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

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

SafelyGraze Looney Sat, 03/31/2018 - 12:47 Permalink

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

Adolph.H. EuroPox Sat, 03/31/2018 - 12:51 Permalink

Americans can only kill so many democratically elected presidents and heads of state. They have absolutely no power to change anything in China. Xi has played a master hand so far, silently moving with Putin his pieces on the chessboard. And now 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 by EuroPox

whatswhat1@yahoo.com house biscuit Sat, 03/31/2018 - 13:04 Permalink

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.

 

O.T. 

Chinese Space Station Tiangong-1 May Fall to Earth Later Than Expected

Update for 6 p.m. EDT: Tiangong-1 is now forecast to re-enter Earth's atmosphere on April 1 at 12:15 p.m. EDT (1615 GMT), give or take 9 hours, according to the Aerospace Corp.

In reply to by house biscuit

BennyBoy BaBaBouy Sat, 03/31/2018 - 13:58 Permalink

 

Libya, Iraq tried to accept other currencies for oil and got invaded and killed leaders.

US wont invade China. Will step up computer attacks.

Number one malware target will be yuan contracts/futures/banks and oil suppliers who sell and accept yuan.

 

In reply to by BaBaBouy

Pinto Currency BennyBoy Sat, 03/31/2018 - 14:17 Permalink

 

This article misses the central part of the story in that physical gold payment for oil can be obtained (a restart of the PetroGold trade that existed before 1971) with gold delivered at Shanghai's Free Trade Zone for legal export from China in return for oil delivery.

 

An interview regarding Petro-Yuan-Gold trade starting in China:

https://www.youtube.com/watch?v=tv0u-mEK7Gg

 

The world is transitioning back to physical gold payment for oil.

In reply to by BennyBoy

overbet Pinto Currency Sat, 03/31/2018 - 14:26 Permalink

Everyone is cheering like China will really be backing the yuan with gold and their gold shavings will magically appreciate. The pipe dream is strong. Chinese, if anything are financial charlatans. What central bank just stops and becomes fiscally responsible? What is the incentive? Does China currently hold so much gold and is so self sustainable they can now live without the US and this is the power move time? Snap call. Im smashing the bid on that pipe dream

In reply to by Pinto Currency

philipat The_Juggernaut Sat, 03/31/2018 - 19:44 Permalink

I'm guessing that item #1 on the US "talking points" with MBS during his visit was the Saudi's oil trade with China. Probably in connection with 9/11 Court cases?

The Saudis really have little strategic choice but to start accepting CNY for oil if it wants to stabilize its declining share of the China oil trade, From there, things start to move more quickly.

In reply to by The_Juggernaut

BigCumulusClouds falconflight Sun, 04/01/2018 - 07:29 Permalink

“it was just two a half years ago that Beijing launched a controversial Yuan devaluation to boost its exports and economy.”

You gotta hand it to the elite, they’ve got everyone and their brother saying that a devalued currency is good for exports and the national economy. What a bunch of fucking bullshit!  Yep that Venezuela, they’ve got a roaring economy now that their currency has been devalued tremendously. They export more oil than Russia and Saudi Arabia combined.

Inflation, that is a devalued currency, is only a wealth transfer paid to the counterfeiter. 

In reply to by falconflight

various1 BigCumulusClouds Sun, 04/01/2018 - 14:09 Permalink

Wow. So many peasants come out in droves to express their delusion.

"Peace" in Korea occurs for one reason only: US is ready to nuke China.

It was unfair the destruction of America, and all billionaires and millionaires who made it so and benefited most shall be wiped out along with China.

And so will traitors Brits, who are now bribed by China. These low peasants Brits will do anything for money, even getting themselves nuked as we nuke China.

In reply to by BigCumulusClouds

loveyajimbo JRobby Sat, 03/31/2018 - 19:14 Permalink

China can get all the oil they need from their ally Russia.  They can also crush the dollar at will, by backing the Yuan with gold and make it fully convertible for physical.  Russia could join them in this...

They are dumping their dollars, so it is just a matter of time, with all the bogus anti-China and anti-Russia bullshit going on...

In reply to by JRobby

francis scott … JibjeResearch Sun, 04/01/2018 - 14:27 Permalink

Absolutely correct.

If China is smart (and they certainly are)

they will not alter the status quo too

quickly. There's nothing but trouble to be

gained by that.  Let oil be sold in both

dollars and yuan and let the oil trade

determine the price of CNYUSD.

That ought to keep the crooks at forex

on their toes.  

 

@loveyajimbo

 by backing the Yuan with gold and

make it fully convertible

Dude, the days of a currency's

convertibility to gold are

gone with the wind.  Sorry.

In reply to by JibjeResearch

JibjeResearch Bay of Pigs Sun, 04/01/2018 - 13:30 Permalink

I have been to Thailand, but not China (but seen the current China via Youtube).  I only use GDP for comparison.  

And yes, they speak different languages, have unique Buddhism, and so on with cultural stuffs.

 

I'll break top 5% in America from traditional investment, with some luck, I'll break top 1% from cryptos.

Don't talk back to me, I made it this far without your opinion.

 

:)

 

In reply to by Bay of Pigs

css1971 in4mayshun Sun, 04/01/2018 - 12:41 Permalink

What China has achieved over the last 40 years is simply epic... But another 800 million people still living in relative poverty. That's the EU + USA added together. Oil bought with Yuan is essentially free...

What exactly is "over production" in that context?

See, you're thinking of market dynamics. But China is a fascist state, where the government has absolute control. What markets they allow are entirely managed.

In reply to by in4mayshun

JibjeResearch Justin Case Sun, 04/01/2018 - 22:18 Permalink

Ok, Justin ... :)  If you put it that way, yes, I agree.

What I am saying is this.  China replicated what the west did and Japan did to a certain extend.  This is not innovation.

An example of innovation is the blockchain, IBM's AI.  China made a home grown chip, that is innovation if it didn't take the blueprint from other design.

Another innovation is Crispr gene editing...

China BRI is not an innovation.  It's direct copy from the old silk road trade route; however, it's good that they remember history :)

 

In reply to by Justin Case

besnook overbet Sat, 03/31/2018 - 18:32 Permalink

this is what seperates the dumbfucks about china like super china bears chanos and the nickel boy and the people who realize the key to china's banking system is that it is a no risk prospect from the pboc's point of view. the bank has to hav econtrols on the debt for the appearance of quality but in the end if someone defaults the debt just disappears into an abyss because the only people screwed are the people who were owed by the debtor and not the holder of the debt, the bank and all the parties the debt has been sold to plus the derivativess attached to the debt and the public companies involved. the pboc eats it and new debt is created to replace the bad money. it is the greatest fiat ponzi scheme circle jerk in the history of circle jerking. the mark is the pboc itself and the pboc controls the game. fn genius!

In reply to by overbet