Just days after Beijing officially launched Yuan-denominated crude oil futures (with a bang, as shown in the chart below, surpassing Brent trading volume) which are expected to quickly become the third global price benchmark along Brent and WTI, China took the next major step in the challenging the Dollar's supremacy as global reserve currency (and internationalizing the Yuan) when on Thursday Reuters reported that China took the first steps to paying for crude oil imports in its own currency instead of the US Dollars.
A pilot program for yuan payment could be launched as soon as the second half of the year and regulators have already asked some financial institutions to "prepare for pricing crude imports in the yuan", Reuters sourcesreveal.
According to the proposed plan, Beijing would start with purchases from Russia and Angola, two nations which, like China, are keen to break the dollar’s global dominance. They are also two of the top suppliers of crude oil to China, along with Saudi Arabia.
A change in the default crude oil transactional currency - which for decades has been the "Petrodollar", blessing the US with global reserve currency status - would have monumental consequences for capital allocations and trade flows, not to mention geopolitics: as Reuters notes, a shift in just a small part of global oil trade into the yuan is potentially huge. "Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s gross domestic product last year." Currently, virtually all global crude oil trading is in dollars, barring an estimated 1 per cent in other currencies. This is the basis of US dominance in the world economy.
However, as shown in the chart below which follows the first few days of Chinese oil futures trading, this status quo may be changing fast.
Superficially, for China it would be a matter of nationalistic pride to see oil trade transact in Yuan: "Being the biggest buyer of oil, it’s only natural for China to push for the usage of yuan for payment settlement. This will also improve the yuan liquidity in the global market,” said one of the people briefed on the matter by Chinese authorities.
There are other considerations behind the launch of the Yuan-denominated oil contract as Goldman explains:
- A commercial benchmark and hedging tool. Until now, Chinese oil imports were based on FOB benchmarks, with long-term procurement contracts settling off Platts Oman/Dubai or Dated Brent. The INE contract has therefore the potential to become the pricing reference for CIF China crude oil, enabling corporate financial hedging. Its warehouse structure is however likely to limit its use for physical crude delivery and may in fact at times reduce its hedge efficiency.
- A new investment vehicle for onshore investors. The majority of China commodity futures trading volumes are from retail investors, yet these had until now little ability to trade oil futures. China’s capital control was the main bottleneck to trading contracts like Brent as authorities only allow $50,000 outflow a year per person. While several petrochemical and bitumen contracts already trade in China, INE will be the first contract for crude oil, likely drawing significant interest.
- Direct access to China’s commodity markets for offshore investors. China offers deep and liquid commodity markets to its onshore investors. Due to China’s tight capital controls, however, foreign investors have so far only been able to trade these through qualified onshore subsidiaries. The INE contract opens up the first channel for offshore investors to trade in its onshore commodity market, with both the USD deposit and capital gains transferable back to offshore accounts. The government further announced last week that it would waive income taxes for foreign investors trading these new contracts for the first three years. The obligation to trade in Yuan will also add a currency risk exposure to offshore investors. We illustrate in Exhibit 6 a likely template (amongst others) of how overseas investors will be able to access INE liquidity.
The danger, of course, is that such a shift would also boost the value of the Yuan, hardly what China needs considering it was just two a half years ago that Beijing launched a controversial Yuan devaluation to boost its exports and economy.
Still, in light of the relative global economic stability, Beijing may be willing to take the gamble on a stronger Yuan if it means greater geopolitical clout and further acceptance of the renminbi.
Which is why restructuring oil fund flows may be the best first step: as of this moment, China is the world’s second-largest oil consumer and in 2017 overtook the United States as the biggest importer of crude oil; its demand is a key determinant of global oil prices.
If China's plan to push the Petroyuan's acceptance proves successful, it will result in greater momentum across all commodities, and could trigger the shift of other product payments to the yuan, including metals and mining raw materials.
Besides the potential of giving China more power over global oil prices, "this will help the Chinese government in its efforts to internationalize yuan," said Sushant Gupta, research director at energy consultancy Wood Mackenzie. In a Wednesday note, Goldman Sachs said that the success of Shanghai’s crude futures was “indirectly promoting the use of the Chinese currency (which, however as noted above, has negative trade offs as it would also result in a stronger Yuan, something the PBOC may not be too excited about).
Meanwhile, China is wasting no time, and Unipec, the trading arm of Asia’s largest refiner Sinopec already signed a deal to import Middle East crude priced against the newly-launched Shanghai crude futures contract, which incidentally is traded in Yuan.
