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China, the world’s largest oil importer, has long relied on the US dollar for most of its crude oil purchases. However, recent efforts to internationalize its currency, the renminbi (RMB or yuan), have led to a gradual shift. While the question “what currency does China use to buy oil” is straightforward, the answer involves both tradition and emerging trends in global trade.
What Currency Has China Traditionally Used to Buy Oil?
Historically, China has used the US dollar to buy oil, aligning with the global standard known as petrodollars. Nearly all international oil trades have been denominated and settled in USD since the 1970s, when the United States struck a deal with Saudi Arabia. For decades, Chinese state-owned enterprises like PetroChina and Sinopec settled payments with major suppliers such as Saudi Aramco, ExxonMobil, and Rosneft in dollars.
This reliance stems from the USD’s role as the world’s reserve currency, offering liquidity and stability. Even today, the vast majority—over 90%—of China’s oil imports are transacted in USD, making it the dominant currency in answering “what currency does China use to buy oil” for routine trades.
Why Is China Shifting Toward the Yuan for Oil Purchases?
China seeks to reduce its exposure to USD fluctuations and US financial sanctions. By promoting the yuan, Beijing aims to enhance its currency’s global status and support the Belt and Road Initiative. Geopolitical tensions, including trade wars and restrictions on Russian oil post-2022 Ukraine conflict, have accelerated this push.
A key milestone was the 2018 launch of yuan-denominated crude oil futures on the Shanghai International Energy Exchange. These contracts allow buyers and sellers to settle in yuan, providing an alternative to the Brent and WTI benchmarks traded in dollars.
How Does China Actually Use the Yuan to Buy Oil?
China has conducted several high-profile yuan-settled oil deals. For instance, purchases from Russia have increasingly used yuan since 2019, with settlements via the China International Payment System (CIPS). Iran has also accepted yuan for oil exports amid US sanctions.
In 2023, Saudi Arabia tested yuan payments for some oil shipments to China, though it remains limited. When addressing “what currency does China use to buy oil,” it’s worth noting that bilateral agreements often convert yuan payments into local currencies for sellers, using offshore yuan accounts in places like Hong Kong.
What Challenges Does the Yuan Face in Oil Markets?
Despite progress, the yuan’s share in global oil trade is under 5%. Challenges include limited convertibility—China maintains capital controls—and lower liquidity compared to the USD. Oil producers prefer dollars for their universal acceptance and ability to recycle petrodollars into US assets.
Additionally, the yuan lacks the depth of USD-denominated markets, making hedging riskier. Full adoption would require broader acceptance by OPEC+ nations and integration into global financial systems.
What Impact Could Yuan Oil Trades Have on Global Markets?
A wider use of yuan for oil could challenge USD dominance, potentially leading to a multipolar currency system. It might lower transaction costs for China, saving billions in conversion fees, and encourage other nations to diversify reserves.
However, experts predict a slow transition. Even if China ramps up yuan usage, the USD will likely remain primary for years due to entrenched infrastructure.
Are There Any Common Misconceptions About China’s Oil Currency Use?
A frequent misconception is that China has fully abandoned the USD. In reality, while “what currency does China use to buy oil” increasingly involves yuan pilots, dollars still dominate daily imports. Another myth is that petroyuan futures have overtaken global benchmarks—they serve mainly domestic and select Asian markets.
In summary, China primarily uses the US dollar to buy oil but is actively promoting the yuan through targeted deals and financial innovations. This dual approach reflects a strategic balance between practicality and long-term goals.
People Also Ask
Does China buy oil from Russia in yuan?
Yes, a significant portion of Sino-Russian oil trade is settled in yuan, especially after Western sanctions on Russia intensified.
Is the US dollar losing its role in global oil trade?
Not imminently, but currencies like the yuan and euro are gaining ground through bilateral deals, eroding its monopoly gradually.
What is the petroyuan?
The petroyuan refers to yuan-denominated oil contracts and trades, aimed at challenging the petrodollar system established decades ago.