Amid the Hormuz choke, Iran has signalled conditional openness to energy shipments by permitting oil cargo passage only if transactions are invoiced in Chinese-yuan (¥), a move widely seen as an attempt to challenge the long-standing dominance of the petrodollar system. This development has revived debate over whether the Petroyuan could emerge as an alternative currency for global energy trade.

However, replacing the dollar requires several structural attributes of an international currency, including deep and liquid financial markets, full capital convertibility, global investor trust, and reserve currency dominance, conditions that the renminbi still only partially meets. Therefore, decoding these structural constraints is essential to evaluate whether such shifts could realistically reshape global energy trade and what implications they may hold for India’s energy security and financial stability.

Petroyuan: The constraints

Petroyuan is a signal, not a system, its growing use in energy trade reflects geopolitical intent to challenge dollar dominance, but structural constraints limit its emergence as a true global monetary alternative. First, from a monetary perspective, the ¥ remains only partially internationalized. According to the IMF, the Chinese-¥ accounts for roughly 2-3 per cent of global foreign exchange reserves, compared with about 56 per cent held in US dollars (see table).

SWIFT data show that the ¥ accounts for about 3-4 per cent of global payment transactions, even though China now invoices over 60 per cent of its trade in ¥, while the US dollar still dominates with more than 40 per cent of global payments. A key constraint lies in China’s continued reliance on capital controls.

Unlike the US dollar or euro, the ¥ is not fully convertible on the capital account, and its exchange rate remains managed by the PBOC. For energy exporters holding large trade surpluses, limited convertibility reduces the attractiveness of ¥ reserves. Moreover, wider ¥ use can constrain PBOC’s monetary and liquidity management, particularly during inflationary cycles.

Second, constraints within China’s financial system limit the yuan’s global role. Reserve currencies require deep and liquid markets capable of absorbing large international capital flows. The US Treasury market alone exceeds $26 trillion, offering a vast pool of safe assets for global investors and sovereign wealth funds.

Although China’s government bond market is sizeable, around $20 trillion, foreign participation remains low, near 10 per cent of outstanding bonds. Capital controls, regulatory restrictions, and concerns over legal transparency discourage investors from holding large ¥-denominated assets. Moreover, China’s financial system remains dominated by state-owned banks and policy-driven lending, weakening global confidence in market-based capital allocation.

Third, foreign-exchange recycling mechanisms for the ¥ remain limited. Under the petrodollar system, oil exporters particularly Gulf states, reinvest surplus revenues into US financial markets, especially US Treasuries and other dollar-denominated assets that provide liquidity, transparency, and legal certainty. China lacks a comparable ecosystem capable of absorbing large global energy surpluses. Although Shanghai hosts ¥-denominated oil futures, their trading volumes remain far smaller than benchmark Brent and WTI contracts.

Geopolitical and institutional factors further reinforce dollar dominance. The US financial system is supported by global infrastructure such as SWIFT messaging networks, dollar clearing systems, extensive banking linkages and ‘rule-of-law’ unlike China’s ‘rule-by-law’.

Moreover, many energy exporters maintain deep strategic and security ties with the US, encouraging continued dollar invoicing. Despite China’s currency swaps and Belt and Road settlements, most global oil contracts remain dollar-priced.

Way forward

Even as a geopolitical signal, Petroyuan-based invoicing warrants a nuanced policy debate in India, given its implications for energy security, monetary stability, and strategic autonomy. Given the dollar’s liquidity, transparent pricing, and stable recycling, India should largely remain within the dollar-based system, while allowing selective ¥ invoicing to manage transactional flexibility, sanctions exposure, and growing unpredictability in US policy. Further, given the ¥’s partial convertibility, capital controls, shallow financial integration and state-controlled policy initiatives, it should be treated as a tactical tool, not a systemic alternative, with vigilance against excessive dependence on China’s state-controlled financial ecosystem.

Second, India must simultaneously strengthen its export capabilities. Without a resilient balance of payments supported by strong export growth, India’s ambition of rupee internationalisation will remain largely aspirational and confined to sanction-driven corridors.

In this context, India may explore emerging digital settlement architectures such as the mBridge platform, enabling corridor-specific payment arrangements with trusted partners. It is paramount given that India’s existing rupee-trade settlement are also subject to risks of sanctions (Russia, Iran).

Third, strengthening foreign-exchange resilience remains essential. Maintaining robust and diversified reserve holdings including gradual integration of yuan in India’s currency reserve amid opening of Chinese investment can be considered as a hedge to manage volatility arising from geopolitical shocks, commodity price fluctuations, or currency realignments in global energy markets amid ever-escalating transactional opacity.

Fourth, India must deepen energy diplomacy beyond ‘supplier diversification’ to ‘supplier integration’ involving them as stakeholders in expanding its strategic reserve infrastructure. As India scale geoeconomically and geo-strategically, its rise will certainly be tested under strategic rivalry and deterrence and correspondingly, it must gradually scale crude oil and gas reserves to initially 90 days to become member of IEA and eventually to 120-150 days.

Finally, India should gradually strengthen the international role of the rupee through deeper domestic financial markets, expanded bilateral currency-swap arrangements, and more resilient cross-border payment infrastructure. Such a balanced strategy, preserving dollar stability while cautiously expanding currency flexibility, will best safeguard India’s energy trade, financial stability, and long-term strategic autonomy.

The writer is Professor and Head, IIFT New Delhi. Views expressed are personal

Published on March 17, 2026