After years of setbacks and delays, China may be days away from launching a yuan-priced crude oil futures contract to make its currency more international and challenge the dominance of the petrodollar.
Many Chinese investors eagerly anticipate the start of yuan oil futures trading on the Shanghai International Energy Exchange, with hope it will come just in time for Christmas, when western markets will be either closed or calmer than usual.
Although local investors can’t wait to pour yuan into another commodity contract, international investors may not be as eager because it is not clear yet how much freedom China would allow in that trade. International traders may have to swallow Chinese intervention on the markets or rigid capital controls, Bloomberg reported last week.
In July, the Shanghai International Energy Exchange, INE, completed a four-step trial in crude oil futures denominated in yuan and said that it would carry preparatory works for the listing of crude oil futures, and would try to launch the contract by the end of this year.
The launch of the yuan oil futures contract will be a wake-up call for traders and investors who haven’t been paying attention to Chinese plans to create the so-called petroyuan and shift oil trade out of petrodollars, Adam Levinson, managing partner and chief investment officer at hedge fund manager Graticule Asset Management Asia (GAMA), said in October.
Although the petroyuan is not expected to immediately supplant the petrodollar, the world’s top oil importer launching a crude oil futures contract in its domestic currency is a sign that the Chinese want their yuan to play an increasingly important role in global trade, starting with the oil trade.
On the yuan front, the Chinese scored a success for their currency last year, when the International Monetary Fund (IMF) included the yuan in its Special Drawing Right (SDR) basket—an international reserve asset created by the IMF in 1969 to supplement the existing official reserves of member countries. The yuan joined the U.S. dollar, the euro, the yen, and the British pound sterling in the basket as the IMF recognized “an important milestone in the integration of the Chinese economy into the global financial system.”
After years of delays, it looks like China could meet this time its self-imposed deadline to launch the yuan oil futures by the end of this year.
“An official launch during Christmas would be appropriate. The western market would be quiet and allow the Shanghai exchange as well as Chinese investors to adjust in the early days,” Chinese trader Yuan Quwei told Bloomberg.
“The Chinese oil industry wants to have a local hedging tool while financial institution investors look on Shanghai crude futures as an important product in their portfolios,” Wang Xiao, an oil analyst at Guotai Junan Futures Co in Shanghai, commented for Bloomberg.
“Shanghai oil will be the first Chinese product that allows foreign investors to trade directly and such involvement will surely bring more volumes,” Wang noted.
According to other analysts, the success of the yuan oil futures contract greatly depends on the Chinese regulation (and room for intervention) on the market, which could deter international investors from bringing huge volumes into the contract. Others believe that while it makes sense that the world’s key oil import market launch yuan oil futures, it would take years for the yuan to really threaten the supremacy of the “entrenched” petrodollar.
For now, investors are looking to see if this year Santa will bring them that long-mooted, long-delayed yuan crude oil futures contract.