Pepe Escobar On China's Petro-Yuan Bombshell

Authored by The Asia Times' Pepe Escobar via The Saker blog,

The new 55-page “America First” National Security Strategy  (NSS), drafted over the course of 2017, defines Russia and China as “revisionist” powers, “rivals”, and for all practical purposes strategic competitors of the United States.

The NSS stops short of defining Russia and China as enemies, allowing for an “attempt to build a great partnership with those and other countries”. Still, Beijing qualified it as “reckless” and “irrational.” The Kremlin noted its “imperialist character” and “disregard for a multipolar world”. Iran, predictably, is described by the NSS as “the world’s most significant state sponsor of terrorism.”

Russia, China and Iran happen to be the three key movers and shakers in the ongoing geopolitical and geoeconomic process of Eurasia integration.

The NSS can certainly be regarded as a response to what happened at the BRICS summit in Xiamen last September. Then, Russian President Vladimir Putin insisted on “the BRIC countries’ concerns over the unfairness of the global financial and economic architecture which does not give due regard to the growing weight of the emerging economies”, and stressed the need to “overcome the excessive domination of a limited number of reserve currencies”.

That was a clear reference to the US dollar, which accounts for nearly two thirds of total reserve currency around the world and remains the benchmark determining the price of energy and strategic raw materials.

And that brings us to the unnamed secret at the heart of the NSS; the Russia-China “threat” to the US dollar.

The CIPS/SWIFT face-off

The website of the China Foreign Exchange Trade System (CFETS) recently announced the establishment of a yuan-ruble payment system, hinting that similar systems regarding other currencies participating in the New Silk Roads, a.k.a. Belt and Road Initiative (BRI) will also be in place in the near future.

Crucially, this is not about reducing currency risk; after all Russia and China have increasingly traded bilaterally in their own currencies since the 2014 US-imposed sanctions on Russia. This is about the implementation of a huge, new alternative reserve currency zone, bypassing the US dollar.

The decision follows the establishment by Beijing, in October 2015, of the China International Payments System (CIPS). CIPS has a cooperation agreement with the private, Belgium-based SWIFT international bank clearing system, through which virtually every global transaction must transit.

What matters in this case is that Beijing – as well as Moscow – clearly read the writing on the wall when, in 2012, Washington applied pressure on SWIFT; blocked international clearing for every Iranian bank; and froze $100 billion in Iranian assets overseas as well as Tehran’s potential to export oil. In the event Washington might decide to slap sanctions on China, bank clearing though CIPS works as a de facto sanctions-evading mechanism.

Last March, Russia’s central bank opened its first office in Beijing. Moscow is launching its first $1 billion yuan-denominated government bond sale. Moscow has made it very clear it is committed to a long term strategy to stop using the US dollar as their primary currency in global trade, moving alongside Beijing towards what could be dubbed a post-Bretton Woods exchange system.

Gold is essential in this strategy. Russia, China, India, Brazil & South Africa are all either large producers or consumers of gold – or both. Following what has been extensively discussed in their summits since the early 2010s, the BRICS are bound to focus on trading physical gold.

Markets such as COMEX actually trade derivatives on gold, and are backed by an insignificant amount of physical gold. Major BRICS gold producers – especially the Russia-China partnership – plan to be able to exercise extra influence in setting up global gold prices.

The ultimate politically charged dossier

Intractable questions referring to the US dollar as top reserve currency have been discussed at the highest levels of JP Morgan for at least five years now. There cannot be a more politically charged dossier. The NSS duly sidestepped it.

The current state of play is still all about the petrodollar system; since last year what used to be a key, “secret” informal deal between the US and the House of Saud is firmly in the public domain.

Even warriors in the Hindu Kush may now be aware of how oil and virtually all commodities must be traded in US dollars, and how these petrodollars are recycled into US Treasuries. Through this mechanism Washington has accumulated an astonishing $20 trillion in debt – and counting.

Vast populations all across MENA (Middle East-Northern Africa) also learned what happened when Iraq’s Saddam Hussein decided to sell oil in euros, or when Muammar Gaddafi planned to issue a pan-African gold dinar.

But now it’s China who’s entering the fray, following on plans set up way back in 2012. And the name of the game is oil-futures trading priced in yuan, with the yuan fully convertible into gold on the Shanghai and Hong Kong foreign exchange markets.

The Shanghai Futures Exchange and its subsidiary, the Shanghai International Energy Exchange (INE) have already run four production environment tests for crude oil futures. Operations were supposed to start at the end of 2017; but even if they start sometime in early 2018 the fundamentals are clear; this triple win (oil/yuan/gold) completely bypasses the US dollar.

The era of the petro-yuan is at hand.

