Is This China's Next Step To Destroy The Dollar?

Tyler Durden's picture

Authored by Byron King via DailyReckoning.com,

China is currently modifying the terms of its oil trade with Saudi Arabia. Specifically, China is working on a deal to pay for Saudi oil using Chinese yuan. This effort poses a direct threat to the security of the dollar.

If this China-Saudi deal happens — yuan for oil — it’s another step closer to the grave for the petrodollar, which has dominated global finance since 1974. You can revisit Jim Rickards article about the Assault on the Dollar, here.

To recap, the petrodollar is weakening because the dollar is losing power as the world’s reserve currency. This is similar to the way pounds sterling gradually fell out of favor during the decline of the British Empire. The decline may take a long time, but what we’re seeing today is another step in the death march of the dollar.

Since 1974, Saudi has accepted payment for almost all of its oil exports — to all countries — in dollars. This is due to an agreement between Saudi and the U.S., dating back to the days of President Nixon.

Beginning about 15 years ago, China ceased being self-sufficient in oil, and began buying Saudi oil. As per all Saudi customers, China had to pay in dollars. Even today, China still pays for Saudi oil in U.S. dollars and not yuan, which perturbs China’s leaders.

Since 2010, China’s total oil imports have nearly doubled. According to Bloomberg News, China has surpassed the U.S. as the world’s largest oil importing nation. Here’s a chart, showing the trend.

Dollar Gold New Levels Bloomberg

As China imports more and more oil, the idea of paying for that oil in yuan instead of dollars becomes more critical. China does not want to use dollars to buy oil. So, China is beginning to squeeze Saudi over the form of currency in which their oil trade is conducted. China is doing this by steadily lowering its oil purchases from Saudi.

Presently, China’s three top oil suppliers are Russia, Saudi and the West African nation of Angola. Backing-up these three key suppliers are a combination of sources in Iran, Iraq and Oman, which help to diversify China’s oil-supply chain.

In the past few years, China has shifted oil purchases away from Saudi, and Russia’s oil exports have risen from 5% to 15% of the Chinese total.

China imports more oil from Russia, Iran, Iraq and Oman; less from Saudi.

Saudi’s share of Chinese imports has dropped from over 25% in 2008, to under 15% now. Meanwhile, Saudi competitors Russia, Iran, Iraq and Oman are selling more oil to China.

Saudi would like to reverse this declining trend of oil-trade with China. However, these kind of major oil flows don’t just happen in a vacuum.

There’s a good reason why Russian oil sales to China are increasing. As you’ll see in Nomi’s article, trade and financial services are often closely linked. Over the past few years, China has deepened its trading roots with Russia — now, China pays for Russian oil in yuan. Russia, in turn, uses yuan to buy goods from China.

Beyond trade in goods, within the past six months Russia has set up a branch of the Bank of Russia in Beijing. From there, Russia can use its Chinese yuan to buy gold on the Shanghai Exchange. In a sense, Chinese-Russian oil trade is now backed-up by a “gold standard.”

Looking ahead, Saudi Arabia will find itself more and more locked-out of the Chinese oil market if it won’t sell oil for yuan. But to do this, the Saudis must move away from U.S. dollars— and from petrodollars — if Saudi wants to maintain and increase access to China’s oil market.

We’ll know more about the likelihood of this after Donald Trump’s tour of the Middle East.

If Saudi begins accepting yuan for oil, all bets are off on the petrodollar. Yuan-for-oil will entirely change the monetary dynamics of global energy flows. I expect the U.S. dollar to weaken severely when that news breaks.

Much of this oil-for-yuan news is public information. Yet, for some strange reason, there’s a form of blindness within western policymaking and media circles concerning the implications of yuan-for-oil. The idea is so “off-the-wall” that many policy leaders simply ignore it.

Ignore away. But we could wake up one morning in the midst of a massive currency crisis, in which dollar values are falling and oil prices in dollars are soaring.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
pitz's picture

But anyone can buy oil in any currency they have.  Just because its quoted in USD$, doesn't mean that the actual currency used to pay for it has to be USD$.  Additionally the Sauds or any other oil exporter have always had the ability to sell their USD$ and buy other currencies or assets with their money.