The bottom line here is whether Beijing is indeed prepared and ready to challenge the US Dollar for the title of global currency hegemon. As Rueters notes, China’s plan to use yuan to pay for oil comes amid a more than year-long gradual strengthening of the currency, which looks set to post a fifth straight quarterly gain, its longest winning streak since 2013.
In a sign that China's recent Draconian capital control crackdowns have sapped market confidence in a freely-traded Yuan, the currency retained its No.5 ranking as a domestic and global payment currency in January this year, unmoved from a year ago, but its share among other currencies fell to 1.7 percent from 2.5 percent, according to industry tracker SWIFT.
A slew of measures put in place in the last 1-1/2 years to rein in capital flowing out of the country amid a slide in yuan value has taken off some its shine as a global payment currency.
But the yuan has now appreciated 3.4 percent against the dollar so far this year, with solid gains in recent sessions.
“For PBOC and other regulators, internationalization of the yuan is clearly one of the priorities now, and if this plan goes off smoothly then they can start thinking about replicating this model for other commodities purchases,” said a Reuters source.
Still, it will be a long and difficult climb before the Yuan can challenge the dollar and for Beijing to shift the bulk of its commodity purchases to the yuan because of the currency’s illiquidity in forex markets. According to the latest BIS Triennial Survey, nearly 90% of all transactions in the $5 trillion-a-day FX markets involved the dollar on one side of a trade, while only 4% use the yuan.
* * *
Still, not everyone is convinced that the new Yuan-denominated contract will create a "petro-yuan" as the following take from Goldman highlights:
The launch of the INE contract is not just about oil, as it will also be the first Yuan denominated commodity contract tradable by offshore investors. Such a set-up meets the PBOC’s monetary policy committee goal to raise the profile of its currency in the pricing of commodities. It has raised however the question of whether the INE contract is an incremental step in achieving the currency reserve status for the Yuan. We do not believe so.
While the INE launch does represent an additional step in the CNY internationalization, the CNY denomination of the INE contract does not in itself imply CNY investments. The INE contract does not represent an opening of China’s capital accounts since foreign deposits operate in a closed circuit, deposited in designated accounts and not to be used to purchase other domestic assets. In practice, the collateral deposit and any capital gains can be transferred back to offshore accounts. The potential for greater foreign ownership of Chinese assets is therefore not impacted by CNY oil invoicing and would require instead oil exporters to recycle their proceeds in local assets, for example. The incentive to do this has not changed with the introduction of the INE contracts. In particular, most Middle East oil producers still have currencies pegged to the dollar and limited ability to hedge CNY exposure.
Whether or not Goldman is right remains to be seen, however it is undeniable that a monumental change is afoot in global capital flows, where the US - whether Beijing wants to or not - will soon be forced to defend its currency status as oil exporters (and investors in this highly financialized market) will now have a choice: go with US hegemony, or start accepting Yuan in exchange for the world's most important commodity.
Comments
I hope China does not impose tariffs on all Flip Flops coming out of Washington, DC. ;-)
Looney
fortunately, the glut of dollars resulting from yuan-denominated oil purchases will be sopped up by the higher interest rates from the fed
the result is price stability and continued confidence in the dollar
In reply to … by Looney
I hope President Xi knows what he is doing. When Sadam and Ghaddafi tried it, they did not last long...
In reply to fortunately, the glut of… by SafelyGraze
Americans can only kill so many democratically elected presidents and heads of state. They have absolutely no power to change anything in China, quite the opposite. Xi has played a master hand so far, silently moving with Putin his pieces on the chessboard. And this is the right time to nail the American coffin.
The only thing America could do would be to trigger a war with China and Russia, but given their rusty non functional arsenal, they know they would be wiped out on their continent this time. The ocean could not prevent their cities from being Dresden-ed and Dresden-ed again. From the north, East and West at the very least for ballistic missiles. Add submarines and all the angles are covered. They are toasted.
I suspect that all this business in China sea is only meant to mobilize and trap US carrier groups to further stretch their logistic to the limits.
So in essence they can't do anything, they can't even leverage any strong position to prevent Korean reunification from happening, therefore them from being thrown out of continental Asia.
Their only remaining safe option is to go back to the drawing board and work on modernizing their arsenal, but this will cost time and money, and by the time they may come up with something original it will already be too late for the dollar.
But they won't because they're too addicted to Hebraic lies and bullying. This will cost them humiliation upon humiliation, and all the remaining credibility they may still have with mostly western countries which will understand there's nothing more to hope from America.
Germany already understood this with Nordstream 2. Wait until the next domino falls.
Finally some poetic justice.
In reply to I hope President Xi knows… by EuroPox
O
In reply to X by Adolph.H.
