An economist explains why Saudi Arabia and China are looking to ditch the dollar in a new oil deal — and where Beijing could target next as it spreads yuan adoption

A potential oil deal between Saudi Arabia and China could signal more unease with reliance on the US dollar, while also showing how Beijing could advance its currency in other parts of the world.

The Wall Street Journal reported recently that Saudi Arabia is in talks to sell oil to China and be paid in Chinese currency.

Tomic told Insider that the Chinese are not alone in their search for a non-dollar reserve currency.

The Saudi riyal is pegged to the dollar, which helps shield its economy from fluctuations, so analysts have downplayed the chances of a yuan deal.

The effectiveness of the West's sanctions against Russia has been a wake-up call for countries that rely on the US.

The world is looking for some counterbalance to the US dollar, and a potential deal in the Chinese currency is a sign.

One reason Saudi Arabia is considering an oil deal in the Chinese currency is that it would give the country a hedge against the dollar. If the US increases its money supply in response to economic challenges, the Saudis may not expect the dollar to be as stable.

He said that the collapse of major financial institutions in Russia means that there is a higher chance of a sea change. The international response to Russia's invasion of Ukraine is also on the horizon.

Tomic said that an extreme view would be that it reduces China's vulnerability to sanctions that the West may impose.

There are two things that must happen for China to establish itself as a reserve currency. First, global faith in the dollar would have to diminish. Tomic said that this could happen if the Federal Reserve fails to get inflation under control or if it strays from its usual predictability.

China would have to prove the long-term stability of the yuan to other nations. China sometimes devalues its currency to boost exports, but other countries won't want to hold a currency like that. Beijing would have to change their policy.

Tomic said that Africa is the most likely place where the dollar could be displaced by the yuan. China is the largest bilateral creditor and source of foreign investment in Africa.

China has a lot of infrastructure in Africa, which is not as important as Europe is.

If China were to replace the dollar as a global reserve currency, it would have to increase its economic standing.

If the US doesn't do anything unpredictable, other countries will trust its currency. The dollar continues.