So this is a big non-event.  The real event is when countries that view the USD$ as a store of value decide to divest in significant amounts. 

luky luke's picture

China doesn't need to do squat to destroy the US $, which will destroy itself since it is itself the problem.

http://biblicisminstitute.wordpress.com/2015/08/14/when-money-is-the-pro...

JamesBond's picture

It would be the irony of ironies if Japan became the safe haven for currencies when the dollar tanks.

mdr attitude's picture

China has it's share of parasites that need culling.

Wonder how they call a sneaky jew in Chinese.

Billionaires are Buying Bunkers in New Zealand Because they Fear You May Want to Kill Them


SafelyGraze's picture

rickards completely misunderstands the valuation of the dollar

the dollar is not a commodity like copper, because the dollar is not consumed

the energy-return-on-investment in the dollar continues to be strong because the energy required to produce a dollar is minimal

glad to clear this up

-Deutche Bank

philipat's picture

@pitz

Sorry but that is incorrect. The Saudis at present ONLY receive US Dollars for oil. Yes, of course the Forex markets can be used to convert any currency into USD but the very act of doing so has the desired effect of weaking the currency being sold and strengthening the USD. It also means there is an artificially high demand for USD overseas (which allows The Fed to keep on printing them), many of which would flow back to the US and cause inflation if the Saudis start to accept CNY. Remember also that CNY can be used to freely purchase physical Gold on the Shanghai exchange which would indirectly mean that in fact Saudi would be receiving Gold for oil which would of itself protect them against a declining USD as a result of the decision to accept CNY payments from China.

This also explains why the Russian Ruble (RUB) has strengthened since Russia started to accept only RUB for European natural gas exports. The Europeans now have to sell EUR to buy RUB to pay for the gas, hence a stronger RUB.

So this IS a very big deal and the Saudis really don't have much choice if they want to maintain and increase their share of the world's largest energy market, which is China. Size matters!

The_Juggernaut's picture

You can keep your Made-in-China currency.  Seriously.  The USD is bad enough.  I have a roll of Yuan sitting next to the shitter.

strannick's picture

Your made-in-China shitter?

pitz's picture

Saudis can and do receive any currency they want.  Euros.  Yuan.  Dinars.  You name it, there is no reason for Saudi Arabia to refuse perfectly good currency because its not USD$. 

 

Unfortunately too many people get lulled into this whole petrodollar conspiracy theory, and come to some incredibly false notions arising from such. 

Sector Catalyst's picture

You're as clueless on currency and trade as you are in the Canadian real estate market.  So the Petrodollar is a conspiracy theory now?

pitz's picture

Yes, the whole 'petrodollar' theory is conspiracy theory.  Its unadulterated nonsense. 

SuperVinci's picture

Petrodollar IS nonsense. If getting paid in yuan to go to gold is so important, what happens if Saud takes dollars from oil sales, buys yuan, then gold on Shanghei? 

No difference.

What oil is invoiced in is immaterial to it's strength or weakness. The dollar is overvalued because it is used as store of value.

strannick's picture

Gun-in-the-face is the reason why Saudi still takes USD for Chinese oil

Saudi shieks could reject the USD for the Yuan, but they'd be too dead to spend it.

Squid-puppets a-go-go's picture

i see it the other way around. The domestic American economy can only start to recover once the 'exhorbitant privilege' of the worlds dominant currency is ended

PrometeyBezkrilov's picture

You are absolutely right, but as usual there are significant buts attached. First the US population is going to lose all their savings to inflation (if they have any), secondly all their pensions are going to evaporate. Their assets are going to deflate since now they are supported by unlimited credit and the credit is going to go away. Food prices are going to go up due to revalued exchange rates of USD-to other currencies. By the way USD is not a correct terminology introduced to fool people. It is FRN (Federal Reserve Note). USD may come into picture as an internal currency the same way it works in Cuba. But it will be greatly devalued.  So all imported food and goods are going to be expensive. This may lead to disintegration of the country. The first (state) one out will declare itself free of federal obligations/debts and an avalanche of these declarations to follow within a day or two. No state will be willing to take a burden accumulated by the federal government. This is how I see it.  

sinbad2's picture

Yeah anyone can ditch the dollar, Saddam did it, and so did Gaddafi.

