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Saudi Arabia could flee to gold or cryptocurrencies to escape the money-printing machine, but it won't replace the US dollar with an inferior fiat currency.
Numerous articles have speculated that Saudi Arabia may use the yuan, China's local currency, to finance its oil exports.
Saudi Arabia exports how much to China? According to the Organization for Economic Cooperation and Development, the kingdom's primary export destinations were China ($45.8 billion), India ($25.1 billion), Japan ($24.5 billion), South Korea ($19.5 billion), and the United States ($12.2 billion). Crude oil exports totaled $145 billion.
Saudi Arabia is the world's top oil exporter, with $145 billion in revenue, while China is the world's largest importer, with $204 billion in revenue in 2019.
Saudi Arabia's public finances are impeccable. The kingdom plans to achieve a surplus in 2022, from a deficit of 4.8 percent, and its public debt to GDP (gross domestic product) ratio is 30.8 percent, one of the lowest in the world.
Is it necessary for Saudi Arabia to use the yuan at all? No. Despite the pandemic-induced decline in exports and oil demand, the country's foreign currency reserves, including gold, stood at $472.8 billion in 2020. Is there any pressure on it to change its currency? Even more so. Its reserves comfortably cover its foreign debt, allowing it to maintain an exceptional level of stability in comparison to other OPEC (Organization of the Petroleum Exporting Countries) members with substantial trade and fiscal deficits.
What benefit might Saudi Arabia derive from the yuan's use? Not an increase in shipments to China. China requires oil imports far more than Saudi Arabia requires Chinese dollars. There is no evidence that Saudi Arabia's exports to China would decline if it continued to utilize the US currency.
Yuan usage in international transactions is extremely limited. According to Bloomberg, based on data from the Society for Worldwide Interbank Financial Telecommunications, "activity in the renminbi, as the currency is often known, increased to its second-highest level ever in 2021." This still amounts to a persistently tiny 2.7 percent of the market, compared to the dollar's 41 percent, which has held the top spot for decades. The euro accounts for 36.6 percent of worldwide transactions, the British pound accounts for 5.9 percent—more than double the yuan's share despite the UK's far smaller economy—and the Japanese yen accounts for the same amount as the yuan at 2.6 percent.
More crucially, despite the Chinese economy's dramatic rise in global importance, the yuan's currency status has barely improved since 2015, when it reached the fourth rank.
Why is the yuan utilized in only 2.7% of global commerce but accounting for 14% of global GDP, and what changed in 2015?
The yuan is the only currency issued by a major global economic power that is subject to capital controls and has a fixed exchange rate. As a result, each holder of the Chinese money is constantly threatened with an unexpected devaluation and the inability to make payments in the currency.
And this is precisely what occurred in 2015. China's central bank has announced a sharp devaluation.
The yuan is not a viable alternative to the US currency because to capital controls, fixed pricing, and, worse, the People's Bank of China's monetary policy is much more aggressive than the Federal Reserve's. For two decades, China's money supply expansion has been multiple times that of the US, despite substantially lower worldwide demand for the yuan.
It's also worth mentioning that even the largest Chinese oil corporations prefer to conduct worldwide business in US dollars. By examining the open interest in the Shanghai Commodity Index, or the so-called petroyuan index, we can observe that the yuan is used in very few worldwide oil transactions.
China's ostensibly substantial gold reserves amount to less than 0.3 percent of its money supply (M2), while its unquestionably substantial US dollar reserves of $3.35 trillion barely cover its foreign currency commitments.
If other countries' oil and commodity producers, particularly in Latin America, have previously accepted China's currency, it was due to the massive debt obligations they incurred with the Asian superpower, not for practical reserve currency–use reasons.
Any commodities producer who takes the yuan in lieu of the US currency must understand that capital controls and price fixing are significant dangers, and there is no indication that the People's Bank of China will alter either.
The reality is that the yuan possesses all of the negative characteristics of fiat currencies—massive printing, a lack of real support, and a central bank incentive to erode purchasing power—but none of the positive characteristics of the dollar, euro, or pound—free-floating pricing, legal and investor protection, and an open financial system.
While Saudi Arabia may use some yuan in its oil exports, the reality is that no fiat currency subject to capital controls is a viable alternative to other fiat currencies, and the arrival of central bank digital currencies accentuates this distinction. Central bank digital currencies are surveillance disguised as money, with significantly greater risks of enormous printing, degradation of purchasing power, and transaction control than with traditional currencies.
Saudi Arabia may seek refuge in gold or cryptocurrency in order to circumvent the money-printing machine. However, it will be difficult to replace the US dollar, a heavily printed but open and secure fiat currency, with a closed and less secure one.
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