From Petrodollar to Energy-Yuan: Currency Internationalization in the Light of Original Institutional Economics

Abstract

The present article relies on an original institutional economics perspective of the international monetary system to argue that contrary to what is generally maintained in international relations literature, China’s effort to internationalize the renminbi has not stalled after its inclusion in the International Monetary Fund’s (IMF) Special Drawing Rights in 2015. This argument rests upon on the evaluation of the global petroleum market as a possible reinforcement of China’s establishment of the renminbi as an international unit of account and means of payment through its participation in both fossil and renewable energy markets. To that end, we analyze China’s energy-yuan strategy aimed at both fostering renminbi internationalization and securing energy provision.

Keywords:

• energy market
• currency internationalization
• China
• petrodollar
• path dependence and institutional change

JEL Classification Codes:

• B52
• E42
• F55
• P18
• Q34

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

1 Another aspect of RBM internationalization that tends to be neglected by those claiming its sluggishness is the eRMB. Although this discussion goes beyond the scope of this article, several scholars argue that digital central bank currencies have the potential to facilitate the use of currencies other than the dollar in international transactions, and furthermore, that China’s first-mover position in central bank digital currencies could result in advantages in relation to the USD (Aglietta and Valla 2021; Aysan and Kayani 2022).

2 For details on economists’ debate on the difference between building a framework on the origins of money, on one hand, or the functions of money, on the other hand, see Paul Davidson (1972) and Louis-Philippe Rochon and Matias Vernengo (2003).

3 Kathleen Thelen (1999) calls institutionalists to build a framework that encompasses both institutional stability (path dependence) and change (critical juncture), while, in parallel, William Waller (1988) explains the importance of understanding institutions as both structures and processes.

4 The “Asian premium” alludes to the higher price Asian countries pay for oil barrels produced in the Middle East with respect to western buyers. Since the 1986 OPEC meeting, in the context of a supply managing system, oil price is based on barrel’s quality, to which either a premium or a discount is added. Several factors explain the premium applied to Asian countries: lack of competition, higher willingness to pay (to secure long-term access), and transportation costs, for instance (Mabro 2005; Doshi and D’Souza 2011).

5 Barry Eichengreen (2011b) has a more flexible view of network externalities (NE), which sees the possibility that the renminbi may share the international currency with the dollar in the upcoming decade. Even though, Eichengreen’s analysis is more complete than that of NE a la Krugman, it suffers of similar shortcomings (Fields and Vernengo 2013). For that reason, analyzing it in detail goes beyond the scope of the present paper.

6 According to Kathleen Thelen (1999, 371), a functionalist approach is limited to evaluating an institution’s functions and relies on notions of equilibrium, whereas a historical approach observes how institutions emerge and are embedded in concrete temporal processes. In our interpretation, the latter goes beyond only looking at functions but does not ignore them. In that vein, our work discusses the historical dynamics around the functions of money to demonstrate that, because money is a debt-credit relationship, the interaction between the three functions triggers cumulative effects in the creation and recycling of U.S. IOUs.

7 The conception of money as a means of payment differs from the idea of medium of exchange; the former understands money as a commercial liability in a monetary production economy, whereas the latter sees money as an agreed upon commodity that facilitates barter (Seccareccia and Correa 2018).

8 Evidence indicates that OPEC initially planned to tariff oil trade in SDRs, then use the IMF to recycle the surpluses (Leverett and Leverett 2015); that is, link the price of oil to a basket of currencies (Kamel and Wang 2019, 1141).

9 China reduced its holding of U.S. Treasuries six consecutive times since November 2021 to hit an historical low in May 2022: first time since 2010 that its holdings are smaller than $1 trillion (Chavez-Dreyfuss 2022).

10 The analysis of U.S. geo-economic strategies prior to the 1970s is out of the scope of this paper as is the comparison between pre-1970s international economic context and the current context, on the latter topic vide Simon Shen and Wilson Chan (2018).

Additional information

Notes on contributors

Natália Bracarense

Natália Bracarense is an associated researcher at Lereps, SciencesPo Toulouse (France). A PhD in economics at the University Missouri-Kansas City and a Master in Data Science, Dr. Bracarense does research in international political economy and works as a consultant for the OECD. Irène Berthonnet holds a PhD in history of economic thought (Université de Lille) and is now an associate professor in economics at Ladyss, Université Paris Cité (France). Her research is mostly in economic philosophy and feminist political economy.

Irène Berthonnet

Natália Bracarense is an associated researcher at Lereps, SciencesPo Toulouse (France). A PhD in economics at the University Missouri-Kansas City and a Master in Data Science, Dr. Bracarense does research in international political economy and works as a consultant for the OECD. Irène Berthonnet holds a PhD in history of economic thought (Université de Lille) and is now an associate professor in economics at Ladyss, Université Paris Cité (France). Her research is mostly in economic philosophy and feminist political economy.