BennyBoy's picture

 

US lies about Saudi's, then invades in 3, 2, 1....

Peanut Butter Engineer's picture

We will stamp them as terrorism state.

Blankone's picture

In reply to Pitz:

I do not believe so. If you have to use the SWIFT system then the dollar becomes a needed mechanism to make the transaction work. China is making purchases with Russia for oil without using the SWIFT system and thus have cut out the dollar. However, the were not able (but maybe now they can) get a system to work for general trade and thus the SWIFT was (is?) still used.

Even Russia cannot seem to trade with Iran using their currencies directly. As unbelievable as it seems, just a year ago Russia was not able to make inter bank money flow within Russia without the SWIFT system.

That is my understanding.

pitz's picture

SWIFT supports many different currencies.  So the USD is not required as some sort of intermediate currency.  Way, way too much "conspiracy theory" crap in this area.

Blankone's picture

SWIFT only transacts through using the dollar as the intermediate currency. That is one reason the dollar is called the global reserve currency.

Currently if you want to trade with direct currency other than the dollar you need to ship/fly pallets of hard currency from place to place. If you want to do trade electronically you end up using the dollar during the transfer. The exception being the limited range of China's electronic exchange system - key work being limited.

SWIFT is a financial thermo nuk, and Russia does not have one. HUGE oversight by Russia and China.

oncemore's picture

I correct you:

Russia WAS able to make domestic payments betwen busines to business

Business to bank

Bank to bank 

Bank to business.

It worked, howver SWIFT was used, as SWIFT charges the same fees for transactions as domestic sttlements, so why double efforts?

Blankone's picture

Russia itself said you are incorrect. A new system was touted as coming online. Then bloggers claimed it would be Russia's international alternative to SWIFT. Then after long delays it became active - and Russia admitted it only pertained to money flow within Russia's borders, mostly between banks.

Treason Season's picture

Your arguement is the exact reason why I stopped reading Mish who said the same thing years ago. Are you a tool too?

SuperVinci's picture

Must. run. from . things. I . don't. agree. with.

AntiMatter's picture

pitz: you're wrong, all international trade are settled in US$ via SWIFT in Brussels by brokers primarely in London and New York who make a handsome commision on these transacted settlements.

IronSights on'um's picture

Wrong.  that's why it's the world reserve currency.  ALL nations must hold USD reserves in order to purchase oil.  If they didn't have reserves they woudl have to purchase dollars at the exchange before getting oil.  wake up dude.

pitz's picture

Any nation can buy oil in any currency that is acceptable to the sellers.  Canadian oil, for example, is generally purchased from Canadian oil companies with Canadian dollars.   The big exporters don't tend to have a lot of their local currency sitting overseas, so they have to accept various foreign currencies.  Euros, USD$, Yen, etc.  Whatever they want.  But it need not be, and certainly isn't always the USD$. 

MaxThrust's picture

The image above should be one of the dollar disappearing into a pool of oil.

vato poco's picture

it's thursday nite, so it must be time for more doom porn! let's fire up ZH and see....

yep! ZH: fear! fear!!! FEAR!!!

so the dollar goes kablooey, just like ZH has been telling us it will for the last 8 or 10 years now, to be replaced by ....what? the yankee dollar is a *profoundly* fucked up currency, it truly is. but what's a better MAJOR currency? (so don't bother yapping about Norwegian or Singapore money) a major currency that's LESS fucked up?? China? please. Japan? Russia? the Euro? LOL Presumably those crafty furriners will have a candidate currency waiting in the wings to replace the tired old dollar, right? so what is it?

