Petrodollar to Digital Yuan
China, the Gulf, and the 21st Century Path to De-Dollarization

Executive Summary
A quiet revolution is reshaping the foundations of global finance. The Petrodollar system, which has underpinned the international oil trade and U.S. financial power for half a century, faces unprecedented challenges.
While headlines focus on geopolitical tensions between the United States and China and the increased use of U.S. sanctions following Russia's invasion of Ukraine, a fundamental transformation is unfolding through technological innovation, shifting trade patterns, and the Gulf states' ambitious economic reinvention.
Three powerful forces are converging to drive this change: China's strategic push to reduce its dollar vulnerability as the world's largest oil importer, the Gulf states' pressing need for economic transformation through massive investment in technology and infrastructure, and breakthrough innovations in digital payment technologies initiated by China that make alternatives to the dollar-led global payments not just possible but potentially more efficient than traditional systems.
This report argues that these intertwining forces could accelerate changes to the dollar-based financial system in addition to the geopolitical shifts alone. While complete de-dollarization of the oil trade is highly unlikely over the next five years, expect gradual erosion of the dollar’s use in oil trade settlement and the global recycling of oil revenues.
The Stakes
The Petrodollar system, born from 1970s agreements between the United States and Saudi Arabia, rests on three pillars: oil priced in dollars, transactions settled in dollars, and oil revenues recycled into dollar-denominated assets. This arrangement has served American interests by enabling persistent deficits at manageable costs while providing Gulf states with stable markets and U.S. security guarantees.
The global oil trade, which is predominantly paid for in dollars, accounts for roughly one-fifth of all dollar-denominated global trade. The Gulf Cooperation Council member states hold approximately 6% of global foreign exchange reserves, while the BRICS nations collectively account for 43%, in a world where the dollar makes up 57% of global reserves.
Today's landscape bears little resemblance to the world that created this system. The United States has achieved energy independence through shale production, China has emerged as the world's largest oil importer, and breakthroughs in digital innovation, largely initiated by China, are about to revolutionize global payment systems. Most significantly, the West's unprecedented financial sanctions following Russia's invasion of Ukraine have intensified the pursuit of alternative global payment systems even among nations traditionally allied with the United States.
For China, reducing dollar dependency represents both an economic imperative and a strategic safeguard against potential sanctions. For the Gulf states, particularly Saudi Arabia, the stakes involve balancing their vital security relationship with the United States against the pressing need to diversify their economies and deepen ties with their largest oil customer. For the United States, preserving key elements of the Petrodollar remains crucial to maintaining its financial power and the dollar's global role, though not every aspect of the current system is equally vital to American interests.
For the global monetary system, these changes signal a potential shift toward a more fragmented architecture where competing financial spheres coexist rather than a single dollar-dominated framework.
China's Strategy: Technology, Industry, and Finance
Rather than directly challenging dollar pricing, China is focused on creating alternative settlement mechanisms and deeper economic integration with oil producers. Its digital yuan and the Multiple Central Bank Digital Currency Bridge (mBridge) platform represent significant technological advances that could accelerate change by offering more efficient alternatives to traditional cross-border payment systems.
Early mBridge trials demonstrate dramatic improvements: transaction times reduced from days to seconds, costs potentially halved.
While the withdrawal of the Bank for International Settlements from the project in October 2024 highlighted geopolitical sensitivities, it may accelerate the mBridge platform's evolution into a China-led alternative payment system.
China's strategy extends beyond payment innovation to creating deeper structural ties with the Gulf states. Beijing is systematically building industrial and technological partnerships — from electric vehicles to artificial intelligence — that align with Gulf states' economic diversification plans. At the same time, China has opened its financial markets while providing Gulf investors with special assurances about capital controls, aiming to make Chinese assets an increasingly attractive destination for recycling oil revenues.
This comprehensive approach combines payment technology, industrial integration, and financial market access to reduce Gulf states' dependence on dollar-based systems and incentivize them to use yuan.
