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In Unprecedented Move, China Plans To Pay For Oil Imports With Yuan Instead Of Dollars

Public Policy

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.

zerohedge



23 Comments on "In Unprecedented Move, China Plans To Pay For Oil Imports With Yuan Instead Of Dollars"

  1. BobInget on Sun, 1st Apr 2018 3:38 pm 

    Relax, it’s going to take at least two years getting
    Venezuela to the point it replaces Saudi Arabian production. When it does, a powerful combo
    of Russia, China and Saudi Arabia determine who gets oil and for what price in what currency.

    That is why a few forward thinkers believe we, North America, should hasten moving to domestic natural gas.

    Texas, of all states, proved wind and solar are viable alternatives to NG and Coal as chief power generation fuels.

    Natural gas, an excellent feed stock for fuel cells
    generating BOTH heat and electricity point of use
    standby and ‘peak’ use..

  2. Cloggie on Mon, 2nd Apr 2018 5:34 am 

    Time works against Washington:

    – China will continue to grow and rise in power
    – Relations between Russia and Europe improve hand-in-hand with the rise of populism in Europe
    – European-American despair will continue to grow, see post Theedrich: http://peakoil.com/consumption/kunstler-not-so-happy-motoring/comment-page-6#comment-459935
    – Russia, China, Iran and others will gradually remove the dollar from inner-Eurasian payments
    – Washington will increasingly get stuck with a ever less competent darkening population (now: 46% white below 20, 61% overall). A majority white US army couldn’t beat tiny North-Vietnam; the present day US army can’t probably beat Belgium.

  3. Cloggie on Mon, 2nd Apr 2018 5:35 am 

    Texas, of all states, proved wind and solar are viable alternatives to NG and Coal as chief power generation fuels.

    According to da rockman built by “f* foreigners”.

  4. makati1 on Mon, 2nd Apr 2018 5:45 am 

    Cloggie, yes, it does, but the last gasp of most empires has been a big war. Now it can and will escalate into an exchange of nukes as neither side will give up.

    That is why I have been hoping for a cataclysmic collapse of the Us economy and the current ability to evade another civil war. I feel that only by depriving the Us of the ability to fight overseas would prevent WW3.

  5. Davy on Mon, 2nd Apr 2018 5:53 am 

    “China will continue to grow and rise in power”
    Where is that written? It is written and there is no way to know which way China is heading. They have huge problems along with huge possibilities. Your agend wants to se ethem rise so they will be a counterweight to the US for your PBM nonsense.

    “Relations between Russia and Europe improve hand-in-hand with the rise of populism in Europe”
    That shure is not happening now so again this is your fantasy.

    “European-American despair will continue to grow, see post Theedrich”
    Thee is an intellectual nightmare cherry-picking the worst just like you and billy 3rd world.

    “Russia, China, Iran and others will gradually remove the dollar from inner-Eurasian payments”
    Says who? We will see more movement away from the dollar but how far is a very big question. This is again just your agenda.

    “Washington will increasingly get stuck with a ever less competent darkening population (now: 46% white below 20, 61% overall).”
    “Racist”

    “ A majority white US army couldn’t beat tiny North-Vietnam; the present day US army can’t probably beat Belgium.”
    OH, we could have beat them but it would have taken pounding them into the dark ages with complete destruction. The US won most major battles. Check the history books. You are just pissed because we protect your lazy European asses.

  6. Davy on Mon, 2nd Apr 2018 5:54 am 

    “According to da rockman built by “f* foreigners”.”

    So what neder? what your point?

  7. Davy on Mon, 2nd Apr 2018 5:56 am 

    “Cloggie, yes, it does, but the last gasp of most empires has been a big war. “
    References please because you are talking out your ass again

    “That is why I have been hoping for a cataclysmic collapse of the Us economy and the current ability to evade another civil war. I feel that only by depriving the Us of the ability to fight overseas would prevent WW3.”
    You disgusting person who could give a shit about your family. Instead of hoping for political change which is possible. You war pigs want violent end. You both are subhuman.

  8. Davy on Mon, 2nd Apr 2018 6:27 am 

    A potential blueprint for the next correction? We are not talking much about the economy lately but it is still there.

