Renminbi refers to the currency and yuan is the basic unit but they are sometimes used interchangeably. The relation is like that of sterling and pound in U.K. currency. Renminbi is referred to in the appended video.
Changing the international currency game
Having an oil futures market in yuan should increase the demand for Chinese currency and the money may very well be recycled into the Chinese economy. Because of the dominance of the dollar the U.S. has been able to borrow money at low rates as its currency has been in demand. Petrodollars also often flow back into the U.S. economy creating economic growth. The U.S. dollar has also become a safe haven for many investors around the world.
In March of this year, China imported 9.17 million barrels of oil per day breaking its previous record of 8.57 million bpd. This was more than the U.S. imported for March and for the year, making China the top global oil importer. Given this record it makes sense to price oil in yuan.
China plans to launch oil futures contracts on the Shanghai International Energy Exchange. However China must convince major countries such as Saudi Arabia and Russia to participate in the exchange or the market will be not deep and liquid enough to make a difference and attract investors.
Another problem is that the yuan does not float freely but is itself fixed to the dollar and adjusted each day.
John Dricscoll, director of ITD Energy Services said: "My biggest reservations are the role of the Chinese central government, potential state intervention and favoritism toward Chinese companies."
However, China has been gradually loosening its grip on the yuan.
Gai Luft, of the Institute for the Analysis of Global Security said:
"Game changer it is not — at least not yet. But it is another indicator of the beginning of the glacial, and I emphasize the word glacial, decline of the dollar."
The beginning of the end for dollar dominance?
Other analysts see the decline of the dollar's domination happening quicker. Juerg Kiener of Swiss Asia Capital said that the use of the yuan in oil trading is well advanced with the launching of the Shanghai benchmark.
There have already been some transactions in yuan particularly with Iran which early-adopted yuan-based sales to avoid the U.S. Treasury Dept. Russia too agreed to some yuan-based transactions due to U.S. sanctions.
Venezuela has also begun to price its oil in Chinese yuan.
Some believe that the success of the Chinese benchmark project depends upon convincing a country such as Saudi Arabia to agree to yuan-based transactions. Saudi Arabia sells more than a million barrels a day to China. However Russia is the top supplier exporting 1.545 million bpd in September to China. Russia has been taking market share away from the Saudis. The Saudis may eventually be forced to trade in yuan if they do not want to lose even more market share to Russia.
There are also reports that Chinese state-owned oil companies are considering an outright purchase of five percent of Aramco the Saudi state-owned oil company. The Saudis are said to be considering the offer as an alternative to issuing an IPO.
Carl Weinberg of High Frequency Economics said: "I believe that yuan pricing of oil is coming and as soon as the Saudis move to accept it — as the Chinese will compel them to do — then the rest of the oil market will move along with them.” If the Saudis did this it could face the ire of the U.S. but if it does not do so it could lose the Chinese market.
Cryptocurrency vs real currency
The role of cryptocurrency in the decline of the dollar may become significant. The Kremlin has announced that it will create a new state-supported cryptoruble. However according to
Oil Price:.".the Kremlin announced that it will be creating a new state-endorsed cryptocurrency backed by gold. The goal of this coin is to allow free exchange between the cryptoruble and the ruble, and to reduce dependence on foreign currency while stimulating the domestic online economy."
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Kuwaiti finance firm suggested at a Gulf Cooperation Council(GCC) meeting that the GCC could benefit from trading oil for bitcoin. The firm claimed that that the GCC could save money with faster, cheaper, and more efficient transactions. Some also like the anonymous feature of transactions through bitcoin.
The dispute between Qatar and Saudi Arabia may also involve trading in yuan. Over the past two years,
Qatar has conducted more than $86 billion worth of transactions with China in yuan. Qatar also shares the world's largest gas field with Iran which allows the two countries to expand their own trade deals.
Economist
James Rickards explains why both China and Russia are interested in stocking up on precious metals:
“They are stuck with their dollars. They fear, rightly, that the U.S. will inflate its way out of its $19 trillion mountain of debt. China’s solution is to buy gold. If dollar inflation emerges, China’s Treasury holdings will devalue, but the dollar price of its gold will soar. A large gold reserve is a prudent diversification. Russia’s motives are geopolitical. Gold is the model 21st century weapon for financial wars.The US controls dollar payments systems and, with help from European allies, can eject adversaries from the international payments system called Swift. Gold is immune to such assaults. Physical gold in your custody cannot be hacked, erased, or frozen. Moving gold is a simple way for Russia to settle accounts without US interference.”
For now, movement away from the dollar appears gradual but in future the dollar appears likely to become less and less central and this will weaken the power of the United States in global finance.
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