The recent $10-bn deal between Chinese national company Chinese National Offshore Oil Company (CNOOC) and French company TotalEnergies was noteworthy because it is to be executed in Chinese yuan and not US dollar, as is typically the case.
The official BRICS website indicated the move as a huge step towards ‘dedollarisation’, which is the reduction or complete removal of the US dollar as the medium of exchange to conduct transactions. In terms of international politics, such a drastic change would be hard to achieve and will not be widely accepted, most notably because of India’s desire to curb Chinese influence at home and beyond.
The US dollar has been used as the currency for exchange for decades, arising out of the Bretton Woods system. As a result, currencies could easily be exchanged, and the US dollar became the standard to which all other currencies are pegged. The move, widely accepted by the major economies when it was first introduced, improved the stability of currencies around the world, reducing fluctuations and bringing about a new standard to exchange currency.
However, just like the Gold Standard, many countries are now questioning the imposition of the US dollar as the standard. The reason lies in the consideration of political-economic situations. According to the Gal Luft of the Institute for the Analysis of Global Security, Central banks around the world are growing wary of the US over extending itself and applying hard sanctions.
Most notably, the sanctions placed on Russia due to the war it brought about in Ukraine has significantly impacted Russia’s ability to use its Central Bank reserves. Moreover, the use of sanctions in at least 25 countries implies that the dollar does not play an extensive role in the central bank reserves of these countries. This, combined with the general wariness of the US on the part of non-Western states, has led to states looking to potentially rely on other currencies.
In recent times, the yuan has emerged as the most likely contender to the dominance posed by the US dollar. A combination of shrewd tactics and the result of long-term partnership building has seen France’s TotalEnergies complete a deal with the CNOOC in the Chinese yuan instead of the US dollar. In addition, French President Emmanuel Macron recently stated that Europe must avoid the “extraterritoriality” of the US dollar.
Such statements and developments, though not indicative of a large-scale shift to the Chinese yuan any time soon, should be taken as a sign that during changing financial markets and times of political instability, countries may start looking at more convenient ways to maintain currency reserves. The large-scale use of the Chinese yuan by leading and emerging economies such as India, the EU, Japan, and the US, however, is a far-fetched idea.
For one, although the BRICS (Brazil, Russia, India, China, and South Africa) alliance has been collectively pushing for de-dollarisation, cracks within the alliance as to which currency may replace the US dollar are clear. India discourages the use of the Yuan owing to its contentious relationship with China. Border issues, public sentiment, and economic competition have thoroughly pitted the two regional powers against each other. The foreign relations ties turning sour largely rely on the border issue, which is of paramount significance to India. China’s underestimation of India’s problem frequently leads to further tensions, thus exacerbating the conflict.
Furthermore, China’s investment in digital currency as a way to reduce reliance on cash spells trouble with regulations on currency, privacy, and surveillance. A major decider in a country’s currency is the demand-supply side of money. Digital currency and China’s recent endeavor to endorse it as a legitimate payment method raises questions over who will oversee transparency over ‘generating’ and surveilling such alternative forms of currency.
In light of these developments, the de-dollarisation of currency exchange methods should be considered carefully, knowing the consequences on the state of national currency reserves. Indeed, while the US dollar may seem like an unattractive option in the long run, the use of the Chinese Yuan must be considered carefully, holding both financial and political stakes in context. For India in particular, these recent trends spell the need to play a delicate balance game and prioritize regional well-being and economic growth along with the need to maintain good relations with the US and other countries.
Disclaimer
Views expressed above are the author’s own.
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