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 China took the first steps to paying for crude oil imports in its own currency instead of U.S. 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”,
China is taking its first steps towards paying for imported crude oil in yuan instead of the U.S. dollar, three people with knowledge of the matter told Reuters, a key development in Beijing’s efforts to establish its currency internationally.
Shifting just 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.
A pilot program for yuan payment could be launched as early as the second half of this year, two of the people said.
Regulators have informally asked a handful of financial institutions to prepare for pricing China’s crude imports in the yuan, said the three sources at some of the financial firms.
“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.
The plans coincide with this week’s launch of the first Chinese crude oil futures in Shanghai, which many expect to become a third global price benchmark alongside Brent and West Texas Intermediate crude.
Shanghai’s new crude contract is traded in yuan.
Besides the potential of giving China more power over global oil prices, “this will help the Chinese government in its efforts to internationalize renminbi (yuan),” said Sushant Gupta, research director at energy consultancy Wood Mackenzie.
Unipec, trading arm of Asia’s largest refiner Sinopec , has already inked a first deal to import Middle East crude priced against the newly-launched Shanghai crude futures contract.
The world’s first yuan-denominated oil contracts launched Monday, as part of China’s drive to turn its currency into a global force in markets.
The history of international currency markets suggests that may be a difficult task, though not impossible if Beijing eases the capital controls that make it hard for foreigners to buy domestic assets, economists say.
Those capital controls and investors’ concerns over the opaqueness of Chinese government and central-bank policy mean that the yuan remains a minnow in international finance, despite China being the world’s largest exporter.
The dollar and euro are global currencies because central banks hold them in their reserves and they are used to buy services and goods both in and outside their home markets.
In launching new yuan-denominated crude-oil futures, Beijing hopes to create an oil benchmark to rival those in New York and London and challenge the dollar’s role as the dominant commodity-pricing currency by making it possible for crude exporters to sell oil in another currency.
Professor Barry Eichengreen of the University of California, Berkeley, who writes about the history of currencies in the international financial system, believes the dollar’s grip on oil pricing isn’t guaranteed.
“As financial markets continue to develop—as there are liquid markets in more currencies, and currency trading becomes cheaper—traditional arguments for why one currency should monopolize this function become even weaker than before,” Mr. Eichengreen said.
Still, “I don’t think the renminbi will displace the dollar from the global oil market anytime soon. Lack of liquidity and accessibility continue to limit its usage,” he added.
ne factor currently limiting the adoption of the yuan as a global currency is Beijing’s capital controls, which place limits on investment in China. Beijing keeps a tight grip of money coming in and out of the country to maintain control of the country’s economy and prevent sudden outflows of capital.
Currently, selling a yuan-denominated futures contract means investors must either exchange the currency back into dollars—partly defeating the purpose of the contract—or find assets denominated in the Chinese currency to invest in.
There is no shortage of Chinese assets. The IHS Markit iBoxx Asia China index, a broad index of Chinese bonds, has more than doubled in size in the past 4½ years, to more than $11 trillion.
Some of the government controls have already been loosened. In 2017, China launched a “bond-connect program” to allow global investors with trading accounts in Hong Kong to access China’s interbank bond market.
Just because more foreigners can now buy Chinese bonds, it doesn’t mean they will. Some investors say Beijing will have to open up its economy more for that to happen.
“Firstly, China will have to remove, or substantially reduce, capital controls for [yuan] priced oil trading to take off,” said Hayden Briscoe, head of fixed income Asia Pacific at UBS Asset Management.
h/t Digital mix guy