Of course there are questions on how Beijing will technically manage to set up a rival mark to Brent and WTI, or whether China’s capital controls will influence it. Beijing has been quite discreet on the triple win; the petro-yuan was not even mentioned in National Development and Reform Commission documents following the 19th CCP Congress last October.

What’s certain is that the BRICS supported the petro-yuan move at their summit in Xiamen, as diplomats confirmed to Asia Times. Venezuela is also on board. It’s crucial to remember that Russia is number two and Venezuela is number seven among the world’s Top Ten oil producers. Considering the pull of China’s economy, they may soon be joined by other producers.

Yao Wei, chief China economist at Societe Generale in Paris, goes straight to the point, remarking how “this contract has the potential to greatly help China’s push for yuan internationalization.”

The hidden riches of “belt” and “road”

An extensive report by DBS in Singapore hits most of the right notes linking the internationalization of the yuan with the expansion of BRI.

In 2018, six major BRI projects will be on overdrive; the Jakarta-Bandung high-speed railway, the China-Laos railway, the Addis Ababa-Djibouti railway, the Hungary-Serbia railway, the Melaka Gateway project in Malaysia, and the upgrading of Gwadar port in Pakistan.

HSBC estimates that BRI as a whole will generate no less than an additional, game-changing $2.5 trillion worth of new trade a year.

It’s important to keep in mind that the “belt” in BRI should be seen as a series of corridors connecting Eastern China with oil/gas rich regions in Central Asia and the Middle East, while the “roads” soon to be plied by high-speed rail traverse regions filled with – what else – un-mined gold.

A key determinant of the future of the petro-yuan is what the House of Saud will do about it. Should Crown Prince – and inevitable future king – MBS opt to follow Russia’s lead, to dub it as a paradigm shift would be the understatement of the century.

Yuan-denominated gold contracts will be traded not only in Shanghai and Hong Kong but also in Dubai. Saudi Arabia is also considering to issue so-called Panda bonds, after the Emirate of Sharjah is set to take the lead in the Middle East for Chinese interbank bonds.

Of course the prelude to D-Day will be when the House of Saud officially announces it accepts yuan for at least part of its exports to China. A follower of the Austrian school of economics correctly asserts that for oil-producing nations, higher oil price in US dollars is not as important as market share; “They are increasingly able to choose in which currencies they want to trade.”

What’s clear is that the House of Saud simply cannot alienate China as one of its top customers; it’s Beijing who will dictate future terms. That may include extra pressure for Chinese participation in Aramco’s IPO. In parallel, Washington would see Riyadh embracing the petro-yuan as the ultimate red line.

An independent European report points to what may be the Chinese trump card; “an authorization to issue treasury bills in yuan by Saudi Arabia”; the creation of a Saudi investment fund; and the acquisition of a 5% share of Aramco.

Nations under US sanctions such as Russia, Iran and Venezuela will be among the first to embrace the petro-yuan. Smaller producers such as Angola and Nigeria are already selling oil/gas to China in yuan.

And if you don’t export oil but is part of BRI, such as Pakistan, the least you can do is replace the US dollar in bilateral trade, as Interior Minister Ahsan Iqbal is currently evaluating.

A key feature of the geoconomic heart of the world moving from the West to Asia is that by the start of the next decade the petro-yuan and trade bypassing the US dollar will be certified facts on the ground across Eurasia.

The NSS for its part promises to preserve “peace through strength”. As Washington currently deploys no less than 291,000 troops in 183 countries and has sent Special Ops to no less than 149 nations in 2017 alone, it’s hard to argue the US is at “peace” – especially when the NSS seeks to channel even more resources to the industrial-military complex.

“Revisionist” Russia-China have committed an unpardonable sin; they have concluded that pumping the US military budget by buying US bonds that allow the US Treasury to finance a multi-trillion dollar deficit without raising interest rates is an unsustainable proposition for the Global South. Their “threat” – under the framework of the BRICS as well as the SCO, which includes prospective members Iran and Turkey – is to increasingly settle bilateral and multilateral trade bypassing the US dollar.

It ain’t over till the fat (golden) lady sings. When the beginning of the end of the petrodollar system – established by Kissinger in tandem with the House of Saud way back in 1974 – becomes a fact on the ground, all eyes will be focused on the NSS counterpunch.

Comments

zorba THE GREEK RationalExuberance Dec 27, 2017 11:59 PM Permalink

The speed at which this happens depends on The Saudis. If they start trading in anything other than dollars, the USA will unite their enemies (of which they have many) to overthrow the new King. But even if the US is successful in doing that, it will only delay the fall of the Petrodollar for a short time. The deep state is a group of nasty MFers. How far they will go is anyone's guess. We are living in interesting times. I just hope the US Military Complex doesn't go to far in trying to stop the inevitable. 

