China’s efforts to expand global use of the renminbi have received a significant boost from the US-Israeli war on Iran, with adoption of Beijing’s cross-border payment system surging since the war was launched, according to a report by the Financial Times.

The Financial Times reported that the average daily value of transactions settled through China’s Cross-Border Interbank Payment System (Cips) reached a record 920.5 billion yuan ($135.7 billion) in March, citing Chinese state media.

Transaction values briefly climbed even higher at the beginning of April, peaking at 1.22 trillion yuan in a single day with nearly 42,000 transactions before volumes later eased.

Beijing launched Cips in 2015 to provide clearing and settlement services for cross-border transactions in renminbi as an alternative to Western-dominated payment systems. The recent increase in its use has fuelled speculation that the Chinese currency is expanding its role in the global oil trade.

While CIPS data does not specify the types of goods involved in transactions, the Financial Times noted that Russian energy export revenues nearly doubled in March to $19 billion compared with February, according to the International Energy Agency. Revenues rose again in April to $19.2 billion.

Analysts at Citigroup, cited by the Financial Times, said a “golden window” for international renminbi use was opening, “driven by geopolitical shifts”. Although official figures on renminbi-denominated oil trading remain unavailable, analysts increasingly believe its use in energy markets is rising.

Sanctions on Russia, Iran, make renminbi best option for purchases

The Financial Times reported that after the United States eased some sanctions on Russian and Iranian oil in an effort to alleviate global energy shortages, buyers such as India were left with limited options but to use renminbi for purchases because Russia and Iran could not easily receive dollar payments.

“There must be an increasing trade in renminbi because it’s the only way that Russia can do business,” Bert Hofman, a professor at the East Asian Institute at the National University of Singapore, told the Financial Times. “Russia can’t use dollars. There’s nothing much else out there that would not have to hit the dollar system at some point.”

Chi Lo, senior market strategist for Asia Pacific at BNP Paribas Asset Management, said: “Public information shows that Russia and Iran are key oil producers using the renminbi due to sanctions, but Saudi Arabia is seen increasingly using the renminbi for bilateral trading with China.”

Renminbi role in global oil still limited 

Despite the increase, the renminbi’s role in global oil trade remains relatively limited. Cheng Tan, founder of Beijing-based consultancy GMF Research, estimated that the Chinese currency accounts for between 3 percent and 8 percent of global oil trade, depending on the methodology used, though the actual figure could vary.

FT calculations suggested the renminbi’s share of global oil transactions remained in the single digits even during the war, while JPMorgan Chase estimates the US dollar still accounts for around 80 percent of global oil trade.

“There is a dearth of good data on this. We’re not able to ascertain exactly how much of the oil trade is conducted in yuan,” Abbas Keshvani, Asia macro-strategy director at RBC Capital Markets, told the Financial Times, noting that “there are good reasons to think the yuan has gained prominence as a medium of exchange in this area.”

Oil, gold, and the ‘petroyuan’

China’s status as the world’s largest oil importer is increasing its leverage over which currencies are used in energy transactions, according to the Financial Times, fuelling renewed discussion about the rise of the “petroyuan” as an alternative to the dollar-dominated “petrodollar” system.

The Financial Times reported that major obstacles still limit broader renminbi adoption in global oil trade, particularly the lack of international use of Chinese financial derivatives markets. “The interest in the western world to access these onshore contracts isn’t there,” Guy Wolf, global head of market analytics at Marex, told the newspaper. “China is still pretty cautious... it has to be a fully open economy and currency to get global acceptance.”

The Financial Times also cited Zouhoure Bousbih of Ostrum Asset Management, who said gold could help expand renminbi use internationally while allowing Beijing to maintain capital controls. Exporters to China “can receive payment in yuan and immediately convert excess yuan into gold bars on the Shanghai Gold Exchange international board without using dollars but with the security of a neutral asset”, Bousbih said.

According to the Financial Times, the Shanghai Gold Exchange opened its first offshore gold delivery vault in Hong Kong last year, creating a pathway for offshore renminbi holders to convert their assets into gold.

The war on Iran has also served as a “proof of concept” for China’s Cross-Border Interbank Payment System (Cips), Benn Steil of the Council on Foreign Relations told the Financial Times. “Participants that first made payments on the system because of the war now have a proof of concept that it works,” Steil said, adding that Beijing appears focused on expanding international renminbi use gradually rather than rapidly.