Petroyuan on the horizon: The Middle East crisis rewires global oil finance

The long-debated prospect of a “petroyuan” — a system in which oil is traded and settled in China’s renminbi (RMB) — has entered a critical new phase. What was once a gradual, policy-driven effort by Beijing to internationalise its currency is now being accelerated by crisis conditions in the Middle East.

Just one month before the US/Israel-Iran conflict, Chinese leader Xi Jinping called on his cadres to build a strong currency of RMB in an article published by the party magazine Qiushi. The conflict and the near-closure of the Strait of Hormuz have transformed the petroyuan from a theoretical alternative into an emergent geopolitical instrument.

Yet while these developments mark a significant inflection point, they do not herald the immediate displacement of the petrodollar. Rather, they point towards a more fragmented, coercion-driven and multipolar monetary order.

At the heart of this shift lies the erosion — though not collapse — of the petrodollar system. Since the 1970s, the global oil trade has been overwhelmingly denominated in US dollars, a structure underpinned by strategic bargains between Washington and Gulf producers. This arrangement generated persistent global demand for dollars, reinforced US financial dominance, and enabled the US to weaponise its currency through sanctions. Even today, the majority of oil transactions remain dollar-based, reflecting deep network effects and the unparalleled liquidity of US financial markets.

A structural factor reshaping the contest between the petrodollar and the petroyuan is the shift in global energy demand, with China having overtaken the US as the world’s largest energy consumer and importer, accounting for roughly 15% of global oil consumption. This transition alters the gravitational centre of global oil markets in ways that subtly but significantly favour RMB internationalisation.

Under the classic petrodollar system, demand for oil — and therefore for dollars — was anchored in a US-centric consumption model, reinforced by Washington’s security role in the Gulf. Today, however, the primary marginal buyer of energy is China, meaning that producers are increasingly oriented towards Chinese demand rather than American consumption.

This creates a structural opening for Beijing to negotiate currency terms, especially in long-term supply contracts or under crisis conditions such as the Hormuz disruption. If major exporters perceive that securing stable access to the Chinese market requires accommodating RMB settlement, the logic of invoicing in dollars weakens at the margins. 

At the same time, this shift does not automatically translate into petroyuan dominance: energy exporters still prefer the liquidity and convertibility of dollar assets, and many continue to price in dollars even when settlement occurs in alternative currencies. The result is a gradual decoupling between pricing and settlement — a hybrid system in which China’s demand power expands the space for RMB usage without fully displacing the dollar’s role as the global unit of account.

The 2026 Iran conflict has exposed the geopolitical fragility of the petrodollar system. Unlike earlier challenges to the petrodollar — such as the introduction of RMB-denominated oil futures or bilateral currency agreements — the current disruption is rooted in physical control over energy flows.

Iran’s strategic position along the Strait of Hormuz, through which roughly one-fifth of global oil supply passes, has enabled it to directly link currency choice to market access. By restricting transit, imposing tolls and reportedly demanding payment in RMB, Tehran introduced a form of “currency coercion” unprecedented in modern energy markets. 

The current US blockade of the Strait of Hormuz is, of course, changing the calculus. Rather than allowing Tehran to unilaterally control transit and impose RMB-denominated tolls, Washington has moved to interdict vessels linked to Iranian trade and to penalise ships that comply with Iranian demands, including those that pay transit fees.

This intervention complicates the petroyuan dynamic in two ways. First, it disrupts the mechanism of “currency coercion” by making it riskier for shipping firms to engage in RMB-based payments tied to Iranian transit, thereby limiting the scalability of such practices. Second, it reasserts the strategic underpinning of the petrodollar system — namely, US naval dominance and its role in securing (or denying) global energy flows. 

It marked a critical departure from market-driven currency competition. Historically, efforts to promote alternatives to the dollar relied on incentives — pricing flexibility, financial infrastructure, or trade partnerships. In the present crisis, however, the adoption of the RMB is increasingly shaped by necessity rather than preference.

For energy-importing countries, particularly in Asia, the willingness to engage in RMB-denominated transactions may hinge less on financial considerations than on securing access to constrained supply routes. In this sense, the Hormuz crisis has converted the petroyuan from an optional mechanism into a conditional requirement under extreme geopolitical stress.

The implications of this shift are amplified by the scale of disruption caused by the war. Attacks on regional energy infrastructure, combined with restricted maritime flows, have removed significant volumes of oil from global markets and driven prices sharply upward.