In reply to by RationalExuberance

jeff montanye bobcatz Dec 28, 2017 1:42 AM Permalink

with the middle east broadly defined to include the ukraine and central america, at a scant minimum (vietnam now ancient history).

and the u.s. does everything it can to threaten, cajole, direct, reward and punish countries into establishing a second monetary system independent of the dollar network. and by the bye, hating the u.s. for its epic, despicable acts.

and these deep state guys think they are geniuses.

In reply to by bobcatz

A Sentinel zorba THE GREEK Dec 28, 2017 4:24 AM Permalink

Depends on how much they can scare opec members. Now, of course, if we’re behind mbs (mbs, right?) then maybe the petrodollar gets two allies- Saudi and us Frac (output controlled by some bullshit regulation?) Why wouldn’t the Russians join that club?

Incentives could be off the charts — if the alternative is the dollar losing its oil “support” then anything less cataclysmic is an acceptable cost, right?

In reply to by zorba THE GREEK

A Sentinel zorba THE GREEK Dec 28, 2017 4:24 AM Permalink

Depends on how much they can scare opec members. Now, of course, if we’re behind mbs (mbs, right?) then maybe the petrodollar gets two allies- Saudi and us Frac (output controlled by some bullshit regulation?) Why wouldn’t the Russians join that club?

Incentives could be off the charts — if the alternative is the dollar losing its oil “support” then anything less cataclysmic is an acceptable cost, right?

In reply to by zorba THE GREEK

BobEore zorba THE GREEK Dec 28, 2017 5:49 AM Permalink

Intractable questions referring to the US dollar as top reserve currency have been discussed at the highest levels of JP Morgan for at least five years now.

Yes. They have, and ... they are no longer "intractable" - or even - 'questions.'

Solutions have been sought. And applied, the most salient one being in regards to how to shift the balance of power and influence eastwards... to the new HQ of international finance capital - aka Shanghai... and away from the old twin towers- NY & London, without anyone paying any attention.

The many and bogus fake narratives with which the process has been successfully screened from view - an entire industry of alt0media scribblers devoted to the CHINA GOLD MEME and the parallel NEW SILK ROAD MEME...

have worked hard to convince naive westerners that 'buying in' to Xi and Vlads' "winners circle" is as simple and easy as picking up the phone and dialing 'AMPEX' or the LCS for a shot o shiny.

rollback begins here:

Panda dogsbody JPM has sequestered HUGE AMOUNTS of shiny metal for the home team. The targets written into the newest 5 year plan are almost reached. When they are... the infrastructural roll out of the long sought 'renewables' energy independence component of the plan kick in. TOTALLY CONTRARY TO the desperate disinfo delivered by $power agents and dissimulator srsrocco... the solar gig is at the heart and center of the Panda Plan for  geopolltical dominance... as chosen chief economic engine of the $power. The revolutionary advances in panel efficiencies and cost WILL NOT BE transferred westwards. THEY WILL make the competitive advantage of the Panda mercantilists insurmountable however.

Having gotten a lock on gold and silver both, for use domestically, first, with the success of that portion of the program, they WILL gradually work to strengthen their influence over price in the conventional centers of the trade. THIS WILL NOT in any way translate into UUGGE WEALTH and long-dreamed of riches for western bagholders...

who bought into the EXACT smokescreen stories which were designed to disguise the whole heist from the beginning. Holding shiny OUTSIDE THE 5 EYES western satrapies WILL have proven to be the ONLY means of escaping the carnage by which the 'FINAL NAIL IN THE COFFIN' for western economies will be delivered.

Those few who survive by hanging onto various pieces of flotsam and jetsam in the aftermath WILL NOT remember fondly ... those who guided them every step of the way to penury and perdition. Nor will Bob and the Black Flag Posse shed a tear for them.... having wasted too many precious hours attempting to alert them to their peril, all to no avail.

END OF REPORT.

please return to your feeding stations... now... oh,

and remember - under the new 'improved' comments system... your vote meters are no longer connected to anything live. You may kick... scream...gnash... and/or bash furniture... in the privacy of your own cell. (Fecal wall smearing no longer allowed - sorry bout that!

 

In reply to by zorba THE GREEK

Infinite QE BobEore Dec 28, 2017 6:36 AM Permalink

While I am in agreement with much, perhaps most of what you state, the wildcard for me remains the stability of the zio state of China. The majority of rich people there are in the process of establishing a base in ABC, anywhere but China, as they know the current state there is not sustainable.

In reply to by BobEore

BobEore Infinite QE Dec 28, 2017 6:54 AM Permalink

It might well have been on another, recent, posting of Pepe le Phew here... that I made reference to the process by which the pandas have been already 're-seeding' the Han hierarchy... via the millions of expat Panda-peeple buying a stake in the western lands.. and who will be on hand for the final...

extinction events... when Moishe n co decide its safe to fully pull the plug on us pesky europoids.

