Is this deal between China and Saudi Arabia going to end dollar dominance in the world?

China Saudi Arabia Trade: The US Dollar (USD) is the the most dominant currency in global trade, accounting for nearly 54 percent of of foreign trade invoices worldwide, according to various reports. But US’ main rival, China, aims to topple the dollar’s dominance and promote its own currency, Renminbi (RMB), in bilateral trade.

According to reports, China has inked an ‘oil for gold’ agreement with Saudi Arabia, under which Beijing will pay for Saudi oil in RMB, and Riyadh will convert any trade plus into gold through the Shanghai Gold Exchange (SGE). As per reports, the SGE is building secure vaults in Saudi Arabia to make it easier for the oil-rich Kingdom to convert their trade surplus into gold.

Challenge to dollar dominance?

While the China-Saudi Arabia deal is undoubtedly a major move on part of Beijing to increase the share of RMB in global trade, which stands at less than 5 percent at present, it is unlikely to cause any significant hit to the US Dollar, which is expected to remain the dominant currency for the foreseeable future, according to economists.

Experts believe the Saudi-China agreement will have little impact on the dollar as its use in global trade will decline only if its utility as a medium of exchange, reserve asset and unit of account plummets.

Saudi-China deal not a step towards gold standard

The agreement to convert trade surplus into gold is also not a novel one, and has been used Central Banks globally for years. These banks have been converting their reserves into gold, and the trend has witnessed a surge in recent years, as per market experts.

According to experts, converting currency into gold is not a step towards establishing a gold-standard in the global market because this would require conversion at a fixed exchange rate as one of the pre-requisites. While China’s RMB can be converted into gold at market value, this is no way implies that gold will replace the dollar as the medium of payment, they say.

Why gold can’t replace currency in global trade?

Experts also pointed how the elasticity of supply of flat currency gives it a major advantage over physical commodities like gold, as the currency supply can be moderated via fiscal and monetary policies, as mandated by the liabilities of the government and its regulated institutions.

Governments worldwide closely monitor the supply of flat currency, ensuring market prices remain stable and deflation does not occur. Central banks often set a target of about 2 percent for inflation, beyond which the attractiveness of the currency decreases, including its utility in terms of storing value.

As an example, if the dollar weakens, the real income of exporting countries who use it as a mode of payment, also goes down, while the purchasing power of their reserves also plumets.

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