Opinion: Dollar is still king, but for how much longer?

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The increasingly close relationship between China and Saudi Arabia has taken another significant step forward. Both countries’ central banks agreed on an initial monetary policy of up to 50 billion yuan (HK$55 billion) over the next three years.

More recently, the agreement promotes bilateral trade in both the yuan and the riyal. In the long run, the two countries will be each other’s most important trading partners, creating an opportunity for a petrodollar deal.

In a global political economy dominated by the petrodollar, this could be the beginning of a seismic shift. It’s been a long time.

Almost a year ago, President Xi Jinping made a historic visit to Riyadh. He then visited Hong Kong Chief Executive John Lee Ka-chiu in February. More offers followed.

The Shanghai Stock Market and its Saudi counterpart have launched collaborations on a range of issues, including exchange-traded funds (ETFs), financial technology (fintech), environmental, social and governance (ESG) and information exchange.

China, Saudi Arabia central banks have signed an agreement to increase trade

The Hong Kong Monetary Authority, the city’s central bank and Saudi Arabia’s central bank have improved their relationship in financial areas such as tokenization and new payment systems, covering new technologies in regulation and control.

However, the final exchange rate agreement will be very important. It means that trade can be done in local currencies instead of paying in US dollars. This could be seen as a challenge to the dominance of the US dollar. Perhaps in the long run, it is. But there is a good economic reason.

The current US Federal Reserve interest rate of 5-plus percent against the dollar has pushed the dollar to historic lows against other currencies, making trading in the dollar expensive.

There are clear advantages to having two of our biggest trading partners, such as China and Saudi Arabia, use the local currency option, which helps ease the pressures of trading in a more expensive currency.

Global “de-dollarization” may still take some time, but the trend is already showing the cracks in the world economy that used the US currency settlement.

The yuan may or may not challenge the dollar’s dominance, but its globalization will continue apace — to the benefit of both China and the global economy.

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