In 1974, Washington and Riyadh struck a deal by which Saudi Arabia could buy US treasury bills before they were auctioned. In return, Saudi Arabia would sell its oil in dollars—not only enlarging the currency’s liquidity but also using those dollars to buy US debt and products. The political economist David Spiro, in his book The Hidden Hand of American Hegemony, described how Saudi Arabia convinced other OPEC nations to invoice oil in dollars, rather than in a basket of different currencies.
If the yuan displaces the dollar to a sufficient degree in the annual $14 trillion global oil trade—although what that sufficient degree would be is difficult to say—countries will have to maintain yuan reserves instead. (At the moment, 2.48% of the world’s reserves are held in yuan, compared to 55% for the dollar, according to IMF data.) Oil producers receiving yuan would have to spend it on Chinese debt and imports, further strengthening China’s economy, but if the world was particularly awash in yuan, other trade might start to be yuan-denominated: metals, say, or soybeans.
The effect on both China and the US would be profound. To preserve the yuan’s new role, China would have to ensure political stability and financial transparency, of the kind the US promised in the 20th century. The US’ abilities to issue dollar debt and earn dollars for exports would decline, so its economy would shrink. In this situation, the dollar’s weakening may trigger a vicious cycle: capital flight away from the dollar and towards the yuan, debilitating the dollar further.
https://qz.com/2143450/saudi-arabia-wants-to-sell-its-oil-in-yuan-not-dollars/?utm_source=YPL
