudi Arabia announced that it was finalizing discussions with China to sell oil in yuan! It was an announcement that shocked the world and provided further evidence that the dollar was under siege. Let’s face it the petro-dollar is legendary and a shift to yuan for oil payments is a major threat to dollar hegemony.
The Petro-Yuan joins the Petro-Dollar
The “petro-yuan” is coming as Saudi delivers a new shock to the world by considering accepting Chinese yuan for payment.
Saudi Arabia’s declaration that it will consider accepting Yuan for oil is STUNNING and illustrates why de-dollarization is not just theoretical
In light of recent sanctions, de-dollarization is now seen as a form of “risk management.” Managing the risk that a "safe dollar" is an illusion given that it is vulnerable to sanctions, reserve freezes, and SWIFT bans. Accepting the yuan is nothing more than managing the risk that the dollar will be unusable.
To get some idea of the scale consider this:
◾️ China is the world’s largest net oil importer
◾️ China is the largest single buyer of oil from Saudi Arabia consuming 25% of output
◾️ Saudi Arabia is China’s top supplier selling some 1.76 mn barrels daily
◾️ Russia is China’s second largest supplier at 1.6 mn barrels daily
In 2021 Saudi exported about $46 bn in petroleum to China. This means that revaluing even small amounts of these payments to petro-yuan will have a big impact on offshore use of the yuan.
To give it some scale, the current volume of transactions carried on China’s SWIFT alternative, CIPS, is around $12 bn in 2021 a 75% YoY increase.
Now consider if Saudi will revalue one-quarter of its sales to China in yuan this would make for $11.5 bn in additional yuan use doubling CIPS use. All of it off of the SWIFT network.
The big questions
◾️ Would that make the yuan a “real currency?”
Likely, even with currency controls, these amounts can't be ignored and will boost adoption.
◾️ What would Saudi do with the yuan?
Saudi’s imports from China in 2020 were $26.5 bn so much of the petro-yuan could flow back to China in trade and put in reserves.
◾️ Could the e-CNY be used for this someday?
It already has. Digital yuan was used in trade finance for a tanker cargo between Hong Kong and Shenzhen last year. Details are sketchy.
◾️ Could the Shanghai International Energy Exchange provide trading infrastructure?
Definitely, it was designed for yuan-valued oil futures contracts and might be used for spot markets and e-CNY one day.
◾️ How important is this?
An oil market analyst said it best: “The oil market, and by extension the entire global commodities market, is the insurance policy of the status of the dollar as a reserve currency. If that block is taken out of the wall, the wall will begin to collapse.”
◾️Are all analysts are convinced?
Not in the least, and its a fair critique that for many years there have been many failed attempts to call the death of the dollar.
It may be tempting to call this just another false alarm, but I don’t think so.
This is a new world and sanctions are speeding up trends that were already well underway.
This is Cashless: Central Bank Digital Currency and China in Perspective, a newsletter about CBDC, the e-CNY, China's fintech and our shared "cashless" future.
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