Under such conditions, transactional flexibility becomes secondary to supply security. This creates an environment in which alternative settlement currencies — especially those tied to major importers like China — gain practical traction, even if they lack the institutional depth of the dollar system.

Iran’s alignment with China is central to this dynamic. Already constrained by US sanctions, Tehran has long sought to bypass dollar-based financial channels. The current crisis accelerates this trajectory by embedding Iran more deeply within a China-centric economic and monetary network.

Selling oil in RMB, accepting RMB for transit fees, and relying on Chinese demand together form a coherent strategy of financial realignment. Large proportions of Iran’s oil revenues in RMB can be recycled back to China via Iran’s purchase of Chinese products and services, which can basically help the country bypass most of the sanctions.

For China, this presents both an opportunity and a test: an opportunity to expand the international role of its currency, and a test of whether crisis-driven adoption can translate into durable monetary influence.

This evolving arrangement reflects a broader shift towards what may be termed a “commodity-anchored RMB”. China has increasingly leveraged its position as the world’s largest importer of energy and supplier of critical minerals to promote RMB settlement in trade. By offering market access, infrastructure investment and long-term contracts, Beijing encourages counterparties to transact in its currency. The inclusion of oil — particularly under crisis conditions — extends this logic into the most strategically significant commodity market in the world.

At the same time, the very conditions that are accelerating the petroyuan also expose its limitations. Unlike the petrodollar, which emerged from a relatively stable geopolitical order supported by US military power and deep capital markets, the petroyuan is being forged in an environment of fragmentation, sanctions and conflict. Its expansion is driven less by global trust than by political alignment and systemic exclusion. As a result, it is likely to remain uneven and geographically bounded.

The structural constraints are well known but remain decisive. First, the RMB lacks full convertibility, with capital controls limiting its attractiveness as a global reserve currency. Second, China’s financial markets do not yet offer the depth, transparency and legal predictability that underpin confidence in the dollar. Third, currency dominance is reinforced by network effects: as long as most oil is priced in dollars, market participants have strong incentives to continue using dollars. Dislodging this equilibrium requires not just bilateral arrangements or crisis-induced shifts, but systemic transformation.

The use of currency as a tool of coercion — whether through sanctions or chokepoint control — introduces volatility and uncertainty into the system. While this may accelerate RMB usage among a subset of countries, particularly those already marginalised from the dollar system, it is unlikely to attract widespread participation from actors seeking stability and predictability.

China’s own policy preferences further constrain the pace of change. Beijing has historically prioritised financial stability and control over rapid liberalisation. Full internationalisation of the RMB would require opening capital accounts, allowing greater exchange rate flexibility, and accepting increased exposure to global financial cycles. These steps carry domestic risks that Chinese policymakers have been reluctant to assume. The Hormuz crisis may increase the strategic value of RMB internationalisation, but it does not eliminate the underlying trade-offs.

What, then, does the current moment represent? The 2026 Iran conflict and the near-closure of the Strait of Hormuz should be understood not as the moment of petrodollar collapse, but as a powerful catalyst accelerating pre-existing trends. The global monetary system is moving towards fragmentation, with multiple currencies coexisting in a more politicised and regionally differentiated landscape. In this emerging order, the dollar is likely to remain dominant, but no longer monopolistic.

The petroyuan, in this context, will expand as part of a parallel system — one anchored in China’s trade networks, supported by alternative payment infrastructures, and utilised by states seeking to hedge against or bypass US financial power. Its growth will be driven less by universal adoption than by selective integration, particularly in energy and commodity trade.

Ultimately, the future of the petroyuan will depend on whether China can move beyond crisis-driven experimentation to build the institutional foundations of a global currency. The events in the Middle East demonstrate that geopolitical shocks can accelerate monetary change, but they cannot substitute for the deeper conditions — financial openness, legal credibility and market depth — that sustain currency hegemony.

For now, the petroyuan is best understood as a currency of strategic necessity rather than universal trust. The 2026 Iran conflict has brought it closer to reality than ever before, but also clarified the limits of its reach. The result is not a new monetary order replacing the old, but a more contested and fragmented system in which energy, geopolitics and finance are increasingly intertwined.

*The author, principal investigator of the NUS NOL Fellowship Programme on China’s export growth and manufacturing outsourcing, gratefully acknowledges the support of the Fellowship for this research.

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