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The yuan could be the new dollar – Geopolitics and oil trade go hand in hand

For centuries, the dollar has been the dominant currency in the oil trade, but in recent years the Chinese yuan has also appeared.

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Chinese yuan has also appeared. Can China take over from the US? If so, what would be the impact on Hungarian consumers? We asked Áron Dénes Hartvig, OTDK (National Scientific Student Conference)-winner and Pro Scientia-medal student, about his research topic.

Author: Belayane Najoua.
Biden’s role in the oil trade

“Biden’s open support for climate action also means that he is trying to move away from oil, as it is one of the largest emitters of carbon dioxide. If Biden continues to support the US decarbonisation policy, US demand for oil will fall and oil-exporting countries may turn away from the dollar towards the Chinese currency,” says Áron.

But China sees this as an opportunity and is slowly taking the credit. The Chinese government has taken several steps in recent years to strengthen the international presence of the renminbi. In 2005, a new era in Chinese exchange rate policy began with a currency reform that allowed the renminbi to appreciate by 15% a year for three years. Will the yuan then become the new dollar? The situation is not that simple, according to Áron.

“Although many researchers believe that China will become the leading economic power, and that thanks to reforms the renminbi is indeed capable of functioning as an international currency, it is unlikely that the Chinese currency will replace the dollar in the oil trade any time soon, because the Western countries will resist, a situation that is only reinforced by the current geopolitical disputes,” says Áron.

Oil as the engine of the world

In the 20th century, oil replaced coal as the most important energy carrier. Its importance is illustrated by the fact that it has since become the world’s most traded product, both in terms of value and volume, and has been ranked in the top 10 risks that define geopolitics. Even if we don’t encounter it directly in our everyday lives, apart from petrol, oil affects every aspect of our lives, and has become one of, if not the most important driver of the global economy.

The period since the 20th century is also known as the oil age, which is not predicted to change for some time, despite the EU’s climate targets saying otherwise. They want to bring more renewable energy sources into the economy and increasingly phase out environmentally destructive non-renewable energy sources. But the many economically positive aspects of oil are hard to resist.

“The volatility of the oil price has the potential to affect both the macro and micro economy, as can be seen from the fact that it has become a hedge for the US dollar. However, in recent years there has been a growing number of articles questioning the long-term dominance of the dollar. With China’s dynamic growth, the Chinese currency, the renminbi, is gaining ground. In particular, it has been able to play a greater role in the oil trade, as more and more major oil-exporting countries are selling their oil in Chinese currency,” says Dénes Áron Hartvig.

Can the euro be the new dollar?

For a currency to fulfil the role of the dollar, i.e. to be the dominant currency in the oil trade, it must be stable, liquid and widely used around the world.

“Before the European sovereign debt crisis broke out, the euro was seen as a potential competitor, but the 2012 crisis has shaken confidence in the European currency and I don’t think the EU is presenting a promising picture. The fragmentation, the geopolitical disputes, do not show a vision of the future that resembles the United States of America,” says Áron, who also adds that a possible trend reversal and stronger integration would allow the euro to once again compete with the dollar, especially if demand for oil in US markets falls.

But China sees this as an opportunity and is slowly taking the credit. The Chinese government has taken several steps in recent years to strengthen the international presence of the renminbi. In 2005, a new era in Chinese exchange rate policy began with a currency reform that allowed the renminbi to appreciate by 15% a year for three years.

“Although many researchers believe that China will become the leading economic power, and that thanks to reforms the renminbi is indeed capable of functioning as an international currency, it is unlikely that the Chinese currency will replace the dollar in the oil trade any time soon, because the Western countries will resist, a situation that is only reinforced by the current geopolitical disputes,” says Áron.

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GEN.:2021.09.22. - 09:18:46