As the war of the US and Israel against Iran — which has now paused for two weeks amidst new diplomatic talks — has shaken the global economy for over a month, Iran and China have seized the opportunity to highlight a common goal regarding the global financial system. Their shared objective is the abolition of the US dollar hegemony. For years, they argue, Washington has used the dollar's dominance in international trade to exert influence and impose sanctions on enemies and competitors, such as Iran and China. The supremacy of the dollar is particularly evident in the global oil market, where approximately 80% of transactions are settled in this powerful currency unit, according to a 2023 JP Morgan estimate. Through Iran's control over the Strait of Hormuz, a passage serving about 20% of global oil and liquefied natural gas production, Tehran and Beijing have found a tool to promote the Chinese yuan as an alternative to the US dollar. According to Iranian officials under the country’s customs authority, merchant ships are being charged transit fees in yuan, according to multiple reports. The latest recording occurred on March 25, when two ships paid their fees in yuan, according to Lloyd’s List. China's Ministry of Commerce acknowledged the Lloyd’s List report last week in a social media post, confirming the use of the yuan for payment settlements. On Saturday, the Iranian embassy in Zimbabwe stated via social media that it is time to add the "petroyuan" to the global oil market.
Heavy blow to existing damage
"On one level, Iran aims to challenge the US, adding a heavy blow to existing damage," stated Kenneth Rogoff, professor of economics at Harvard University and former chief economist of the International Monetary Fund (IMF), speaking to Al Jazeera. "On another level, Iran is serious about its preference for the yuan to avoid US sanctions and to cultivate its ally, China, which is steadily moving toward denominating its trade and that of the BRICS countries in yuan," Rogoff added.
A "multipolar" financial world
For Tehran and Beijing, the strengthening of the yuan is a win-win situation. The use of the yuan allows China and Iran to bypass US sanctions imposed through the dollar-dominated financial system. Furthermore, it simplifies and reduces the cost of trade between the two countries, which has grown rapidly since the signing of the 25-year "strategic partnership" in 2021. "Iran clearly understands the importance of this challenge to American financial sovereignty, as well as the critical role of the dollar system and petrodollars," stated Bulent Gokay, professor of International Relations at Keele University in the UK, to Al Jazeera. For China, according to Gokay, the move aligns with Beijing's goals to create a "multipolar financial world, where the central position of the dollar is negated by the growing influence of emerging powers." China buys more than 80% of Iran's oil exports, enjoying discounts on purchases estimated to be facilitated using the yuan. Iran, for its part, imports large quantities of Chinese machinery, electronic equipment, chemicals, and industrial components. The war has not materially affected the oil flow between the two countries, which remains at levels close to pre-conflict figures, according to analyses from data firms. In the first two weeks of the conflict, Iran exported 12 to 13.7 million barrels of crude, most of it to China, according to Kpler and TankerTrackers. China has for years aspired to challenge dollar dominance. In a 2024 speech, Chinese President Xi Jinping expressed hope that the yuan would become a common currency in international trade and acquire "global reserve currency status."
The "mountain" of the yuan
China's yuan has made steady progress in recent years amidst the rising influence of Global South economies, many of which have strained relations with Washington. But the Chinese currency still has a steep mountain to climb if it wants to pose a serious challenge to the dollar. Unlike the dollar, the yuan is not freely convertible due to the strict capital controls imposed by Beijing, meaning businesses and financial institutions cannot exchange it for other currencies or move it across borders at will. The Chinese government's control over financial institutions, including the central bank, has further slowed yuan adoption, as it reinforces perceptions that China's markets lack transparency and a predictable regulatory base. While the percentage of central bank foreign exchange reserves held in dollars has seen a continued decline in recent years, the US currency remains by far the dominant reserve currency worldwide. The dollar accounted for 57% of global reserves last year, compared to about 20% for the euro and 2% for the yuan, according to the IMF. At the same time, only 3.7% of cross-border trade was settled in yuan in 2024, up from less than 1% in 2012, according to S&P Global. "This is not really what will 'dedollarize' the world," said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis in Hong Kong, to Al Jazeera, adding that the use of the yuan in the Strait of Hormuz "only adds increasing pressure and legitimizes alternatives in energy flows." The real "dedollarization" of the dollar, according to Garcia-Herrero, would require the participation of the Gulf states, all of which have priced oil in dollars since the 1970s, when Saudi Arabia agreed to exclusively use the currency in exchange for US security guarantees.
"Breaking" dollar dominance
Even if China faces difficulties matching the globalization of the dollar, this might not matter much to Tehran, said Hosuk Lee-Makiyama, director of the European Centre for International Political Economy in Brussels. "China buys almost all of Iran's oil, and their trade is actually balanced, since Iran can source all the machinery and industrial goods it cannot find elsewhere," Lee-Makiyama told Al Jazeera. European and Japanese currency units failed to replace the dollar in the past because none of those powers could supply oil-producing states with all their import needs, Lee-Makiyama said. But China, he added, is "perhaps the closest country the world has seen to a 'one-stop shop' for manufacturing," as it is the world's largest manufacturer by far.
Impact on international trade
Dan Steinbock, founder of the consultancy Difference Group, stated that while dollar supremacy will not change in the short term, the growing use of the yuan could "break" US dominance in specific sectors over time. "Overall, it is a matter of gradual erosion rather than abrupt substitution," Steinbock told Al Jazeera. Kenneth Rogoff, the Harvard economist, mentioned that much will depend on the outcome of the war and its consequences in the coming years. "If Iran and China prevail, under most scenarios, it will encourage countries to diversify away from the dollar financial system to protect themselves from being held hostage to US economic sanctions," stated Rogoff, who has argued that dollar dominance has already peaked. "But if the US succeeds in its goal of weakening and modernizing the radical regime in Iran — which currently seems possible, but extremely costly and difficult — this would support the US and dollar hegemony for some time longer," he concluded.
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