    “Julian Brigden Warns The Dollar Will Be “The Final Napalm Run” Into The Crash”
    https://tinyurl.com/y8hn5cek

    “What actually lowered Treasury yields through almost all the period of QE was falling inflation. It was disinflation. And I use that term because I’m not a big believer in deflation. Deflation is falling aggregate demand and falling prices. What we had was falling inflation. So it’s disinflation. And that’s really what lowered yields. What’s been interesting, though, is, since the end of 2015, inflation has actually been rising, relatively significantly in the US. It’s gone up a whole 2%. But yields (real yields) have fallen. Why? Because other central banks have come in. And they have – because of the nuances of their policies (particularly NIRP, and particularly regulatory requirements that require European investors to be fully invested and match assets with liabilities) – you’ve had this tsunami of cash that’s come out of Japan and Europe and suppressed our Treasury yields. “

    “And just as markets are breaking from the strain of Fed-induced tighter financial conditions, the Trump administration’s policies will result in dollars piling back into the US from foreign markets – a scenario that could undermine the currency’s long-term value and, ultimately, its status as a reserve currency. Before it begins the next leg of its secular downtrend, the greenback will be squeezed higher, triggering a punishing selloff across risk assets.”

    “when the dollar rallies at the same time as you get risk-off, it turns things really vicious, really quickly. And, given this massive hole created by a low current account deficit, with the whole world depending on the hot money flows, in a world where you can click and bring that money home, it could be really vicious. I think – let’s be honest. Up until now we’ve had loose fiscal, relatively loose monetary. Right? It’s only changed in the last couple of months. And arguably even since Powell has come in. We’ve had central banks that have – and I think, big picture, they still want to – the expression we like to use is “run it hot.” They want to boil bond investors slowly. They want to run nominal GDP hot. This is how we eviscerate the value of the debt in what are aging and very indebted societies. So, yeah, loose fiscal, loose monetary is disastrous for a currency. Things are changing a little. As I said, I think the Fed will be forced, relatively, to become more hawkish. But, bigger picture, what I’m talking about is an episodic, final, nasty, destructive dollar rally. I think it’s a dollar rally that ends up resetting the system. I think after the dollar has rallied and destroyed a lot of things, more people will abandon it. You’ll see more use of the renminbi. We are in a cyclical, I think, decline of the dollar. You get bond pressure and rate pressure and equity problems, and then the dollar. And the dollar comes in and is just the final napalm run into the risk-off move, and then we’ll kick off again.”

  9. Cloggie on Mon, 2nd Apr 2018 6:32 am 

    So what neder? what your point?

    That you can always count on your older European brothers to drag you out of the shit, you worked yourself into, be it 1776, the development of a renewable energy base or 1776-2.0.

    It should give you comfort tonight, when, after a decision process lasting an hour, whether you will sleep with your beard on top or under the sheets, you can fall asleep in the deep certainty that Europeans, all 700 million of them, will guard you.

  10. Davy on Mon, 2nd Apr 2018 6:41 am 

    “That you can always count on your older European brothers to drag you out of the shit, you worked yourself into, be it 1776, the development of a renewable energy base or 1776-2.0.”
    Sure, nedernazi, your daily agenda spam never changes. It is getting so boring. The 1776 part two. LoL what a loon.

    “Europeans, all 700 million of them, will guard you.”
    Ah, it is the US that has a big army stationed in Europe protecting you lazy Eurotards so you can lay on your ass and eat cheese and drink wine.

  11. Cloggie on Mon, 2nd Apr 2018 7:57 am 

    Ah, it is the US that has a big army stationed in Europe protecting you lazy Eurotards so you can lay on your ass and eat cheese and drink wine.

    You don’t. You have a symbolic occupation army mainly consisting of demotivated black kids on drugs. An angry German village could deal with these barracks.

    https://en.wikipedia.org/wiki/United_States_military_deployments

    So the US managed to add no less than 150 countries to its empire since 1945, but the remaining 50 countries will remain out of reach. This is it. From 2003 onward it was all downhill and by 2025-2030 your empire will be like the Soviet empire: non-existing. Reason: inner collapse, caused by demographic developments in the US itself. Third world countries per definition can’t run a global empire. And the majority of European-Americans on second thoughts will prefer to remain member of the European world rather than George Soros his diversity nightmare.

  12. Davy on Mon, 2nd Apr 2018 8:06 am 

    It is a excepted fact Europeans can’t fight without American support. Explain that away neder. Oh, well France can go play in Africa. You duchies can send a plane or two to a coalition bombing party but that is about it. You Eurotards can’t fight. The might Eurotard Army you brag about is a big cash cow all the corrupt politicians salivate over. It will never happen but they will throw cash into the pig trough for the hungry to feast on.

  13. Cloggie on Mon, 2nd Apr 2018 8:41 am 

    “It is a excepted fact Europeans can’t fight without American support.”

