April 17, 2026
11:04 pm

Iran China Push the “Petroyuan” in the Strait of Hormuz

[Image Generated by DALL·E, OpenAI’s image generation model]

April 17, 2026 (Friday) – Yoo Jung

Recent developments in the Strait of Hormuz during the 2026 Iran conflict have drawn attention to the emergence of the “petroyuan,” as Iran and China have taken steps to expand the use of the Chinese yuan in energy-related transactions.

Commercial vessels passing through the strait have been charged transit fees in yuan under what has been described as a “de facto toll booth regime,” with at least two vessels making such payments as of March 25. Iran’s embassy in Zimbabwe stated that it was time to add the “petroyuan” to the global oil market, reflecting an official push to introduce yuan-based settlements into energy flows. Iran exported between 12 million and 13.7 million barrels of crude oil during the first two weeks of the conflict, with most shipments going to China.

For over 50 years, the petrodollar system, in which global oil is priced and traded in U.S. dollars, has shaped global trade by linking oil sales to the U.S. dollar and embedding it into international finance. Oil is used daily to fuel cars, planes, and ships, as well as to produce plastics, electricity, chemicals, and fertilizers, making it a central component of modern economies. Countries with large oil reserves export to those with high demand, creating a massive global oil market that depends on continuous cross-border transactions. In this context, the petroyuan refers to the use of Chinese yuan to price and settle oil trades as an alternative to the dollar-based system.

The dollar’s role in this system developed after the Second World War, when the United States emerged with its economy intact and led the establishment of a monetary order centered on the dollar at the Bretton Woods conference. The 1971 Nixon shock ended the gold standard, transitioning the system to a fiat currency system, defined as money that “gets its value from public trust and economic stability.” Moreover, in 1973, following the OPEC oil crisis, the United States reached an agreement with Saudi Arabia to sell oil exclusively in dollars in exchange for military protection, and other producers followed this model.

This arrangement meant that countries needed U.S. dollars to purchase oil, leading them to maintain dollar reserves as foreign exchange, which are holdings of foreign currencies by central banks to conduct trade in dollars. This widespread demand contributes to the dollar’s role as a reserve currency, reinforcing its global use.

Oil-exporting countries reinvested their earnings in U.S. assets through a process known as “petrodollar recycling,” in which funds flowed back into government bonds, companies, and real estate, creating a capital flow cycle in which surplus dollars returned to U.S. financial markets, increasing liquidity and lowering borrowing costs.

This system is further strengthened by a network effect, in which the widespread use of the dollar incentivizes continued use through efficiency and high switching costs, making alternatives less attractive. Hence, 80% of oil market transactions are settled in the currency, according to a 2023 estimate. This reduces volatility as constant global demand stabilizes the currency’s value, reinforcing a positive feedback loop in which demand for dollars sustains its strength, encouraging further use in global trade.

China has pursued efforts to expand the yuan’s role in oil markets, including the launch of a yuan-denominated crude oil futures contract in 2018. This initiative aimed to allow Chinese firms to secure a fixed, future price for oil in yuan, reducing price and currency risks arising from currency volatility.

Early trading volumes were less than a tenth of comparable contracts in New York and London, and restrictions on capital flows limited foreign participation. The system required foreign participants to open special onshore bank accounts and restricted the use of profits, which constrained broader adoption.

Currently, China purchases more than 80% of Iran’s oil exports, often at discounted rates, and imports machinery, chemicals, and industrial components in return. The use of yuan allows countries to circumvent U.S. sanctions enforced through the dollar-dominated global financial system, reflecting its role in facilitating trade outside traditional financial channels.

The scale of the dollar’s dominance remains significant, with the currency accounting for 57% of global foreign exchange reserves compared with about 2% for the yuan. Only 3.7% of cross-border trade was settled in yuan in 2024, compared to less than 1% in 2012. Analysts have described the increased use of yuan in energy transactions as “incremental pressure” that “normalizes alternatives in energy flows.”

Financial institutions have presented differing views on recent developments, particularly regarding the Iran conflict. Deutsche Bank, a German investment bank, stated that the conflict could mark “the beginnings of the petroyuan,” linking geopolitical instability to changes in currency usage. Similarly, Franklin Templeton, an American investment firm, stated that oil exporters prefer the dollar because it provides “access to the deepest, most liquid capital markets in the world,” supported by legal and institutional frameworks.

The dollar index fell almost 10% through 2025, marking its worst performance in over 50 years, before strengthening again during the Iran conflict. The share of global reserves held in dollars has declined from over 70% in 1999 to just over 50% today, while other currencies such as the euro and renminbi have increased their share. Analysts have stated that “there is no alternative,” citing the lack of comparable financial infrastructure in other currencies.

Gulf Cooperation Council– an intergovernmental union comprising 6 Arab states– has continued to maintain ties with the United States, with analysts stating that they have “more reason than ever to keep ties with Washington close.” The use of yuan or cryptocurrency for payments in the Strait of Hormuz has been described as limited in impact, with some analysts stating that such arrangements are “not meaningfully dollar-bearish.”

Current developments indicate that the petroyuan is being introduced in specific contexts such as bilateral trade and strategic transit routes. At the same time, the dollar continues to dominate global oil transactions and financial systems. Recent data show that changes in currency usage are occurring gradually, with increases in yuan settlements alongside continued reliance on the dollar. Nevertheless, the structure of global finance, including established markets and widespread use of the dollar, remains a defining feature of the international economic system.