The Birth of the Petroyuan, Sino-American Currency Contestation, and the International Monetary System: An Institutional Analysis

Abstract

This paper focuses on the rise of the -- the use of China's currency (renminbi, denominated in yuan) to pay for a growing share of its hydrocarbon imports. The advent of the petroyuan holds potentially profound ramifications for both transactional practice in international energy markets and the future of the international monetary system. For the last four decades, the dollar has been the overwhelmingly dominant currency in which oil and gas volumes are priced and in which international oil and gas sales are invoiced and settled. In turn, the dollar's role in the international energy trade has, for forty years, been a pillar for its standing as the world's leading transactional and reserve currency. The birth of the petroyuan is the most significant challenge yet to the indefinite prolongation of dollar dominance in international oil and gas transactions -- and thus, by extension, to the dollar's global primacy. The paper examines the birth of the petroyuan, considers its current and prospective challenge to the petrodollar, assesses the long-term implications of these developments for transactional practice in international energy markets and for the future of the international monetary system. In doing so, the paper highlights deficiencies in conventional economic explanations for patterns of currency use in cross-border oil and gas transactions and underscores the analytic value-added of alternative approaches drawn from institutional and neo-institutional economics. In particular, the paper emphasizes how powerful state actors work through international political and economic structures to limit and influence market participants' options for currency choice in cross-border hydrocarbon sales. They do so for explicitly strategic reasons, including shaping the institutional environment for international monetary relations. In this regard, taking account of American and, more recently, Chinese state preferences and actions is essential to explaining evolving patterns of currency choice in international oil and gas markets.Looking ahead, it seems highly likely that use of renminbi as a settlement currency for cross-border hydrocarbon transactions will increase. As Sino-American currency contestation unfolds in coming years, it is important for scholars, practitioners, and policymakers to understand that currency choice in international energy markets is framed at least as much by political forces -- in particular, by great power competition -- as by economic considerations.