Can China erode the dollar’s power in the Middle East?

China’s brokering of talks between Saudi Arabia and Iran in March was a further step in the seismic realignment of the world’s power balance. Beyond this diplomatic victory – while making vast economic inroads worldwide – Beijing seeks to uproot the US dollar’s hegemony.

Within the Arab world, there have been past attempts to adopt alternative currencies. During Saddam Hussein’s final years in charge, Iraq sought to sell oil in euros. Additionally, Libya aspired to create a pan-African gold standard in the 2000s. However, no significant attempts to weaken the US dollar have emerged, partly accelerated by the 2007-08 financial crisis, which saw moves towards de-dollarisation diminished.

Yet China’s rapid rise has changed this. Chinese officials have made little secret that they want to weaken the dollar’s power, which could see more adoption of the Chinese yuan – or renminbi. Doing so would blunt American economic power - which, along with its military dominance, has allowed the US to shape the world order.

China is also looking to hedge economically away from the dollar, to alleviate the threat of US sanctions like Russia has faced, which has also prompted Moscow to increase its renminbi reserves.

With a perceived lack of authority from Washington in the region, Russia’s military offensive in Ukraine has further reshuffled the Middle Eastern order, with US sanctions on Moscow prompting regional states to pick sides.

This Ukraine conflict has reinforced the reality that US sanctions can always be imposed, but some states, including some oil-rich Gulf countries, also have defied Washington, maintaining and even expanding ties with Russia and China. And with China acting as an economic powerhouse to trade with, the conflict has undoubtedly further bolstered Beijing’s economic clout in the region.

Ultimately, economic power equals political power. US hegemony in the post-Cold War world order has largely been achieved through the dollar being the global reserve currency. Any decline in the dollar’s usage would equally correlate with a drop in US hegemony.

Renminbi in the Middle East

Some Middle Eastern countries have welcomed the opportunity to trade with alternative currencies to the dollar - an expected consequence of China rising as a leading economic actor in the region. After all, China has become the Middle East’s largest trading partner, including in key states like the UAE, Saudi Arabia, Iraq and Iran.

Take the United Arab Emirates (UAE), which has gradually moved away from US dependency over the past decade and has empowered itself as a country that all global powers must work with. In March, it contributed to the biggest liquefied natural gas (LNG) deal in Chinese yuan between TotalEnergies and China National Offshore Oil Corporation. Not only is it significant that Total is a French and Western company, but also that Abu Dhabi helped drive the move, thus opening the door for the yuan to be used more.

It certainly reflects a wider shift in the regional bloc, the Gulf Cooperation Council (GCC). Saudi Arabia was also reportedly recently in talks with Chinese officials over selling oil to China in yuan after President Xi Jinping proposed it in December 2022. The US has traditionally been the largest buyer of Saudi oil, while the US dollar has been pegged to the price of oil - forming the ‘petrodollar’. This also granted the US substantial influence over OPEC, meaning relations with Saudi Arabia have been key to US interests in the Middle East.

To be clear, even if Saudi Arabia did accept payments in yuan – which it might then use to pay for Chinese imports, this alone would not unravel the dollar’s hegemony. After all, Gulf capitals unanimously accept the petrodollar isn’t going anywhere and still currently welcome it due to the stability and liquidity it provides.

Yet, as China’s economic clout advances, reduced US engagement in the Middle East still opens the door for the renminbi. In February, Iraq announced it planned to accept trade with China in yuan, which comes after Baghdad faced shortages of the US dollar in its central bank – a worrying situation for an oil-rich economy. China has already supplanted the US by investing heavily in Iraq’s oil infrastructure, which the US neglected in the country’s post-war period.

It’s not only the yuan that’s entering Middle Eastern markets. In January, India and the UAE discussed plans for Abu Dhabi to sell non-oil goods to Delhi in the Indian rupee (INR). The GCC, namely through the UAE, is evidently propelling this shift in diversifying the economic landscape.

Sanctions and US pressure

New currencies may certainly seem attractive, given how the US has used the dollar to exert political pressure, backed by financial institutions like the IMF - which critics have seen as an arm of US foreign policy.

The sanctions on Russia show that the US has used its reserve currency status to coerce and punish countries. Like Russia, Iran’s central bank has also been choked by US sanctions. It has also threatened to devalue its own currency to gain the upper hand in trade wars, while Washington also leverages the dollar’s worldwide reach to boost its own economy.

Such weaponisation of the dollar worked when the US was the primary global hegemon, with the dollar remaining the international reserve currency. Now, states that have felt coerced by US economic pressure have other options. Having endured years of US sanctions, Iran’s central bank has listed the yuan as one of the major currencies for trading. Iran has already sold oil to China in yuan, and given Western pressure, Tehran hopes to completely abandon the dollar and euro and trade in yuan with China wherever possible.

Some regional countries have shown desires to move away from the US’ economic influence, which has sometimes been criticised as interference due to its political strings-attached aid. In Tunisia, a pro-government movement said it hopes Tunis will join Algeria, Egypt and Saudi Arabia in applying to join the BRICS group that includes Brazil, Russia, India, China and South Africa at present.

While such bids are not clear cut nor guaranteed to be accepted, the anti-Western and IMF sentiment within Tunis reflects how it and other states may favour moving towards China and other emerging economic powers, which could be welcomed as less interfering.

Some observers say BRICS itself has emerged as a potential vehicle to erode US hegemony and de-dollarise countries, and there are clearly wishes within the organisation to achieve this. On April 13, Brazil’s leftist president Lula da Silva called for a new currency for BRICS members to trade in as opposed to the dollar, saying, “Every night I ask myself why all countries have to base their trade on the dollar” to applauding Chinese and Brazilian dignitaries in Shanghai.

Although largely a symbolic statement at this point, such aspirations could further consolidate opportunities for Middle Eastern and North African countries to trade in different currencies should they join BRICS.

Challenging the dollar

Despite these challenges to the dollar, its power should not be dismissed outright. Most financial transactions, international debt, and trade invoicing are currently made in dollars. And as of 2021, almost 60 percent of the world’s foreign exchange reserves were stored in dollars. And with oil, 80 percent of global transactions are denominated in dollars.

China would face a huge challenge to replace the dollar worldwide and in the Middle East. In practical terms, it would need to convince central banks to hold at least at least $700 billion worth of yuan in foreign exchange reserves for it to be a reserve currency, in the way that the US has.

Moreover, the yuan is not considered a hard currency, meaning it is currently considered less stable than the dollar. China would need to consider adapting its monetary policy and prove to central banks that the yuan's stability could match that of the dollar and, therefore, fully internationalise its currency.

However, global reserves have been correlated with the leading power in the world. Portugal and then Spain once dominated reserves, as did currencies by the Netherlands and France in the 17th and 18th centuries. The British Empire made the pound sterling the reserve currency in the 19th and early 20th centuries to trade within its colonies until the US took the baton as the global superpower.

Obviously, the future is uncertain, and variables can change. Yet, for now, more countries have further opportunities to trade in multiple currencies, like the renminbi as well as the dollar.

China has smelt blood as it observes the dying US hegemony, and this is in line with Beijing’s own rapid economic growth in the past several decades. Moreover, various financial analysts have predicted that China’s economy will comfortably surpass the US by 2050. China becoming the top economic power on earth would be a massive contributing factor in who controls global reserves.

Incidentally, that forecast will be one year after the Chinese Communist Party’s centenary in 2049, which President Xi Jinping has expressed as a target by which the country will aim to have evolved so much that it will be able to exert tremendous global influence and power.