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As one of the world’s top energy importers, China has successfully completed its fifth dry run in yuan-backed oil futures contract trading. The step has been already called Beijing’s challenge to the US dollar.
Link Source 1 : (Reuters) https://www.rt.com/business/413107-petro-yuan-futures-trading/
Link Source 2: (CNBC News) https://www.cnbc.com/2017/10/24/pet...one-dollar-rmb-denominated-oil-contracts.html
Link Source 3 : (Bloomberg) https://www.bloomberg.com/news/arti...how-hurdles-confronting-china-s-currency-push
Link Source 4 : (Zero Hedge) https://www.zerohedge.com/news/2018-01-03/petro-yuan-looms-how-china-will-shake-oil-futures-market
Link Source 5 : (Foreign Policy News) http://foreignpolicy.com/2018/01/18/chinas-bid-upend-global-oil-market-petroyuan-shanghai/
Link Source 6 : (Reuters) https://www.rt.com/business/415347-iran-sanctions-help-petro-yuan/
-----------------------------------------------------
The Chinese government announced plans to start a crude oil futures contract priced in yuan and convertible into gold earlier this year. The contract will enable the country's trading partners to pay with gold or to convert yuan into gold without the necessity to keep money in Chinese assets or turn it into US dollars.
The new benchmark will reportedly allow exporters, such as Russia, Iran or Venezuela to avoid US sanctions by trading oil in yuan.
In September, Venezuela ditched the greenback for oil payments. Caracas has ordered oil traders to convert crude oil contracts into euro and not to pay or be paid in US dollars anymore. The measure followed the rolling out of sanctions by the United States against the country.
------------------------------------------------------
The new strategy is to enlist the energy markets' help: Beijing may introduce a new way to price oil in coming months — but unlike the contracts based on the U.S. dollar that currently dominate global markets, this benchmark would use China's own currency. If there's widespread adoption, as the Chinese hope, then that will mark a step toward challenging the greenback's status as the world's most powerful currency.
China is the world's top oil importer, and so Beijing sees it as only logical that its own currency should price the global economy's most important commodity. But beyond that, moving away from the dollar is a strategic priority for countries like China and Russia. Both aim to ultimately reduce their dependency on the greenback, limiting their exposure to U.S. currency risk and the politics of American sanctions regimes.
The plan is to price oil in yuan using a gold-backed futures contract in Shanghai, but the road will be long and arduous.
------------------------------------------------------
Potential consequent reactivation of sanctions may cause Iran to export oil using the Chinese Yuan denominated contract, which launches on 18 January,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement. “This may spark a move away from the present long-established US Dollar (USD) denominated oil trading regime.”
For a while, China has worked to launch a yuan-denominated oil futures contract—a move that would symbolize, as well as contribute to, the ascendance of the Chinese economy as a rival to long-held US hegemony. Reports suggest China is planning to allow trading in the oil futures contract on the Shanghai Futures Exchange on January 18.
“The increased threat of renewed US banking/USD sanctions on Iran alone is likely to boost Iran’s interest in the new Yuan oil contract,” said Bjarne Schieldrop of SEB. “China will benefit considerably from such developments.”Schieldrop argues that the more that the oil trade is conducted in yuan, the more the Chinese currency will be recognized as a major, or even a central, global currency. “While the USD will not be replaced overnight as the world’s reserve currency nor as the one most commonly used for crude oil trading, it will be negative for the greenback, which will cease to be the crude oil market’s only ruling currency,” Schieldrop added.
The implications aren’t just a concern for national security types sitting in Washington. The weakening of the dollar could result in higher oil prices. “A potentially significantly weaker dollar would mean a much higher Brent crude oil price in nominal terms making today’s longer-term nominal prices a bargain,” Schieldrop said.
Washington could unwittingly accelerate the changeover. President Trump has sought to “make America great again,”but his effort to isolate Iran could have the side effect of pushing OPEC’s third-largest exporter onto the Chinese currency—giving a boost to China’s rise.