*crickets*

then there's THIS little gem, buried deep in the story: "we'll know more after Donald Trump's visit to the ME". the visit where the saudis lined up to kiss his ass and buy weapons they don't know how to use and won't maintain. you know: the $100 billion ++ deal for (what will end up as paperweights) wow. good call there, Byron & daily reckoning. do you get your ideas from the world-famous Daily Westerner? 

stop wasting our time with your fearmongering Fake News and write something useful, boys.

His name was Seth Rich

#PizzaGate

#WhatsontheLaptop

#TheyAllHaveToGoBack

Kayman's picture

Since the Yuan, Yen, and Euro are all fiat currencies, the Saudis would only be jumping out of the frying pan and into the fire.  

The USD might be an ugly girl at the dance, but she has less warts than all the others.  The long term trajectory for the Yuan is down not up.

Communists discovering a printing machine is a sight to behold.

Peanut Butter Engineer's picture

Less wart but look like tran from from side.

Xena fobe's picture

No doubt plans are already in the works to rnake sure that never happens. 

Koba the Dread's picture

If plans are in the works to make sure this never happens, who might be making those plans? The US? If so, please explain exactly which plans the US has made in the last 30 years that have worked out well?

OregonGrown's picture

Fortunately for China's sake, they have nukes.....

If not, USA would have Iraq'ed em by now.  Saddam was killed after he decided to sell his oil for gold or Iraqi dinar.  Then, in retaliation, America made up this fake meme about WMD, bombed the shit out of them then proceeded to steal all of Iraq's oil and gold in the end.  

WOW

Still shake my head at the whole WMD meme....  and we ALL fell for it hook line and sinker!

Just Another Vietnam Vet's picture

JMHO.........  .

Clearly seems like a good Time to buy a little gold or gold stocks.   

After the Petro dollars starts dropping, it may be too late.

And it could happen in a hurry.  

Like a market crash that happens in a hurry.

 

 

beemasters's picture

If the deal goes ahead, it's not China that will get Iraq'ed. It's Saudi Arabia. Buying US military gears/supplies is like buying a computer system from the NSA. No one should be surprised if all their purchased equipment/weapons are compromised. Never mind the amount they have spent; they are practically defenseless. When SA launch a missile targeting any US interest, it could automatically be directed to China. :)

researchfix's picture

That´s true. These amounts of weapons can and will only end in warehouses. Well, the deal was not about weapons, it was about money.

Laughing.Man's picture

That may be true but trouble is made in North Korea and the South China Seas.  If you can't take on the player then make sure the environment around them is in chaos.

Nobodys Home's picture

I love to see people that know what's up. Don't fuck with the petrodollar! Khadaffi, same thing////Wolfowitz doctrine is bullshit! Paul of Arabia.

Nobodys Home's picture

I keep buying a bunch of physical silver and a little gold with every check.
edit: I like the British Queen's Beast ten ounce coin.

sinbad2's picture

Check these out, they also have Elizabeth II on one side, and a roo on the other.

http://www.perthmintbullion.com/au/Buy-Gold-Coins.aspx

Nobodys Home's picture

I've been buying Perth mint for a while..Wish their gold bars had serial numbers.
edit: I buy low mintage coins...just for fun like the old days...the 1 oz silver 2017 Kangaroo Privy Koala looks good.

xrxs's picture

The petro dollar allows the US to charge the MIC on the credit card. I don't think that's lost on Vlad and Xi.  unseating the dollar could tip the scales, but I don't think the petro dollar goes down without a fight.

sinbad2's picture

All stories on China wanting to trade in Yuan instead of dollars pretend it's about power, politics or some other asinine reason.

It's about money, it's always about money. The US charges both the seller and the buyer money changing fees. All global trade conducted in US dollars is effectively taxed by the US, and is also subject to US laws and political pressure.

Who likes paying tax?

How would you feel about paying tax to another country?

Of course other countries want to trade in their own currencies, and as Jesus said, fuck the money changers.

TheReplacement's picture

"Money" is nothing but a tool used to attain and maintain power.  It is always about power.  Once you have power you can just take the money.

Two guys run into each other in an alleyway.

One guy has a million dollars.

The other guy has a pistol.

Guess who leaves with the money.