The Gulf's Careful Dance
Saudi Arabia and its Gulf neighbors face complex choices in balancing their traditional security relationship with the United States against deepening economic ties with China. Their approach reflects careful calibration rather than dramatic realignment.
Saudi Arabia's Vision 2030 and similar programs for economic transformation initiated by the United Arab Emirates create natural alignment with Chinese capabilities in technology, construction, and renewable energy.
Saudi Arabia and the UAE — two pivotal players in the Petrodollar system — are making deliberate efforts to enhance their geopolitical and economic resilience while maintaining strategic flexibility between the United States and China. Their state-led transformation plans prioritize sectors like digital finance, renewable energy, and digital infrastructure — areas where they find increasing synergies with Chinese capabilities and technology.
However, concerns about China's capital controls and the need for continued security cooperation with the United States constrain the pace of change.
The Gulf states are systematically building capabilities that could enable more significant shifts while maintaining strategic flexibility. Their participation in initiatives like the mBridge digital currency project demonstrates a willingness to explore alternatives to traditional dollar-based systems, even while preserving existing relationships.
The Path Forward
Looking ahead five years, three scenarios emerge:
- Managed Evolution (Most Likely): Gradual expansion of yuan settlement and investment while maintaining core Petrodollar architecture.
- External Shock (Second-Most Likely): Sudden changes forced by geopolitical conflict, major political upheaval in key countries, technological breakthroughs, or market disruption. Depending on the nature of the shock, this scenario could lead to either a dramatic decline of the Petrodollar system or its reinforcement as nations seek the safety of established dollar markets and the U.S. security umbrella.
- Rapid Shift East (Least Likely): A decisive strategic pivot by Saudi Arabia and other Gulf states toward deeper integration with Chinese systems.
The most immediate changes are appearing in payment settlement mechanisms and revenue recycling patterns. While oil pricing remains predominantly dollar-based, reflecting the depth and efficiency of U.S. financial markets, the channels through which oil revenues flow are diversifying significantly.
Strategic Implications for the U.S.
For the United States, maintaining international financial leadership requires strategic adaptation: modernizing dollar-based global infrastructure, strengthening Gulf partnerships, and developing frameworks for managing parallel payment systems. Success lies in preserving fundamental advantages while competing effectively with emerging alternatives.
China's strategy focuses on creating viable alternatives for specific functions rather than attempting to fully replace the dollar's international role. The Gulf states must balance their need to rapidly transform their fossil fuel–based economy against security considerations, with their choices significantly influencing the pace of change.
The report recommends several critical priorities for U.S. policymakers:
- First, accelerate innovation in cross-border finance by supporting development of central bank digital currencies while maintaining the advantages of existing dollar-based systems.
- Second, strengthen strategic partnerships with Gulf states by supporting their economic transformation initiatives and facilitating U.S. technology companies' participation in their mega-projects.
- Third, lead efforts to reform international financial institutions to address the realities of an increasingly fragmented world, including developing new crisis response frameworks and expanding the Federal Reserve's swap line network with key partners.
- Finally, modernize market infrastructure to ensure U.S. markets remain the world's deepest and most reliable.
Looking Forward
The international monetary system appears to be moving toward a more fragmented structure, with distinct but interconnected spheres of financial influence. While the dollar is likely to remain dominant, its role may evolve from being the sole pillar of international finance to becoming one core currency of a bifurcated, U.S.-led financial sphere.
Success in navigating this transition will require careful attention to four critical factors: the pace of technological innovation in global payment systems, China’s ability to develop credible alternatives, maintain financial stability, and continue to innovate, U.S. success in modernizing its financial infrastructure while preserving its institutional strengths, and Saudi Arabia’s strategic choices about adopting new payment systems and financial relationships.
The transformation of global finance will likely proceed through careful evolution rather than sudden disruption. However, the range of plausible outcomes has widened considerably.
The key lies not in resisting change but in shaping it — modernizing payment infrastructure, strengthening relationships with key partners, and ensuring U.S. markets remain the world’s deepest and most reliable.