-------------------------------------------------------
Ultimately, though, if China hopes to throw its weight around in the energy market and make the petroyuan a big success, Beijing will have to make the kind of far-reaching reforms it has so far resisted making in order for the yuan to become a global currency. That includes allowing the currency to float freely and removing limits on capital flows — still risky moves for a government that micromanages economic policy.
“China would have to substantially eliminate restrictions on international financial transactions in order for the renminbi to become a leading reserve currency,” Eichengreen said. Instead, “it continues to tighten restrictions.”
------------------------------------------------------
1. When will trading begin?
According to the Shanghai-based news portal Jiemian, which cited an unidentified person from a futures company, trading is expected to start Jan. 18. Multiple rounds of testing have been carried out and all listing requirements met. The State Council, China’s cabinet, was said to have given its approval in December, one of the final regulatory hurdles. The push for oil futures gained impetus in 2017 when China surpassed the U.S. as the world’s biggest crude importer.
2. Why is this important for China?
Futures trading would wrest some control over pricing from the main international benchmarks, which are based on dollars. Denominating oil contracts in yuan would promote the use of China’s currency in global trade, one of the country’s key long-term goals. And China would benefit from having a benchmark that reflects the grades of oil that are mostly consumed by local refineries and differ from those underpinning Western contracts.
3. How do oil futures work?
Futures contracts fix prices today for delivery at a later date. Consumers use them to protect against higher prices down the line; speculators use them to bet on where prices are headed. In 2017, oil futures contracts in New York and London outstripped physical trading by a factor of 23. Crude oil is among the most actively traded commodities, with two key benchmarks: West Texas Intermediate, or WTI, which trades on the New York Mercantile Exchange, and Brent crude, which trades on ICE Futures Europe in London.
4. Why didn’t China begin trading futures until now?
Lower crude prices have played a part. Chinese oil futures were proposed in 2012 following spikes above $100 a barrel, but prices in 2017 have averaged little more than $50. There’s also concern over volatility. China introduced domestic crude futures in 1993, only to stop a year later because of volatility. In recent years, it repeatedly delayed its new contract amid turmoil in equities and financial markets. Such destabilizing moves have often prompted China’ government to intervene in markets in one way or another.
5. What’s China’s track record in commodities?
Nickel was the last major commodity to be listed there in 2015; within six weeks, trading in Shanghai surpassed benchmark futures on the London Metal Exchange, or LME. In China, speculators play a far greater role, boosting trading volumes but making markets susceptible to volatility. In early 2016, the then-head of the LME said it was possible some Chinese traders did not even know what they were trading as investors piled into everything from steel reinforcement bars to iron ore. Steep price rises relented when China intervened with tighter trading rules, higher fees and shorter trading hours.
6. Will foreigners buy Chinese oil futures?
That remains to be seen. Overseas oil producers and traders would need to swallow not just China’s penchant for occasional market interventions but also its capital controls. Restrictions on moving money in and out of the country have been tightened in the past two years after a shock devaluation of the yuan in 2015 prompted a surge in money leaving the mainland. Similar hurdles have kept foreign investors as bit players in China’s giant stock and bond markets.
7. Could the yuan challenge the dollar’s dominance in oil?
Not any time soon, since paying for oil in dollars is an entrenched practice, according to some analysts. Shady Shaher, head of macro strategy at Dubai-based lender Emirates NBD PJSC, says it makes sense in the long run to look at transactions in yuan because China is a key market, but it will take years. Bloomberg Gadfly columnist David Fickling argues that China doesn’t have “nearly the influence in the oil market needed to carry out such a coup.” On the other hand, paying in yuan for oil could become part of President Xi Jinping’s "One Belt, One Road" initiative to develop ties across Eurasia, including the Middle East. Chinese participation in Saudi Aramco’s planned initial public offering could help sway Saudi opinion toward accepting yuan, which is used in only about 2 percent of global payments.
