In recent years, the Chinese Yuan Renminbi (RMB) has emerged as a popular form of exchange on the foreign currency markets in the Middle East. This arose as a direct result of the current global events that have shattered economies all across the world.
The supremacy of the US dollar as an international currency has been called into doubt as a result of the post-pandemic economic structure, Russia’s war on Ukraine, growing inflation in both the United States and Europe, and the collapse of the banking sector in the United States. By seizing this opportunity, China’s presence in the Middle East has been spectacular, with the yuan being considered for use in commercial transactions.
In October 2016, China took a significant step by internationalizing its currency. The Yuan was accepted as one of the main currencies by the International Monetary Fund, and during that time there was a rise in economic cooperation between China and the Middle East. The yuan has already exceeded the share of trade that is done in the Canadian dollar, the Australian dollar, or the Swiss franc.
The internationalization of the yuan has placed it as the fifth-most valuable currency in the world. The value of financial assets denominated in yuan increased by 8.98 trillion yuan in 2020. In the meantime, the function of the yuan as a reserve currency also increased, with more than 70 nations’ central banks including it in their reserve assets. In 2022, the country’s cross-border payments and receipts of $42.1 trillion yuan were paid in the Chinese currency. This was a 15% growth from the previous year and the fifth consecutive yearly increase in this figure.
As Beijing becomes more powerful in the Middle East against the background of diminishing US hegemony, there are geopolitical variables at play that are contributing to the situation. Over the years, China has committed to delivering $55 billion in the form of loans and investments for infrastructure projects in the region. These projects involved Saudi Arabia, Egypt, and Iran. In addition to the GCC, a number of other nations in the Middle East are sending signs that they are also participating in this campaign against the US currency.
The yuan officially surpassed the U.S. dollar as China’s preferred mode of payment for international transactions in March 2023. Because of the sanctions that the United States has placed on the Islamic Republic, Iran is especially interested in cutting down on its reliance on the dollar. Further, Iran and Russia made the announcement in August 2022 that they had begun conducting commerce in their own national currencies.
On January 18, 2023, a currency exchange agreement was signed between the People’s Bank of China and the United Arab Emirates (UAE). This transaction was worth 35 billion renminbi (about $5.5 billion). It was another example of the continuous development and popularity of the renminbi in the Middle East. In February, the Central Bank of Iraq announced intentions to strengthen Iraq’s access to foreign currency by enabling commerce with China to be paid directly in Yuan for the very first time. In March, China successfully concluded its first energy transaction denominated in yuan. The transaction included the importation of around 65,000 tons of liquified natural gas (LNG) from the UAE. In addition, Egypt was in the process of securing finance from China in the form of yuan bonds for a total of 500 million dollars in 2022. Also, Israel’s collection of foreign currencies now includes the yuan.
The six-nation economic bloc in the Middle East known as the GCC is interested in expanding its commercial and investment ties with China, and negotiations between the two countries are inching closer to the conclusion of a free trade deal. In addition, China has urged the full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlements in oil and gas trading. With China being the top oil importer in the world, the Middle East is embracing investment from China to assist with the region’s efforts to diversify its economy. Due to the high volume of trade with China, the Middle East nations are benefiting from the use of swap lines in Chinese Yuan conditions to mitigate currency risk.
In order to increase the number of transactions, other nations swiftly signed arrangements to exchange the Yuan for their own currencies. Because of these advantages and benefits, an increasing number of nations and regional organizations have shown an interest in purchasing the Chinese currency, which will lead to an increase in the volume of commerce using the Yuan in the near future. These significant currency agreements, according to the Chinese central banks, will lead to a rise in the usage of the RMB in direct commerce.
From a geopolitical lens, the establishment of the yuan as the preeminent global reserve currency has been one of China’s long-cherished goals. The imposition of western sanctions on Russia has provided the yuan with an additional boost, which has contributed to the currency’s rising popularity. As a result, having connections in China has become more useful for any state that is interested in doing business in Russia. As more and more international commerce is settled in yuan, the role of the yuan as a global trade settlement currency is growing, as is the yuan’s significance in international trade.
Despite the United States resistance to this trend, demand for the US dollar continues to drop over time. because the Global South is working to establish a new trading system that will protect them from the hegemonic position of the US currency as well as the weaponization of it by Washington. It is possible that increased commerce in yuan-denominated goods might contribute to the development of even closer relations between Middle Eastern nations and Beijing.
The current state of the geopolitical situation in the Middle East paints an extremely positive picture for the future of the Chinese yuan in that area. Because of this, the Yuan may end up controlling a large portion of the trade flow of foreign money across the Middle East. This would imply that the Yuan is a trustworthy currency.
However, it will not be able to overcome other hard currencies like the dollar and the euro, which are more widely used and trusted across the globe and in the area. The global market is too big, and the yuan is still not liquid enough. Considering that the US dollar is still the primary currency used in the Middle East and a sudden shift towards yuan will be gradual. It does not matter how much of a role the Yuan plays, but the increased use of the Yuan in the Middle East will offer up more opportunities and possibilities for commerce between China and the countries in the area, as well as between China and those nations outside of the region that already trade using the yuan. Additionally, it will boost the flow of Chinese finance into the markets of the Middle East.
In concluding remarks, it can be added that the yuan has emerged as a trustworthy currency not only in the Middle East but also around the globe. As a result of the expansion of China’s economy, the yuan’s share in international commerce, currency trading, and even the reserves held by the world’s central banks is increasing. In fact, trade in Yuan in the area comes as part of developing bilateral agreements in the majority of instances. Additionally, it is subject to the region’s current volatile and challenging political and economic conditions, which might not change in the future. This has temporarily increased the demand for Yuan. In addition, it marks a significant step forward for the development of economic relations between China and the Middle East in the years to come.