In reply to by Infinite QE

BobEore Putrid_Scum Dec 28, 2017 6:14 AM Permalink

err... the "smart guys" LEFT ... whilst the leavin was good. The "smart asses" stayed behind... and played with their exceptionalist "Master of the Universe" consoles... on site just like this one.

Getting proper set up in a new place o refuge is a work of years. They aren't available anymore.

Sorry bout that geniuses!

In reply to by Putrid_Scum

BobEore Infinite QE Dec 28, 2017 6:45 AM Permalink

In our smallish 'micro-nation' of

neo-Byzantium 'LUKKALAND' here... we brew a steady pot o nettle tea for the weary sojourner lookin for a stopover caravansaray on the long road back to

the really real. You're welcome to pull up any time.... the horses and camels will be feed and watered, and your dreams will be full of whispered remembrance of the ancestral times when our peeple were brave... n brooked no evil!

Two quotes from the insuperable Miguel Unamuno ... to set yur compass by!

"La vida es lucha, y la solidaridad para la vida es lucha y se hace en la lucha. No me cansaré de repetir que lo que más nos une a los hombres unos con otros son nuestras discordias. Y lo que más le une a cada uno consigo mismo, lo que hace la unidad íntima de nuestra vida, son nuestras discordias íntimas, las contradicciones interiores de nuestras discordias.

“Only he who attempts the absurd is capable of achieving the impossible.”

In reply to by Infinite QE

Anteater HRH of Aquitaine 2.0 Dec 28, 2017 12:21 AM Permalink

This how it ends. You shipped 40MM BBLs of crude to Shanghai, after the clearing house put a $200,000,000 BLoC in Yuan in your Hong Kong account. You dial up Alibaba to see what you can get for all your new Yuan. There's doll heads, minimum order 3,000! There's jewel cell phone cases, minimum order 5,000. There's some kind of unbranded sports show in mauve - lemon only, minimum order 10,000. Or you can cash it all in on Ramen and Shrimp Crackers, lol.

In reply to by HRH of Aquitaine 2.0

BlindMonkey uhland62 Dec 27, 2017 11:59 PM Permalink

What is the first dollar sign that the petro-yuan is taking over foreign demand from dollars?  I've been trying to figure this out from a timing perspective for a while now.  What I've guessed to this point is to see a drop in US dollar holdings by the Russian CB as the first step but I'm not sure that is terrible best thing to look at as the canary in the mine. 

In reply to by uhland62

You Only Live Twice BlindMonkey Dec 28, 2017 7:30 AM Permalink

The biggest sign that I have seen was in the 2017 annual report of the English Rothschild Bank branch where they announced that they were selling their holdings of US Treasuries in large proportion and moving the money over to Asia.

The other sign is now happening which is a rapidly weakening US dollar over the last few days with large rise in short term Treasuries (look at what is happening with the 3 month Treasury).

Russia is already prepared for several years now. It is what happens in the Middle East that will be more of an indication. OPEC will meet and decide what do to with the petrodollar. Then, the day will be at hand.

In reply to by BlindMonkey

Implied Violins CrashJPM Dec 28, 2017 1:33 AM Permalink

Fuck these bastards.

 

THIS is the 'stealth' NWO.  Don't buy into it.

 

This is a game of Good Cop/Bad Cop.  Sure, the 'Good Cop' is better, but do we *really* want a one world currency that is crypto based at this point - even if (((they))) say it's "gold backed"?

 

If the BIS and IMF are still at the top of this chain, then we are SCREWED.  Even if (((they))) sacrifice the FED, it's BULLSHIT.  DO NOT BUY INTO THIS.  It's just the right hand leading us into the hidden left hand.

 

Sure, the "bad cop" will be out of the picture...but we will STILL be in jail, maybe with a picture window - but (((they))) will STILL be in charge; will STILL have more gold/silver/crypto than us; will STILL control everything we do - is this good enough???  It isn't for me.

In reply to by CrashJPM

Ghost who Walks Dec 27, 2017 11:58 PM Permalink

I am sure that there is more planned than just the new reserve currency zone. The EU has previously demonstrated by introducing its own standards, that there are other ways to gain a competitive advantage.

The problem with this analysis is that it assumes that the Chinese will continue to need to import oil to meet their energy needs. If there is a non-polluting low-cost form of energy generation, the Chinese need adopt it as quickly as possible to improve air quality over Chinese cities.

The other missing item from the analysis is what happens to the value of the $20T in Treasury bonds and the impact of that on financial calculations. What then becomes the "Risk-free rate of return" when people are doing investment calculations.

The other key question is how quickly does the transition happen? Since many commercial contracts in the resources industry are currently written in US dollars, when does the shift in currency occur? If the transition is less than 5 years I wonder at the ability of the US Government to finance its debt at current levels.