Calls grow louder to end hegemony of US dollar

Moves toward a ‘petroyuan’ can contribute to reform of international monetary, financial system


In recent years, the global trend of “de-dollarization” has become increasingly prominent as a way to break the hegemony of the US dollar and respond to US sanctions.

During the two World Wars, the change in the balance of power laid the foundation for the US dollar to become the international currency. Following the collapse of the Bretton Woods system and the oil crisis in the Middle East in the 1970s, the United States signed an “unshakeable agreement” with Saudi Arabia — the leader of the Organization of the Petroleum Exporting Countries, or OPEC — to maintain the dominant position of the US dollar in the international monetary system.

The deal set up a US-Saudi alliance based on oil exports paid in US dollars in exchange for security support, which was later extended to other OPEC countries. The petrodollar system was thus created, paving the way for the economic and financial hegemony of the US.

The country’s overall national strength was the true reason behind the US dollar’s dominance. As a credit currency issued by a sovereign state, the dollar has played a dominant role in the international monetary system, consistently ranking first among all currencies in terms of international reserves, international payments and global foreign exchange. Some countries peg their currencies to the US dollar, and US Treasury bonds are also considered the safest and highest-quality assets by investors worldwide.

The dollar hegemony is a manifestation of the financial hegemony of the US. The country collects “seigniorage” by issuing dollars; it uses “US dollar tidal waves” to plunder wealth from around the world; it frequently imposes financial sanctions on “uncooperative” countries, and employs long-arm jurisdiction.

For example, due to the Iran nuclear issue, Teheran was banned from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in 2012 and 2018, which caused serious economic and financial impacts and isolation. Many companies in the European Union and China faced sanctions for doing business with Iran.

After the outbreak of the Russia-Ukraine conflict, the US and Europe tightened their financial sanctions against Russia. In response, Russia announced that it would gradually empty its holdings of US dollars and euros in foreign exchange reserves, keeping only gold, the renminbi and rubles, and using rubles, the renminbi, or the currencies of friendly countries for trade settlement.

Russia is also seeking to establish a new type of economic partnership in Africa that is independent of the US dollar and promoting the establishment of a settlement system among the BRICS countries.

For economic security reasons, some countries are considering promoting the use of their own currency in trade settlement, to avoid excessive reliance on SWIFT. OPEC+, led by Saudi Arabia and Russia, has frequently taken a stance against the US in recent years.

At the 2023 World Economic Forum in Davos, Switzerland, Mohammed Al-Jadaan, the finance minister of Saudi Arabia, said the country is open to using currencies other than the US dollar for trade settlement.

Since the start of the 21st century, China’s rapid economic growth has led to a remarkable rise for the country’s currency. The renminbi now ranks third in terms of weighting in the International Monetary Fund’s Special Drawing Rights basket (12.28 percent); it is the fifth-largest payment currency in the world and the fifth-largest reserve currency.

China’s central bank, the People’s Bank of China, has signed bilateral currency swap agreements with more than 40 countries and regions, with a total value of over 4 trillion yuan ($582.3 billion). In 2022, the value of cross-border receipts and payments in the renminbi reached 42 trillion yuan, 3.4 times the corresponding level in 2017 and accounting for about 50 percent of the total value of cross-border receipts and payments in home and foreign currencies.

The Renminbi Cross-border Interbank Payment System, or CIPS, is an important financial market mechanism that plays a critical role in supporting the internationalization of the renminbi. CIPS now has more than 1,300 participants covering over 100 countries and regions globally.

In March 2018, crude oil futures priced and settled in the renminbi were officially listed and traded on the Shanghai International Energy Exchange, which created favorable conditions for improving the international crude oil pricing system and promoting energy and financial cooperation with major oil-producing countries. It also supports Middle Eastern countries to enhance their strategic autonomy and break away from US dollar hegemony.

The renminbi is gradually becoming a new choice for diversifying foreign exchange reserves in some Middle Eastern countries. For example, renminbi assets account for 21 percent of Iran’s foreign exchange reserves; in 2022, the US’ staunch ally Israel included the renminbi in its foreign exchange reserves for the first time.

In February, Iraq — the second-largest oil producer in OPEC — announced that it would allow direct renminbi settlement for its trade with China to reduce dependence on the US dollar. China has also established renminbi clearing banks in Qatar and the UAE to facilitate bilateral trade and investment.

The petrodollar pricing mechanism underpins US financial hegemony, but it has many problems. With the rise of the Chinese economy and the acceleration of the renminbi internationalization, the call for the “petroyuan” is growing louder.

It is hard to shake the US dollar as the dominant currency in the short term. The road ahead for the “petroyuan” is long and arduous, but it can contribute to the reform of the international monetary and financial system.

The author is an associate researcher at the Institute of West-Asian and African Studies at the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily. 

The views do not necessarily reflect those of China Daily.