Dollar Dumped: How the first China-UAE gas deal in yuan is a big blow to US

China struck a blow against the US dollar last month.

Beijing and Abu Dhabi in March settled a gas deal in yuan for the first time.

Let’s take a closer look:

What happened?

In March, China’s national oil company CNOOC and France’s TotalEnergies settled an LNG trade in yuan for the first time.

Around 65,000 tonnes of LNG imported from the UAE changed hands in the trade.

The exchange was done through the Shanghai Petroleum and Natural Gas Exchange (SHPGX), as per Global Times.

While TotalEnergies confirmed to Reuters that the transaction involved LNG imported from the UAE, it did not comment further.

What does it mean?

A prominent economist, speaking to the website The Cradle anonymously, said, “The French either resorted to the yuan due to the acute shortage of Russian gas supplies to the European continent, or they have reserves in the Chinese currency that they want to use.”

The economist added that the move comes as countries like UAE sense a “global imbalance of power” and look to expand relationships.

Pakistani analyst FM Shakil in an article for The Cradle earlier in 2023 said that “dollar reserves are dwindling and the influence of the United States of America is receding in the global economy, which represents an opportunity for regional powers’ currencies and alternative payment systems.”

Global Times quoted SHPGX chairman Guo Xu as saying the deal was a “meaningful attempt to promote multi-currency pricing, settlement and cross-border payment in international LNG trading”.

CNOOC deputy manager Yu Jin added, “In the future, CNOOC will continue to promote innovation in the international LNG trade business model," Yu said.

Chinese oil experts further told the outlet it was “a major event in China’s market-oriented oil and gas reform.”

The UAE isn’t alone.

In February, Iraq’s central bank said it planned to allow trade from China to be settled directly in yuan for the first time, in an attempt to improve access to foreign currency.

“It is the first time imports would be financed from China in yuan, as Iraqi imports from China have been financed in (US) dollars only,” the government’s economic adviser, Mudhir Salih, told Reuters.

In January, Saudi finance minister Mohammed Al-Jadaan, speaking to Bloomberg at the World Economic Forum in Davos, said the Kingdom was ‘open to’ alternative currencies to “improve trade”.

According to Al-Monitor, Egypt in August said it would issue bonds in yuan while Israel added the currency to its foreign reserves in April.

However, some question whether the Gulf states would actually do this on a large scale.

A piece in Energy Intelligence pointed out that pulling the trigger on such a move, while hurting the dollar’s ‘safe haven’ status, would also hurt the Gulf currencies that are affixed to the dollar.

Another area of concern is that the amount of yuan available in the market remains limited to say the least.

“People are looking at the benefits and detriment of dollar trade,” Theodore Karasik of Gulf State Analytics told the website. “It’s a sovereignty issue and I think that it is becoming a more serious policy issue."

“The crucial point is whether Mideast producers are happy to use the yuan,” a China-based source close to the Shanghai International Energy Exchange (INE) told the website_._

“Surely they are happy to have more choice, but there is no free meal. Maybe they want something in exchange, from the US or from China.”

China bid to weaken dollar

China has placed an emphasis on settling oil and gas trades in yuan in recent years in a bid to establish its currency internationally and to weaken the dollar’s grip on world trade.

Russia has increasingly embraced the yuan amid Western sanctions.

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.

Xi was speaking as Crown Prince Mohammed bin Salman hosted two “milestone” Arab summits with the Chinese leader which showcased the powerful prince’s regional heft as he courts partnerships beyond close historic ties with the West.

A Saudi source, speaking before Xi’s visit, told Reuters at the time that a decision to sell small amounts of oil in yuan to China could make sense in order to pay Chinese imports directly, but “it is not yet the right time”.

India discourages settlement in Chinese yuan

India in March asked banks and traders to avoid using Chinese yuan to pay for Russian imports, three government officials involved in policy making and two banking sources told Reuters.

This is due to long-running political differences with its neighbour.

India, which has emerged as a top buyer of Russian oil as well as discounted coal, would prefer the use of United Arab Emirates dirhams to settle trade, three government officials said.

One of the government officials directly involved in the matter said New Delhi is “not comfortable” with foreign trade settled in yuan but said settlement in “dirham is okay.”

The second official said that India cannot allow settlement in yuan till the relations between the two countries improve.

Thousands of Indian and Chinese troops are locked in a standoff along the border since 2021, casting a shadow over the whole relationship.

The five officials did not say whether there were also economic reasons behind India’s reluctance to accept yuan settlement.

With inputs from agencies

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