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Page added on March 29, 2018

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China taking first steps to pay for oil in yuan this year

Public Policy

China is taking its first steps towards paying for imported crude oil in yuan instead of the U.S. dollar, three people with knowledge of the matter told Reuters, a key development in Beijing’s efforts to establish its currency internationally.

FILE PHOTO: U.S. Dollar and China Yuan notes are seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration/File Photo

Shifting just 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.

A pilot program for yuan payment could be launched as early as the second half of this year, two of the people said.

Regulators have informally asked a handful of financial institutions to prepare for pricing China’s crude imports in the yuan, said the three sources at some of the financial firms.

“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.

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.

Under the plan being discussed, Beijing could possibly start with purchases from Russia and Angola, one of the people said, although the source had no details of anything in the works.

Both Russia and Angola, 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. [O/CHINA1]

The move would mark a major step in reviving usage of the currency of the world’s second-largest economy for offshore payments after several years of on-again, off-again measures.

If successful, it could also trigger shifting other product payments to the yuan, including metals and mining raw materials.

All three sources, who spoke to Reuters on the condition that they not be named, said the plans were at early stages. Officials at some of China’s state oil companies said they had not heard of such plans.

CRUDE FUTURES

The plans coincide with this week’s launch of the first Chinese crude oil futures in Shanghai <0#ISC:>, which many expect to become a third global price benchmark alongside Brent and West Texas Intermediate crude.

Shanghai’s new crude contract is traded in yuan.

Besides the potential of giving China more power over global oil prices, “this will help the Chinese government in its efforts to internationalize renminbi (yuan),” said Sushant Gupta, research director at energy consultancy Wood Mackenzie.

Unipec, trading arm of Asia’s largest refiner Sinopec (600028.SS), has already inked a first deal to import Middle East crude priced against the newly-launched Shanghai crude futures contract.

U.S. bank Goldman Sachs said in a note to clients this week that the success of Shanghai’s crude futures was “indirectly promoting the use of the Chinese currency.”

People’s Bank of China (PBOC), the country’s central bank, did not respond to a Reuters request for comment on the plan. The Ministry of Commerce (MOFCOM) also declined to comment.

reuters



8 Comments on "China taking first steps to pay for oil in yuan this year"

  1. rockman on Thu, 29th Mar 2018 10:59 pm 

    Doesn’t seem like such a big deal. So Russia and Angola will use yuan to pay for some of their imports. For instance Russia buys almost $40 BILLION worth of imports from China. And Angola less…about $4 BILLION. Or those countries could exchange the yuan for other currency.

  2. GregT on Thu, 29th Mar 2018 11:54 pm 

    “Doesn’t seem like such a big deal.”

    Nope not a big deal at all. Certainly not something to start another world war over…..

  3. Kat C on Fri, 30th Mar 2018 4:47 am 

    https://www.sbcgold.com/blog/petro-yuan-rising-must-read-truth-behind-chinas-plan-dethrone-dollar/
    “there are a few key facts you need to understand.

    China imports more oil than any other country, giving it a lot of sway over oil-rich nations like Saudi Arabia.
    China hates being forced to purchase oil in U.S. dollars and is using its buying power to strong-arm countries into accepting payments for oil in yuan.
    China’s yuan-denominated oil trades would be backed by gold. The Petrodollar is not.”

  4. Davy on Fri, 30th Mar 2018 6:22 am 

    “China’s yuan-denominated oil trades would be backed by gold. The Petrodollar is not.”

    This is BS. I have never see the explanation of how this works. It is talked about by people who don’t know what they are talking about.

  5. Davy on Fri, 30th Mar 2018 6:34 am 

    “The Gold-Backed-Oil-Yuan Futures Contract Myth”
    https://tinyurl.com/y7fme7gu

    1.As shown above, China hasn’t announced anything but an oil-yuan futures contract. Gold has nothing to do with it. 2. Yuan can technically be spent on gold at the SGE, but gold in the Chinese domestic market (SGE system) is not allowed to be exported. Gold from the SGEI is allowed to be exported but is bought in the international market via yuan with US dollars. 3.Foreign enterprises, like oil producers, cannot hedge gold on the Shanghai Futures Exchange. The SHFE is not open for international customers. There’s only a spot deferred product listed on the SGE, which is comparable to a futures contract, through which foreign enterprises can hedge gold in yuan. But why would oil producers buy gold and subsequently hedge the metal in yuan. Their end position would be merely exposure to the price of yuan. Why then not buy a yuan denominated bond with an interest rate? Or hold gold without the hedge?

    “Aside from all the inaccuracies in the Nikkei article, what stands out for me is that indeed a large number of countries is willing to trade oil in yuan and the new INE futures contract is important for this development as it allows oil producers and users to hedge directly in renminbi. And so the INE contract will support oil for yuan trading. That’s what the article should have focused on. Although not much has happened yet*, it’s clear Asia wants to get rid of the petrodollar, and it will be interesting to see how this initiative develops. *Still the majority of global trade is conducted in US dollars, and most foreign exchange reserves are in dollars too. The share of yuan payments, compared to all other currencies, tracked by payment service provider SWIFT were under 2 % in June, down slightly from two years ago (I have no data on CIPS payments).”

  6. fmr-paultard on Fri, 30th Mar 2018 8:32 am 

    kat, my thinking is at some point supertards made the decision that communism and militarism in china was an ok cost, acceptable as non issue to do business in order for containment of russia/communism, and for the sake of commerce.

    we seem to forget that without supertards china will still have MOAR not fewer open defecation pitts.

    don’t worry about juan and gold bs. they’re not trustworthy, any dictatorship and one party rule are not trustworthy.

    supertards can just move everything to taiwan and china would sink. there are so many other places to do biz besides china.

    just a decade ago, chinese state media is 10x worse than north korea state media. i kid you not. they acted like a little demanding child…they still have problem cleaning up their act. they immediately made territorial expansion and supertards will find allies around china in no time.

  7. JuanP on Sat, 31st Mar 2018 8:46 am 

    “China can succeed with Petro Yuan …”
    https://www.rt.com/business/422838-petro-yuan-dollar-gaddafi/

  8. MASTERMIND on Sat, 31st Mar 2018 9:56 am 

    Juanp, Sorry fake News from Putin is not a reliable source..

    The IMF just released its report, Currency Composition of Official Foreign Exchange Reserves (COFER), for the fourth quarter 2017.Dollar-denominated assets among foreign exchange reserves rose 14% year-over-year in Q4 to $6.28 trillion, and are up 42% from Q4 2014. There is no indication that global central banks have lost interest in the dollar; on the contrary:
    https://wolfstreet.com/2018/03/30/what-could-knock-the-dollar-down-as-top-global-reserve-currency/

    The dollar makes up 60 percent of the IMF’s reserves and the Yuan make up less than 2 percent!

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