    Not sure what an “excepted fact” is… probably Davy and his exceptionalism again.

    Last time I checked it is the other way around. If continental Europe hadn’t intervened, America could still be British-owned, which in hindsight would have been better. It is for everything better that Americans are owned by Yuropeans rather than kikes.

    And when Europe refused to fight in Eyeraq (remember those “cheese-eating surrender monkeys” and “freedom fries”.lol), America eventually got chased back into the Green Zone before the Yanks fled from the country, tail between the legs, by a bunch of third-worlders.

    Vietnam was held by the French for decades, by simply walking on (perhaps these Vietnamese liked wine and cheese better than Hamburgers).

    The French army made it to Moscow, the Germans almost, where the Soviets made it all the way to Cuba.

    You should not have any pretentions, you just piggy-backed into Europe thanks to the Soviets.

    https://www.washingtonpost.com/archive/opinions/1985/05/05/their-wehrmacht-was-better-than-our-army/0b2cfe73-68f4-4bc3-a62d-7626f6382dbd/

    Meanwhile your country is on the verge of being taken over by darkies, sicked upon you thanks to uncle George Soros Open Society and Diversity Programs, en passent destroying the only weapon uncle George had to threaten the world with. Uncle George is not as smart as he likes to think he is.

    Summing it up: we Europeans need Americans for exactly nothing. America is the worst disaster in continental European history, with Britain a good second.

    No, you are going to need us continental Europeans to keep uncle George from putting you into his future gulags on US soil, where this time the guards will be of mixed color.

    But what do you know…

  14. Davy on Mon, 2nd Apr 2018 8:48 am 

    Come on nederliar, we won all major battles in Iraq: We are talking about recent history not ancient history. We all know how wonderful and grand the Euroland was back then Please stay on topic and relevant.

  15. Cloggie on Mon, 2nd Apr 2018 8:54 am 

    “Come on nederliar, we won all major battles in Iraq:”

    The last battle you lost and that is always the battle that counts. For a jew tip of three trillion $ you handed over Eyeraq to the sphere of influence of Eyeran.

    Now how smart is that?

    Syria same story.
    And now KSA and Yemen are next.

  16. .. on Mon, 2nd Apr 2018 9:06 am 

    Eurofags are more gay than amerifags. So it doesn’t even matter if you are both replaced by psychopathic dark animals. And you will be. You are a power vacuum caused by a lack of testosterone and intelligence and righteousness.

  17. Davy on Mon, 2nd Apr 2018 9:38 am 

    Sure nederliar, Iran does not own Iraq, there are no winners in Syria, Yemen is a lost cause. Nothing to win in ME.

  18. Cloggie on Mon, 2nd Apr 2018 9:52 am 

    “Sure nederliar, Iran does not own Iraq, there are no winners in Syria, Yemen is a lost cause. Nothing to win in ME.”

    Apart from spelling, reading isn’t your fort either, now is it? Never used the word “own”, but spoke about “sphere of influence”.

    https://www.huffingtonpost.com/entry/iran-reshapes-the-middle-east_us_5a1ee003e4b0e37da0447b83

    https://www.bellingcat.com/news/mena/2015/03/13/irans-expanding-sphere-of-influence-iranian-t-72-tanks-in-iraq/

    https://en.wikipedia.org/wiki/Greater_Iran

  19. Davy on Mon, 2nd Apr 2018 10:25 am 

    They don’t own Iraq and that is what matters.

  20. Davy on Mon, 2nd Apr 2018 10:32 am 

    Neder, empty links don’t make things so

  21. Cloggie on Mon, 2nd Apr 2018 12:31 pm 

    millimind/apneaman, now in the disguise as “..”, opines: Eurofags are more gay than amerifags. So it doesn’t even matter if you are both replaced by psychopathic dark animals. And you will be. You are a power vacuum caused by a lack of testosterone and intelligence and righteousness.

    Ah yes, the kosher agenda in all its magnificence. You do realize you are playing with fire, TalmudTurk.

  22. MASTERMIND on Mon, 2nd Apr 2018 1:15 pm 

    Clogg

    Losers are more likely to believe in conspiracy theories, study finds
    http://www.psypost.org/2017/09/losers-likely-believe-conspiracy-theories-study-finds-49694

  23. MASTERMIND on Mon, 2nd Apr 2018 1:36 pm 

    California’s Housing Crisis Is So Bad, Families Are Squatting Abandoned Homes Just to Survive

    https://www.motherjones.com/crime-justice/2018/04/retake-the-house/

    Fuck this country….

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