China’s long-term battle to reduce the power and reach of US dollar hegemony took two steps forward this week. And further such moves appear to be in the winds.
First, the Brazilian government announced on Wednesday that it had agreed with Beijing that all bilateral trade will now be settled in their local currencies, rather than the dollar.
That deal is perhaps no surprise given the emphasis put on this issue by Beijing in recent years and the fact China is Brazil’s biggest trading partner.
The second step was news that China’s national oil company CNOOC and France’s TotalEnergies had completed China’s first LNG trade settled in yuan.
The Shanghai Petroleum and Natural Gas Exchange made that announcement on Tuesday.
Approximately 65,000 tonnes of LNG imported from the United Arab Emirates changed hands in the trade, it said in a statement.
TotalEnergies confirmed to Reuters that the transaction involved LNG imported from the UAE but did not comment further.
The state-owned Global Times quoted Chinese oil experts who hailed yuan settlement of international LNG trades as “a major event in China’s market-oriented oil and gas reform”, with a CNOOC manager saying it would help “build a diversified ecosystem for LNG trading”.
It said internationalization of the Chinese currency had made “remarkable progress” in recent years, noting that while it only accounts for 7% of all foreign exchange trades globally, the yuan had “become the world’s fifth-largest payment currency, the third-largest currency in trade settlement and the fifth-largest reserve currency”.
China has moved to settle oil and gas trades in yuan in recent years in a bid to promote its currency internationally and to weaken the dollar’s grip on world trade.
Russia has, not surprisingly, increasingly embraced the yuan amid Western sanctions imposed after it invaded Ukraine in February 2022.
During a visit to the Saudi capital Riyadh in December President Xi Jinping announced that China would “make full use” of the Shanghai exchange as a platform to carry out yuan settlements of oil and gas trades.
ASEAN ministers discuss local currency use
Meanwhile, interest in greater use of local currencies is growing in ASEAN, particularly for trade within the region.
Talks about reducing dependence on the US dollar, plus the euro, yen and British pound and moving settlements to local currencies was a key topic at a meeting of ASEAN finance ministers and central bank governors that began in Indonesia on Tuesday, according to a report by ASEAN Briefing.
Ministers and central bank chiefs have previously discussed a Local Currency Settlement Scheme and are keen to expand the use of local currencies for trade with a regional cross-border digital payment system, the report said, adding that five of the region’s biggest economies – Indonesia, Malaysia, Singapore, Malaysia and Thailand – agreed to do cooperate on this in November 2022.
“Indonesian President Joko Widodo has urged regional administrations to start using credit cards issued by local banks and gradually stop using foreign payment systems,” it said. “He argued that Indonesia needed to shield itself from geopolitical disruptions, citing the sanctions targeting Russia’s financial sector from the US, EU, and their allies over the conflict in Ukraine.
Moving away from Western payment systems is necessary to protect transactions from “possible geopolitical repercussions,” Widodo was quoted as saying. To date, only Singapore has imposed sanctions on Russia, it said.
- Jim Pollard with Reuters
NOTE: Further details were added to this report on March 30, 2023 (on ASEAN talks on greater use of local currencies).