Link Source 1 : (Reuters) https://www.rt.com/business/413107-petro-yuan-futures-trading/
Link Source 2: (CNBC News) https://www.cnbc.com/2017/10/24/pet...one-dollar-rmb-denominated-oil-contracts.html
Link Source 3 : (Bloomberg) https://www.bloomberg.com/news/arti...how-hurdles-confronting-china-s-currency-push
Link Source 4 : (Zero Hedge) https://www.zerohedge.com/news/2018-01-03/petro-yuan-looms-how-china-will-shake-oil-futures-market
Link Source 5 : (Foreign Policy News) http://foreignpolicy.com/2018/01/18/chinas-bid-upend-global-oil-market-petroyuan-shanghai/
Link Source 6 : (Reuters) https://www.rt.com/business/415347-iran-sanctions-help-petro-yuan/
-----------------------------------------------------
The Chinese government announced plans to start a crude oil futures contract priced in yuan and convertible into gold earlier this year. The contract will enable the country's trading partners to pay with gold or to convert yuan into gold without the necessity to keep money in Chinese assets or turn it into US dollars.
The new benchmark will reportedly allow exporters, such as Russia, Iran or Venezuela to avoid US sanctions by trading oil in yuan.
In September, Venezuela ditched the greenback for oil payments. Caracas has ordered oil traders to convert crude oil contracts into euro and not to pay or be paid in US dollars anymore. The measure followed the rolling out of sanctions by the United States against the country.
------------------------------------------------------
The new strategy is to enlist the energy markets' help: Beijing may introduce a new way to price oil in coming months — but unlike the contracts based on the U.S. dollar that currently dominate global markets, this benchmark would use China's own currency. If there's widespread adoption, as the Chinese hope, then that will mark a step toward challenging the greenback's status as the world's most powerful currency.
China is the world's top oil importer, and so Beijing sees it as only logical that its own currency should price the global economy's most important commodity. But beyond that, moving away from the dollar is a strategic priority for countries like China and Russia. Both aim to ultimately reduce their dependency on the greenback, limiting their exposure to U.S. currency risk and the politics of American sanctions regimes.
The plan is to price oil in yuan using a gold-backed futures contract in Shanghai, but the road will be long and arduous.
------------------------------------------------------
Potential consequent reactivation of sanctions may cause Iran to export oil using the Chinese Yuan denominated contract, which launches on 18 January,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement. “This may spark a move away from the present long-established US Dollar (USD) denominated oil trading regime.”
For a while, China has worked to launch a yuan-denominated oil futures contract—a move that would symbolize, as well as contribute to, the ascendance of the Chinese economy as a rival to long-held US hegemony. Reports suggest China is planning to allow trading in the oil futures contract on the Shanghai Futures Exchange on January 18.
“The increased threat of renewed US banking/USD sanctions on Iran alone is likely to boost Iran’s interest in the new Yuan oil contract,” said Bjarne Schieldrop of SEB. “China will benefit considerably from such developments.”Schieldrop argues that the more that the oil trade is conducted in yuan, the more the Chinese currency will be recognized as a major, or even a central, global currency. “While the USD will not be replaced overnight as the world’s reserve currency nor as the one most commonly used for crude oil trading, it will be negative for the greenback, which will cease to be the crude oil market’s only ruling currency,” Schieldrop added.
The implications aren’t just a concern for national security types sitting in Washington. The weakening of the dollar could result in higher oil prices. “A potentially significantly weaker dollar would mean a much higher Brent crude oil price in nominal terms making today’s longer-term nominal prices a bargain,” Schieldrop said.
Washington could unwittingly accelerate the changeover. President Trump has sought to “make America great again,”but his effort to isolate Iran could have the side effect of pushing OPEC’s third-largest exporter onto the Chinese currency—giving a boost to China’s rise.
