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India, Saudi Arabia Consider Transacting in Yuan

In a new twist to what could inadvertently lead to an increase in the use of the digital yuan (e-CNY) for international trades when fully operational, India and Saudi Arabia are reportedly considering using Chinese yuan – instead of the U.S. dollar – for some of their oil transactions.

China has been on the verge of making the e-CNY more popular for the past two years and there have been talks of the yuan’s internalization being instrumental to achieving this goal. Dow Jones reports that Saudi Arabia is weighing the option to accept yuan for oil sales to China while Chinese Global Times says Indian officials are considering using the yuan as a reference currency in an India-Russia payment settlement mechanism.

As the world’s largest net oil importer, China buys about 25% of its oil from Saudi Arabia, and due to the Russia-Ukraine war coupled with the sanctions imposed as a result, U.S. dollar holding has become an issue as some nations look for alternatives, according to Bloomberg. Though the internalization of the yuan is debated among insiders, some of them say its use by major economies for oil sales would mean a great shift in geo-economic realities and a challenge to the current system which has been dominated by the U.S. dollar since the collapse of the Bretton Woods system in 1973.

In this fashion, the U.S. dollar’s dominance which has been a major driver sustaining its world reserve currency status could be reduced as several countries seek alternatives for cross-border trades. Splits from the U.S. dollar will adversely affect its overall demand  – though some suggest up to 10 years for the real impacts to reflect- as well as its reserve currency status which has empowered the U.S. for decades as a major global economy.

“Naturally, China’s currency is increasingly being used as a reserve currency,” says Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, as he shared about his book, Principles for Dealing with the Changing World Order. The billionaire investor adds that China is active in a pending change in the current world order. With a risen market share of 3.2% going by recent data from SWIFT, coupled with China’s intensifying of the yuan’s use for cross-border e-commerce according to a local report, the e-CNY stands to benefit from increased use of the yuan for payment.

While the extent of the e-CNY involvement in this development is not clear yet, both India and Saudi Arabia have been linked with the digital currency at some point. As one of the world’s largest economies, India is supposedly following in the footsteps of China to issue a digital rupee in the 2022-2023 financial year. While joining the Multiple Central Bank Digital Currency (m-CBDC) Bridge Project (formerly known as Project Inthanon-LionRock) alongside China in February 2021, the governor of the Central Bank of the United Arab Emirates, Abdulhamid Saeed Alahmadi, mentioned his bank’s involvement in a wholesale CBDC proof-of-concept project with the Saudi Central Bank to settle domestic and cross-border transactions using money on distributed ledger technology. The m-CBDC Bridge seeks to, among other things, facilitate real-time cross-border foreign exchange payment-versus-payment transactions in a multi-jurisdictional context and on a 24/7 basis.

Meanwhile, on the other side of its internationalization effort, a former CIA analyst, Yaya Fanusie, believes that China’s progress with the e-CNY is more about data harvesting than it is for advancing its currency. In an article published together with Brookings, he maintains that the e-CNY is a national data strategy.

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