Most of China’s RMB internationalisation efforts have so far been divided between its near neighbours in Asia and the developed economies of Europe and the Americas. But the recent announcement that Saudi Arabia and the Emirate of Sharjah may be looking to begin funding in renminbi, by issuing directly in China’s onshore Panda bond market, appears to be a signal that Beijing may be moving on to a new phase of its strategy.
This is, of course, a clear result of the Belt and Road Initiative (BRI). Unlike the RMB internationalisation strategy of the previous five years, the BRI is clearly targeting stronger ties with developing economies in Central Asia, the Middle East and Africa. The news out of Riyadh and Sharjah indicate that China is making headways in that direction.
It is hard to overstate the significance of the geopolitical shift this would mark. China's success in luring Middle Eastern sovereigns to its bond market could bring about nothing less than the end of the petrodollar.
Of course, a symbolic, politically-driven Panda bond issue by a Middle Eastern name would not in itself mean much. But that funding channel could open the door to China finally convincing key oil exporters to accept renminbi in payments instead of dollars.
That would be the game changer.
China being a key customer for Saudi Arabia easily explains why the possibility is even vaguely on the horizon. But there is some cause for scepticism.
Previous experiments have not fared particularly well. A 2014 contract between China and Russia saw the two countries agree that the former would pay for gas imports in RMB. But with commodity prices collapsing globally shortly after and the RMB losing nearly 7% of its value against the dollar in 2016, the decision became nearly disastrous for the Russians.
Whether or not the agreement still stands is unclear, but the unhappy turn in what was marked as a landmark development in the Sino-Russian relationship serves as a clear cautionary tale.
One analyst made an interesting link between such developments, RMB gold contracts and the potential to break the dollar’s dominance in the oil market. With the Hong Kong and Dubai exchanges now offering renminbi-denominated gold contracts, there is now an obvious investment choice for oil exporters accumulating RMB.
“This means that having accepted payment for oil or gas in RMB, the seller, be it Russia or Saudi (or anyone else for that matter) does not have to worry about having excess RMB, they can simply trade it back into gold,” wrote Mark Tinker, head of equities at AXA IM Framlington Equities Asia. “At no point does the dollar or the US banking system become involved.”
A world where oil and gold are traded primarily in renminbi is certainly a distant one. Perhaps it will never come to pass on the scale China hopes for. But step by step, the long-standing global order in the commodity markets appears to be coming to an end.