PetroDollar vs. PetroYuan

Beijing launched a “crude oil futures contract” denominated in the “Chinese yuan” on March 26, in a move that could significantly enfeeble the international influence of the United States dollar.

The contract lets foreign investors buy and sell crude oil on the Shanghai International Exchange with yuan rather than dollars. Reuters said it “kicked off to a roaring start,” with 15.4 million barrels of crude changing hands in the 2½ hours of the first day of trading.

“This could be a death blow for an already weakening U.S. dollar, and the rise of the yuan as the dominant world currency,” economics blog ZeroHedge wrote of the launch.

Since the 1970s, global oil trade has been conducted almost entirely in U.S. dollars, also known as “petrodollars.” The petrodollar system boosts global demand for U.S. dollars, increases international demand for American debt securities, and allows Washington to purchase oil with money it can print at will. Continual conversion of petrodollars into U.S. Treasuries has helped fuel America’s immense deficit spending.

Since China overtook the U.S. last year to become the world’s number one importer of crude oil, Beijing may now be positioned to topple the petrodollar with a “petroyuan.”

Oil-exporting nations remain concerned about the viability of the Chinese currency in the international arena. The concerns center on the fact that the Chinese government routinely interferes with the machinations of local commodity markets. And the nation is not a market economy.

But for some major oil exporters, the desire to end the era of American dominance may override these concerns.

Since 2015, Russia and Iran have both taken steps away from the dollar and toward the yuan. Last September, Venezuela signaled its willingness to abandon the dollar by publishing some prices for its oil in yuan. And in January, Pakistan approved use of the yuan for bilateral trade.

But China is unlikely to topple the petrodollar without participation from the world’s largest oil exporter, Saudi Arabia. Procuring that participation is high on Beijing’s priority list.

“China is now trying to persuade Saudi Arabia to start accepting the yuan for its crude oil,” wrote international oil economist Mamdouh Salameh.

This attempt was most evident in March 2017 when Saudi King Salman bin Abdulaziz traveled to Beijing and reports emerged saying China could become the primary investor in the forthcoming initial public offering of Aramco, Saudi Arabia’s state-owned oil company. At an estimated $2 trillion, Aramco would be the world’s highest-valued firm, and China looks set to buy a substantial share of it.

If China buys the share and is able to use its unmatched purchasing power to persuade Saudi Arabia to accept yuan for crude purchases, the global shift toward the yuan would accelerate.

“If the Chinese succeed, other oil exporters could follow suit,” Salameh wrote. “For Saudi Arabia, it will find itself between a rock and a hard place—lose the Chinese oil market or spark the ire of Washington.”

Less than a year after China launched an oil futures contract denominated in the Chinese currency, the contract is beginning to be embraced by global commodities traders. The Chinese Communist Party has long desired to see the United States dollar sidelined and the Chinese currency, the yuan, take on a more central role in global finance.

Trading volumes for the new Chinese oil futures contract have already surpassed contracts traded in Tokyo, in Singapore, and those of the Dubai Mercantile Exchange, making it the world’s third-most popular benchmark.

“The Shanghai contract has become an unexpected thorn in the side of the main Western benchmarks,” said Stephen Innes, chief of Asia-Pacific trading at futures brokerage Oanda in an October 17 interview with the Nikkei Asian Review The pace of expansion has been explosive.”

Due to the success, “China will now pursue de-dollarization head-on,” wrote Project Syndicate on December 3. “As more of China’s oil imports come to be priced in its domestic currency, foreign suppliers will have more renminbi-denominated accounts with which they can purchase not only Chinese goods and services, but also Chinese government securities and bonds.” China’s capital markets are likely to be strengthened by the measure, the article stated, and this trend will “promote the renminbi’s internationalization—or at least the progressive de-dollarization of the oil market.” (Renminbi refers to China’s currency, the primary unit of which is the yuan.)

Meanwhile, Charles Gave, chairman of Hong Kong-based Gavekal Research, told the Nikkei Asian Review, “The likelihood is that in the fairly near future China will seek to stop paying for its oil in U.S. dollars.”

Since the 1970s, international oil trade has been conducted overwhelmingly in U.S. dollars, sometimes referred to as “petrodollars.” This system increases worldwide demand for U.S. dollars and American debt securities, and it also allows the U.S. to buy oil with funds it can print at will. Decades of converting petrodollars into U.S. Treasuries has helped fuel America’s reckless deficit spending.

The Chinese have long sought to replace the petrodollar with a “petroyuan.” Now its yuan-denominated oil futures contract is being embraced by more global commodity traders. “If the dollar is devalued, inflation will almost surely result—and eventual economic collapse for the United States.”

The final result could be a death blow to the U.S. dollar and the American economy.

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