-------------------------------------------------------
Ultimately, though, if China hopes to throw its weight around in the energy market and make the petroyuan a big success, Beijing will have to make the kind of far-reaching reforms it has so far resisted making in order for the yuan to become a global currency. That includes allowing the currency to float freely and removing limits on capital flows — still risky moves for a government that micromanages economic policy.
“China would have to substantially eliminate restrictions on international financial transactions in order for the renminbi to become a leading reserve currency,” Eichengreen said. Instead, “it continues to tighten restrictions.”
------------------------------------------------------
1. When will trading begin?
According to the Shanghai-based news portal Jiemian, which cited an unidentified person from a futures company, trading is expected to start Jan. 18. Multiple rounds of testing have been carried out and all listing requirements met. The State Council, China’s cabinet, was said to have given its approval in December, one of the final regulatory hurdles. The push for oil futures gained impetus in 2017 when China surpassed the U.S. as the world’s biggest crude importer.
2. Why is this important for China?
Futures trading would wrest some control over pricing from the main international benchmarks, which are based on dollars. Denominating oil contracts in yuan would promote the use of China’s currency in global trade, one of the country’s key long-term goals. And China would benefit from having a benchmark that reflects the grades of oil that are mostly consumed by local refineries and differ from those underpinning Western contracts.
3. How do oil futures work?
Futures contracts fix prices today for delivery at a later date. Consumers use them to protect against higher prices down the line; speculators use them to bet on where prices are headed. In 2017, oil futures contracts in New York and London outstripped physical trading by a factor of 23. Crude oil is among the most actively traded commodities, with two key benchmarks: West Texas Intermediate, or WTI, which trades on the New York Mercantile Exchange, and Brent crude, which trades on ICE Futures Europe in London.
4. Why didn’t China begin trading futures until now?
Lower crude prices have played a part. Chinese oil futures were proposed in 2012 following spikes above $100 a barrel, but prices in 2017 have averaged little more than $50. There’s also concern over volatility. China introduced domestic crude futures in 1993, only to stop a year later because of volatility. In recent years, it repeatedly delayed its new contract amid turmoil in equities and financial markets. Such destabilizing moves have often prompted China’ government to intervene in markets in one way or another.
5. What’s China’s track record in commodities?
Nickel was the last major commodity to be listed there in 2015; within six weeks, trading in Shanghai surpassed benchmark futures on the London Metal Exchange, or LME. In China, speculators play a far greater role, boosting trading volumes but making markets susceptible to volatility. In early 2016, the then-head of the LME said it was possible some Chinese traders did not even know what they were trading as investors piled into everything from steel reinforcement bars to iron ore. Steep price rises relented when China intervened with tighter trading rules, higher fees and shorter trading hours.
6. Will foreigners buy Chinese oil futures?
That remains to be seen. Overseas oil producers and traders would need to swallow not just China’s penchant for occasional market interventions but also its capital controls. Restrictions on moving money in and out of the country have been tightened in the past two years after a shock devaluation of the yuan in 2015 prompted a surge in money leaving the mainland. Similar hurdles have kept foreign investors as bit players in China’s giant stock and bond markets.
7. Could the yuan challenge the dollar’s dominance in oil?
Not any time soon, since paying for oil in dollars is an entrenched practice, according to some analysts. Shady Shaher, head of macro strategy at Dubai-based lender Emirates NBD PJSC, says it makes sense in the long run to look at transactions in yuan because China is a key market, but it will take years. Bloomberg Gadfly columnist David Fickling argues that China doesn’t have “nearly the influence in the oil market needed to carry out such a coup.” On the other hand, paying in yuan for oil could become part of President Xi Jinping’s "One Belt, One Road" initiative to develop ties across Eurasia, including the Middle East. Chinese participation in Saudi Aramco’s planned initial public offering could help sway Saudi opinion toward accepting yuan, which is used in only about 2 percent of global payments.