Sure, they can buy the oil
But can they protect the oil
In reply to O by I hate cunton
Beginning of the end for the $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$.
Next: Yuan backed by AU
Next: Ruble backed by AU
Next: Treasuries are TP
(somewhere in between all of the "nexts": WAR!)
"In A Non-Violent Way, How To Put A Wrench In The Spokes Of The Fed And The MIC"®
...It's a real page turner! Now available, in your dreams, on Amazon.
In reply to Sure, they can buy the oil… by house biscuit
Dollars? dollars? We don't need no stinkin' dollars.
In reply to Beginning of the end for the… by whatswhat1@yahoo.com
The actual composition of currency reserves around the world:
http://thesoundingline.com/is-the-dollar-losing-its-reserve-currency-st…
In reply to Dollars? dollars? We don't… by Potato Farmer
SALE!!! BUY 1 GET 100,000,000 FREE!!!
***bonus*** two days, 1 nights schtooping a nubile, sexy goy when you purchase five!!!
In reply to Dollars? dollars? We don't… by Potato Farmer
What would China and Russia bomb? The apparatus of Federal .gov? NO, NO! Not the instruments of tyranny we know as the IRS, FBI, CIA, DoJ, and Congress! Theat might actually shrink US .gov.
Would China and Russia bomb the USA's BOOMING manufacturing and retail sectors? Local Wal-Mart, McDonalds? NO! NO! Not that!
Maybe China and Russia could bomb some of those pricey homes/apartments into oblivion, eliminating the vast wealth inequality that daily grows larger in Murrika. If Zuckerburg were to have his Hawaii compound pulverized, that would be a real loss for the masses, I tell ya.
In reply to O by I hate cunton
That's a laugh
Your fundamental mistake is assuming the leader of any county has a chessboard to start with. Any leader may, at most, be a rook
And yes Putin fangirls; that means Vlad, too
Life is not a game of Risk
TPTB influence balance of power politics between nations the same way they sow discord to divide & conquer groups within a given nation
In reply to X by Adolph.H.
Isn't Angola up for a Humanitarian intervention...?
In reply to That's a laugh… by house biscuit
I'd like to motorboat your tits.
In reply to Isn't Angola up for a… by bonderøven-farm ass
Expext Angola to have a 'color' revolution, with CIA help.
In reply to That's a laugh… by house biscuit
Putin and Xi play chess, the West plays blackjack.
In reply to That's a laugh… by house biscuit
You, Sir, are an idiot...
In reply to X by Adolph.H.
"From the north, East and West at the very least for ballistic missiles."
Russia's latest ICBMs can fly via the South Pole specifically to evade the northern facing ABM systems.
In reply to X by Adolph.H.
"The only remaining safe option"
is definitely NOT to "modernize their arsenal",
but instead to invest in the domestic social and physical infrastructure,
and seek detente with other nations,
and seek to participate in rebuilding the global economy
for the betterment of all life,
not just Monsanto, Goldman Sachs, and the MIC.
In reply to X by Adolph.H.
Correct!
I want to see the USA tries it on China.
In reply to I hope President Xi knows… by EuroPox
Xirious!
In reply to I hope President Xi knows… by EuroPox
Saddam Houssein and Gadhaffi tried the same.
Look what happened to them!
In reply to Xirious! by Déjà view
Yuan or Dollars it's just more paper. How about we use gold then everyone will know exactly where they stand in the world of finance.
In reply to … by Troy Ounce
They just didn't know kung-fu.
In reply to … by Troy Ounce
Will gold go up when this happens?
Just askin'
In reply to … by Troy Ounce
" I hope President Xi knows what he is doing. When Sadam and Ghaddafi tried it, they did not last long "
That's only because going in to Libya, or Iraq was like GOING IN TO WISCONSIN/CZECHOSLOVAKIA.
It takes more than an EM-50 recreational assault vehicle
In reply to I hope President Xi knows… by EuroPox
I once got my ass kicked in Wisconsin
In reply to " I hope President Xi knows… by DillyDilly
Yuan/yawn
In reply to fortunately, the glut of… by SafelyGraze
Not sure if this is in China's Interest. China already has Trillions of US Dollars. At least using the Dollar or Oil purchases China and reduce its Dollar accumulation. If they start buying most or all of their Oil in Yuan, than there dollar holding only go up higher.
I don't think China is going to abandon the US export market anytime soon. This move will only further provide the US gov't funding because China will have even more dollars it will need to hold in US gov't debt, those treasury purchases will be used to increased US military spending and also help keep treasure yields low.
