
The petroyuan is based on the concept of the petrodollar, where crude oil exports are denominated in US dollars. For many decades, the US dollar has been the prime currency for global oil transactions.
For clarity, “petrodollars” and the “petroyuan” are not considered currencies themselves, rather dollars or yuan used to trade oil. Introduced in 2018, the petroyuan is China’s attempt to usurp the dominance of the US dollar in global crude oil trade. The petroyuan has gained traction in recent years, with Putin naming the Chinese yuan as his favoured currency to conduct trade in, during Xi Jinping’s state visit in March 2023.
Since Russia’s invasion of Ukraine, Western sanctions have forced the nation to become more dependent on trade with China. As China continues to rise (becoming the world’s largest importer of crude oil), dynamics are shifting in global oil trade. Analysts have put forward the idea of ‘dusk’ for the petrodollar, and ‘dawn’ for the petroyuan. Throughout this article we will examine the history of petroyuan, its significance and features in global oil trade, and how it fits into an overall shifting of trade dynamics in the 21st century.
History of the petroyuan
The first mention of a ‘petrocurrency’ can be traced back to the collapse of the Bretton Woods system for pegging currencies to gold. Coined by Ibrahim Oweiss in 1973, the term ‘petrodollar’ referred to dollars paid to countries that produced oil for their exports. The system was established in 1973 when the US and Saudi Arabia agreed to conduct their oil trade in US dollars, which also helped to stabilise the dollar after it was de-pegged from gold. Fast forward to 2017, and China emerges with a plan to challenge the dominance of the petrodollar with the petroyuan. On the 26th of March 2018, China launched yuan-denominated futures contracts for crude oil, marking the beginning of a long-term strategy to internationalise the use of the yuan.
Which countries are using the petroyuan?
As of January 2025, several countries are using the petroyuan, including Russia, Iran, Venezuela, Saudi Arabia, China, UAE and Egypt. For Russia, the move to using the petroyuan is a direct attempt to reduce their dependence on the US dollar and western payment systems like SWIFT, in response to sanctions. It’s important to note that while Saudi Arabia is not fully committed to the petroyuan, it has shown openness to its use, as well as joining the mBridge project – a BRICS-led payments system enabling cross-border transactions using CBDCs. While these countries are already using the petroyuan, the absence of the vast majority of nations highlights the continued dominance of the petrodollar. While a full transition to petroyuan is not on the horizon, the shift in global trade dynamics is significant.
How does the petroyuan influence global oil trade?
The petroyuan has a number of impacts on global trade.
Currency alternative
The petroyuan gives countries another option for conducting oil trade, reducing overall dependency on the US dollar. This is particularly useful for those countries facing sanctions, potentially reducing sanction effectiveness. This combines with an overall shift towards ‘de-dollarisation’, a movement supported by the likes of Russia, Iran and Venezuela to reduce their reliance.
New global benchmark
China is aiming to establish the petroyuan as a global crude benchmark, alongside Brent and WTI. This will help to reflect the patterns of Asian demand more accurately. It will also help to integrate yuan-denominated oil into financial markets, such as the yuan-based oil futures contracts on the Shanghai International Energy Exchange.
Potential fragmentation
As international oil pricing becomes further fragmented due to the rise of the petroyuan, potential impacts include higher transaction costs and market volatility.
Greater yuan demand
As more countries adopt the petroyuan for oil trading, the yuan will strengthen as a result due to increased demand.
What’s the difference between the petroyuan and the petrodollar?
The main differences are as follows:
Establishment & global reputation
While the petrodollar has been the dominant system since the 1970s, the petroyuan has only been introduced properly since March 2018. The petrodollar accounts for almost 80% sales (being priced in dollars). While the petroyuan is gaining traction, it is not yet widely adopted.
Economic influence
The dominant status of the petrodollar solidifies its use as the global reserve currency, while the petroyuan is aiming to challenge this dominance through internationalisation of the yuan. The dominant petrocurrency enjoys significant economic influence and leverage. Currently, the yuan is primarily seen as an alternative currency, for those under the effects of US sanctions, for example.
Market integration
While the petroyuan is utilised in a smaller market, the petrodollar has deep roots in global finance, appearing in multiple markets across the world.
What does the future look like for the petroyuan?
If the petroyuan continues to gain influence, a number of situations may arise. In addition to the market fragmentation previously discussed, geopolitical tensions may be amplified. For the US in particular, a decrease in demand for the petrodollar could lead to higher inflation, and difficulties in financing deficit spending. There would be less demand for dollars overall, and US government bonds – currency fluctuation would become more common, as oil transactions move away from the dollar.
For the petroyuan, it may suffer from liquidity issues, as short-term investors look to capitalise on its growth. Those foreign investors may be vulnerable to interventions from the Chinese government to control capital flow. Furthermore, as oil exporters accumulate more petroyuan, they may become an excess, leading to further incurred costs through exchange rate differences and conversion fees.
Conclusion
The rise of the petroyuan is just one part of global movements away from the dominance of the US dollar. The petroyuan has made considerable progress among nations looking to transact in an alternative currency to the dollar, but is far from usurping the dollar as the dominant currency. China is in a powerful position as the world’s largest importer of crude oil to enact change. However, its success depends on the ability to manage the risks of market dynamics, global trust and widespread adoption. The situation is made further complex by risks to global markets by way of fragmentation. As power moves towards rebalancing in the 21st century, the progress of the petroyuan is a key area to watch that will hold the potential to significantly affect the future of international trade.
Caleb Hinton
Caleb is a writer specialising in financial copy. He has a background in copywriting, banking, digital wallets, and SEO – and enjoys writing in his spare time too, as well as language learning, chess and investing.