Alasdair Macleod: The Petroyuan Shift Has Begun

As Hormuz oil flows increasingly shift toward yuan settlement, Iran may be forcing the dollar-based energy order into crisis before China even makes its final gold-backed move.

Iran is doing more to promote the petroyuan at the expense of the petrodollar than China has achieved so far. It is accelerating the dollar’s demise at its worst possible moment.

Introduction

Unlike America’s current administration, China plans ahead. And unlike most governments whose plans are driven by day-to-day reactions to domestic politics, China’s leaders seem to be able to plan their national interests strategically for the longer term.

In 1983, the People’s Bank was appointed with the sole responsibility for acquiring the nation’s gold and silver and managing national stocks, alongside its responsibilities for foreign exchange and exchange controls. With government policies to promote mining and expand refining capabilities, this led to China rapidly becoming the largest nation by gold mine output in 2007. Having satisfied initial government demand by 2002, when hitherto gold ownership by the public was banned, the ban was finally lifted, and the Shanghai Gold Exchange was born.

The reasons behind these developments were simple. The leadership understood the role of gold in securing the value of credit, having been insulated from the Keynesian revolution in the West. They knew that their industrial revolution must be based on those of the Europeans in the nineteenth century, which proved to be a great economic leap forward based on free markets protected by colonial umbrellas. Having been on the wrong end of British colonial policy with respect to the tea trade, which led to the Opium Wars of 1832 onwards, for China, it was a lesson well learned.

If you regard China’s gold and silver policies in this light, they make sense. But importantly, Britain’s remarkable success leading a small nation to dominate world trade required a currency which was freely exchangeable for gold at a fixed rate. The pound was literally as good as gold. China knew that it would have to accumulate enough gold to emulate Britain’s example.

Apart from what has been declared as official PBOC reserves, China’s true gold holdings remain secret. There are two reasons why this has been necessary. As the principal buyer of bullion from 1983 onwards, it was not in her interests to show her hand in the market. If it was a matter of a few thousand tonnes, this would not have been much of a problem, but in the realms of tens of thousands of tonnes secrecy was vital when the opportunity of the 1981—2002 bear market presented itself as an opportunity to accumulate massive amounts.

Secondly, China was pursuing her gold acquisition policy in a global fiat currency environment with which she had to conform. For the sake of her balance of trade, the yuan’s relations with other currencies and, in particular, the dollar would have to be with a floating rate, rather than one fixed to gold, with the threat that implied to the fiat currency system. Furthermore, with her Confucian philosophy, China was prepared to be patient and not to be associated with the eventual and inevitable downfall of the dollar-based fiat currency system.

Then came Trump

President Trump’s election in November 2023 and his inauguration the following January changed global trade relations, particularly so when last April he revealed a new round of higher trade tariffs against every nation in the world, including China. The following week, President Xi embarked on a tour of ASEAN nations to reaffirm China’s free trade policies, and China announced that it would accelerate plans for trade agreements with South Korea and Japan, which so far have proved stillborn. But with her ASEAN partners, Xi almost certainly discussed not only tariff-free trade, but trade settlements.

It had been clear for a long time that China was moving away from using dollars to settle trade, and in the light of weaponised US trade tariffs, China made two further important steps. The first was to promote her Cross-border International Payments system (CIPS), which allowed the exchange of all currencies for renminbi without being exchanged for dollars first.

The second step was for the Shanghai Gold Exchange to open a vault in Hong Kong, whose role as China’s international financial centre comes into play, and a further SGE gold vault in Saudi Arabia, the centre of the West Asian oil trade. These two vaulting facilities allowed for the exchange of gold for renminbi only, and vice versa.

Suddenly, the threat to the fiat dollar became obvious. All China now had to do was declare her true gold reserves and fix an exchange rate between the renminbi and a given weight of gold. This final step is now pending.

Iran as China’s proxy

On 28 February, the US and Israel attacked Iran. Iran subsequently and selectively closed the Straits of Hormuz to shipping, which became uninsurable at Lloyds anyway. The relationship between Iran, China, and Russia had led to a trilateral strategic pact in early January, a 20-year comprehensive strategic partnership including military coordination, a shared opposition to Western military dominance, and its economic coercion.

Under this agreement, Iran is provided with electronic intel support from China and technical expertise from Russia. In effect, as Ukraine is NATO’s proxy in a war against Russia, Iran is China’s and Russia’s proxy in a war against the United States. All three nations want to drive US bases out of West Asia, removing them from the Asian continent entirely. As part of the plan, Iran insists that free passage out of the Gulf through Hormuz can only be obtained for cargoes paid for in yuan, effectively ending the petrodollar for all GCC states.

This is seen as an Iranian initiative rather than one planned by China. After all, China didn’t start the war and is not a combatant. But the financial consequences for GCC states are significant. For the last fifty-two years, they have accumulated dollars, only to find that they are now redundant, no more than an investment in a foreign currency and possibly a speculative one at that.

However, this is not the surprise it first appears. In a 2014 Goldmoney interview, which was not published, I was told by a director of a major Swiss refinery that large numbers of LBMA 400-ounce bars were being sent in from the Middle East for refining into the one-kilo 99.99% Chinese standard. Clearly, there was an understanding at least twelve years ago that with respect to energy exports, the region’s future was bound up with China.

It appears that the moment has now come for the GCC members to embrace this reality, to expel US military forces from the region, and to sell down their dollars and underlying assets.