Yaun v/s U.S Dollar

The brain child of former Secretary of State Henry Kissinger and Saudi Arabia, the petrodollar was created in the early 1970s. In exchange for political and military security from the US, Saudi Arabia began to sell oil only in U.S. dollars. In fact, the Saudis had pegged their own currency to the dollar. Thus, the US had vested interest in Saudi Arabia as they needed that co-relation between dollars and oil.

Historically, crude oil contracts are settled in US dollars. In other words, if you wanted to purchase crude oil, you needed dollars. Thus, the oil importing countries bought dollars and oil exporters sold their oil for dollars - again. Of course, exporters then purchased more dollar denominated assets, boosting the strength of the currency. A circle! Naturally, dollar dominated as the global reserve currency. It allowed the US to chug along, in spite of the deficit, largely because of the world's insatiable thirst for dollars- and oil. In a way, the USA's largest export is the US dollar.

Changes do come, don't they? For petrodollar, the change came in 2015 when Russia's state owned Gazprom agreed to sell oil to China for Yuan instead of the usual dollars. Then on November 13th 2015, the IMF added the Chinese Yuan to its basket of reserve currencies, giving the Yuan the highly-regarded international status of "Reserve Currency". In early 2016 China has already purchased a vault capable of housing 1,500 tons of gold in London. Despite the slowdown in the Chinese economy, the Chinese Yuan is emerging as a strong contender to the US dollar.

The plans are gigantic, fit enough for a giant country. China is all set to launch a new crude oil contact at the Shanghai International Energy Exchange that would be priced in Yuan. Since China is the world's third largest buyer of oil, the development is worth noticing. Is it only incidental that Saudi Arabia is also the largest provider of oil to China?

This year will see the first stab at petrodollar by China. One of the main advantages of the Yuan is that it's not a floating currency. In other words, China can (and does) set the value of its currency without much accountability. This currency manipulation has allowed China's manufacturing sector the undercut every single industry in the world and is the single most important reason China has achieved such growth. Since, it's working for the Chinese why would they discontinue- you have to ask. Certainly, 2016 will see China settle oil payments in Yuan with various African countries. With a robust manufacturing industry, China will push the African countries to use Chinese Yuan to buy goods directly from China cutting the US banking system out of the loop. Already, more than a dozen countries settle about ten percent of their trade deals with China in Yuan. Apart from Russia, Canada's usage of Yuan is also steadily increasing.

Almost thirty two percent of China's $4 trillion foreign exchange reserves are invested in U.S. government debt. It's natural that China wants to shelter itself from any future risk. Since there is a staggering amount of oil in the world at present, there is no real contention for this overabundant resource. So, the time is just right for China to nibble away the dominance of dollar.

Petro- Yuan could be one of the biggest but under-reported and discussed threat to the US economy.