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China’s Petroyuan Stunts

The dollar has ruled the roost since 1944 and, brother, it is not going anywhere.

USD vs RMB (US dollar and CCP Renminbi)
(DigiPub/Getty Images)

Look carefully and you might just spot a report from this past December about Xi Jinping visiting Saudi Arabia. Among other things, the Chinese premier discussed the feasibility of paying for Saudi crude in yuan. Shortly afterwards the Iraqi government announced it would drop the dollar and settle imports from China via the yuan. Economist Nouriel Roubini believes a "bipolar currency regime" is in the cards. Given the implications for American influence in the region, it might seem odd that these various dispatches received only passing attention from agenda-setters in the press. 

Were they being nonchalantly dismissive? Or perhaps this is how media gatekeepers display unease when a rival threatens something that’s near and dear? The answer is likely more of the former tinged with the latter. We have all been warned that a rising giant named China is shaking things up to usher in a new multipolar era. But as Oscar Wilde observed, “the truth is never pure and rarely simple.” To help us guess where global trade and the economies of America and China are actually headed, let’s review the history of the dollar’s primacy on the world stage.       

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In the aftermath of World War II the United States was the only industrial power left intact. When the dust settled, many countries, including former enemies, looked to America for leadership. The phrase “leadership” is a code word that officials use in polite company when they want to refer to “assistance,” which itself euphemistically denotes loans, direct investment, trade deals, and security guarantees. Circa 1945, America was a freshly anointed empire. Heads of state in Europe and Asia, desperate to rebuild, accepted the empire’s terms.    

Chief among those terms was the Bretton Woods Agreement, a monetary scheme whereby other countries would fix the value of their currencies relative to the American dollar and the dollar would be convertible to gold at $35 per ounce. This placed the United State at the very center of international commerce with the dollar serving as the world’s reserve currency. The resulting demand for dollars allowed America to sell bonds at lower interest rates and thus accumulate higher levels of federal debt. That is handy if you want to do something really expensive, like station bases in dozens of countries and fund a series of lengthy military campaigns. 

Yes, life was sweet for Uncle Sam after the Second World War—until certain Europeans started getting ideas. President de Gaulle, in particular, suspected that the United States—which had been spending like crazy to fund the war in Vietnam, the Apollo missions, and President Johnson’s Great Society program—was issuing more cash than it could cover with gold. De Gaulle was correct: The United States was printing cash out of thin air, making something from nothing. But other countries had to fork over hard assets and labor to get those same dollars. 

President de Gaulle had seen enough and wanted out. In August 1971, he sent a battleship over to New York to collect France’s gold. Richard Nixon knew well that de Gaulle was on to him, as were other European politicians, and that the United States wouldn’t be able to reimburse everyone if they suddenly appeared to demand their gold. The results would be catastrophic for the dollar. Nixon handled the problem just as you’d expect. Within days of de Gaulle’s flagship arriving in harbor, he publicly reneged on the Bretton Woods deal, yanking the dollar off of the gold standard—an incident that’s known glibly as the “Nixon Shock.” 

Yet that was not the end of the dollar as the world’s reserve currency. In fact, the greenback still holds the reigning title because of other factors that reinforce the dollar’s standing as a safe haven. While the value of a fiat currency like the dollar rests heavily on faith, the consensus is that it is still the best option out there. After all, the United States currently sports the world’s largest economy, runs liquid stock exchanges, exports more goods than any other country, and retains a military that remains unrivaled. Trust is also an essential ingredient. America, with constitutionally enshrined property rights and a long track record as a relatively stable country, has earned the trust of international investors. (Though Afghanistan, Russia, and their various allies might beg to differ.)

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Despite being unmoored from gold, the dollar is still linked to another tangible asset. Thanks to the above reasons as well as deep ties with the Middle East that go back to 1945, most foreign oil producers have customarily priced their output in terms of dollars (often referred to as “petrodollars”). While the dollar is no longer pegged to gold, it is still the currency of choice when it comes to buying oil. And the stream of petrodollars flowing to the Middle East often ends up returning to the United States by means of agreements made when Henry Kissinger was in office. In a nutshell, the Gulf States sell oil priced in dollars and a portion of the proceeds are used to purchase U.S. arms and invest in America’s capital markets via sovereign wealth funds.  

This doesn’t mean that the House of Saud singlehandedly decides the dollar’s fate today. That is a common misperception. The dollar’s popularity is a product of a whole economic system. The Gulf monarchs simply want what most people with spare cash want, somewhere safe to put it. So President Xi showing up in the Middle East doesn’t necessarily move the dial as much as the future outlook of the Chinese economy. Backroom confabs with China in the Middle East are a potential symptom of economic shifts, not the cause.    

Common knowledge suggests that China’s GDP is expected to exceed that of the United States in the coming decades, and its military could be on schedule to reach parity sometime before the end of the century. But a lot can happen in that kind of time. Not to mention that the seeds of China’s ruin may be sprouting just over the horizon. For example, the country faces a severe demographic reckoning on behalf of its one-child policy, wildly skewed gender imbalance, and rapid industrialization. According to projections by the United Nations, come 2050, China will have lost around 100 million people. The percentage drop in China’s GDP will be substantial. 

China is also acutely reliant on energy and agricultural imports. In 2020 China was the world’s largest importer of crude petroleum with most of it coming from the Middle East. In addition, possessing a fifth of the world’s population, China has less than 10 percent of the world’s arable land. It remains to be seen if the “no limits” partnership with a resource-laden Russia will be capable of filling in the gaps. If not, one wonders what will happen as crucial resources dwindle. China’s “Wolf Warrior” nationalism may not be enough to prevent the Middle Kingdom from fracturing into a handful of regions as it has countless times in the past.   

Change is a permanent feature of history. Eventually the dollar will lose its spot. But as things stand now, it is unlikely the dollar’s demise will occur in the immediate future, nor does it seem likely that China will be the agent of that change. China, with its murky single-party political system, creepy social credit scores, and state-owned property framework, remains a dicey bet for outside money. It will only become more so as the Communist Party struggles to prop up the status quo. But having said that, the presence of Chinese officials looking to ink deals in the Middle East is a subtle cue to Americans. It is a reminder that our day in the sun will not last forever. 

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