In reply to fortunately, the glut of… by SafelyGraze
40 years of US arrogance and ignorance is now resulting in payback time.
In reply to fortunately, the glut of… by SafelyGraze
Still the cleanest dirty shirt. The dollar will collapse as soon as we run out of zeros.
In reply to fortunately, the glut of… by SafelyGraze
What's wrong with you?
In reply to … by Looney
Yuan this?
Inflation, dead ahead! Largest crude importer not recycling dollars isn't going to go unnoticed.
Rising interest rate dead ahead!
In reply to Inflation, dead ahead!… by dirty fingernails
"Inflation, dead ahead! Largest crude importer not recycling dollars isn't going to go unnoticed."
Actually the opposite: China parks it Surplus dollars in US debt, which helps keep interest rates low and keeps dollars out of circulation. On the other hand, US dollars spent on Oil purchases for China increase US dollars in circulation the world as oil producers spend those dollars into the global economy.
Considering that China has Trillions in US debt, I doubt China has any interest in seeing a rapid dollar deprecation. Perhaps this move is to delay dollar devaluation by rolling over more of its trade surpluses into US Debt purchases instead of letting those dollars circulate resulting in dollar devaluation.
In reply to Inflation, dead ahead!… by dirty fingernails
yea, well the usa dollar army is bigger than the chinese yuan army, so , there!
So, we stop supplying Saudi Arabia protection and military supplies?
so in other words.... china is not a free market? >.<
Just in time for the switch to electric cars.
Leaping Lizards!! From the article:
"A pilot program for yuan payment could be launched as soon as the second half of the year"
"According to the proposed plan, Beijing would start with purchases from Russia and Angola,"
Holy Heck! China has been using the dollar, and still is, to purchase from RUSSIA. China and Russia can not even do business in oil without the dollar. And in the second half of the year they will make initial tries to begin using the yuan and if successful China may then try to purchase other oil using Chiina's currency and not the US currency. For the first time.
China and Russia have not even figured out how to buy/sell oil without using the dollar. Therefore they are decades away from doing common trade without the dollar. What have they been working on? How could they be this backwards? SWIFT is THE WMD. Not only is Putin not a chess player he does not even play checkers. Hopscotch maybe.
I really thought China and Russia were doing their oil trade without the dollar two years ago. Good grief Putin/China.
I hope we wont have to pay for things with yuan in the dollar store.
You do have a choice. Use Yuan and keep it in your pocket, or buy some wheelbarrows to take your cash to the 'trillion dollar store'.
In reply to I hope we wont have to pay… by Francis Marx
Always wondered why the dollar stores don't have signs up, saying you can pay in Gold.
In reply to I hope we wont have to pay… by Francis Marx
Good for China!!! This action was well thought out. It's only a matter of time now, when OPEC will be trading exclusively in gold-backed yuans, and drop the worthless dollar from circulation. Then you will see the U.S. economy in a world of hurt, because the dollar's value will evaporate into thin air, like the Venezuelan Bolivar. (If you think you are poor now, just wait until that happens)! Also, the U.S. will have to acquire yuans to pay for their international oil trade too, and the U.S. won't be able to pay for that big expensive military they have. That will be a real humiliation for the U.S., and it's the most effective way of nullifying the U.S. hegemony, without actually going to war. Checkmate---China wins!
Is the Yuan gold backed? If I hold yuan's can I exchange them for gold when in China or at a China bank outside China?
In reply to Good for China!!! This… by Chief Joesph
No but it's backed by printing trillions of worthless paper yuans whose value will last until other countries realize that monopoly money is worth more than the Yuan.
In reply to Is the Yuan gold backed? If… by Blankone
No, not yet, but you will be able to buy tofu at WallMark.
China have a gold & now oil Exchange, so only a matter of time.
In reply to Is the Yuan gold backed? If… by Blankone
All Chinese banks sell gold, whether it is the Bank of China, the Agricultural Bank of China, or any other Chinese bank. You can find them listed here:https://en.wikipedia.org/wiki/Overseas_Chinese_banks. None of the U.S. banks have gold for trade or sale. You can only get gold through the Federal Treasury here.
In reply to Is the Yuan gold backed? If… by Blankone
The question that was put to you - Is the yuan gold backed? Not if you can buy gold with the yuan. You can buy gold with the dollar, that does not make it gold backed.
Is the yuan gold backed? If it is then China must have a set conversion rate which is independent of the dollar, the price of gold in dollars and must be a set rate of conversion of ounces of gold for x number of yuan which does not change. Is the yuan gold backed and if so what is set conversion rate that is not subject to change?
In reply to All Chinese banks sell gold,… by Chief Joesph
Pagination