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Wolf Richter with Jim Goddard on This Week in Money:
China latest effort to get its currency to be used globally is the “petro-yuan.” Is it a credible challenge to the supremacy of the US dollar? If China dumped US Treasuries, what would that accomplish? And more…
Central banks around the world seem leery about the Chinese yuan. Read… What Could Dethrone the Dollar as Top Reserve Currency?
Just days after China’s (denied) threat to slow/stop buying US Treasuries, and just days before the launch of China’s petro-yuan futures contract, Germany’s central bank confirmed it would include China’s Renminbi in its reserves.
The FT reports that Andreas Dombret, a member of Deutsche Bundesbank’s executive board, said at the Asian Financial Forum in Hong Kong on Monday that the central bank had “decided to include the RMB in our currency reserves”.
He said: “The RMB is used increasingly as part of central banks’ foreign exchange reserves; for example, the European Central Bank included the RMB [as a reserve currency].”
The Bundesbank’s six-member board took the decision to invest in renminbi assets in mid-2017, but it was not publicly announced at the time. No investments have been made yet; preparations for purchases are still ongoing.
The inclusion in the German central bank’s reserves basket underscored China’s increasing prominence in the global financial landscape, and reflected policies aimed at making the currency more freely tradable internationally.
Mr Dombret said:
“The notable development from the European point of view over the past few years has been the growing international role of the RMB in global financial markets.”
The offshore Yuan strengthened on the news overnight – pushing to its strongest in over 2 years…
And as Les Echoes reports, while the Bundesbank wants to integrate the yuan into its foreign exchange reserves, the Banque de France is already using it as a currency of diversification.
The Banque de France has raised a corner of the veil on its strategy of managing foreign exchange reserves.
“The foreign currency holdings remain overwhelmingly invested in US dollars, with diversification to a limited number of international currencies such as the Chinese renminbi.“
Which currency would you rather hold as a stable reserve?
…click on the above link to read the rest of the article…
In a few days, U.S. President Trump may try to re-impose sanctions on Iran, a dramatic step that could heighten tensions between the two countries. Some analysts believe the move could contribute to a much broader global economic power shift from the U.S. to China.
The connection between the issues may not be obvious at first glance, but by seeking to isolate Iran from the international market, Iran could look elsewhere. Because the global oil trade is conducted in greenbacks, the U.S Treasury was able to restrict Iran’s ability to access the global financial system in the past. That made it extremely difficult for Iran to sell its oil prior to the thaw in relations in 2015, which kept millions of barrels of daily oil production on the sidelines.
This time around, however, the U.S. will likely go it alone. The Trump administration won’t have the backing of the international community in its campaign to resurrect sanctions against Iran, which will make isolation much more difficult. A few months ago, Goldman Sachs predicted that unilateral sanctions from the U.S. could affect a few hundred thousand barrels per day from Iran, but without help from the rest of the world, the effort would not curtail nearly the same amount of oil as the last time around.
Moreover, some analysts argue that the Washington crackdown could merely push Iran to begin selling oil under contracts denominated in yuan rather than dollars.
“Potential consequent reactivation of sanctions may cause Iran to export oil using the Chinese Yuan denominated contract, which launches on 18 January,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement. “This may spark a move away from the present long-established U.S. Dollar (USD) denominated oil trading regime.”
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The “huge story”,as Graticule’s Adam Levinson called it, will, it appears, be a “wake up call” for the West that seems to happily be ignoring this potential bombshell that is China’s looming launch of domestic oil futures trading.
Additionally, Levison warns Washington that besides serving as a hedging tool for Chinese companies, the contract will aid a broader Chinese government agenda of increasing the use of the yuan in trade settlement… and thus the acceleration of de-dollarization and the rise of the Petro-Yuan.
“I don’t think there’s any doubt we’re going to see use of the renminbi in reserves go up substantially”
China has been planning this for a number of years and given rising tensions, now seems like a good time for China to flex a little.
The Shanghai International Energy Exchange, a unit of Shanghai Futures Exchange, will be known by the acronym INE and will allow Chinese buyers to lock in oil prices and pay in local currency. Also, foreign traders will be allowed to invest — a first for China’s commodities markets — because the exchange is registered in Shanghai’s free trade zone. Even Bloomberg admits there are implications for the U.S. dollar’s well-established role as the global currency of the oil market, as Sungwoo Park sums up some of the key questions…
1. When will trading begin?
According to the Shanghai-based news portal Jiemian, which cited an unidentified person from a futures company, trading is expected to start Jan. 18. Multiple rounds of testing have been carried out and all listing requirements met. The State Council, China’s cabinet, was said to have given its approval in December, one of the final regulatory hurdles. The push for oil futures gained impetus in 2017 when China surpassed the U.S. as the world’s biggest crude importer.
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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.
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Amid all the chatter of Venezuela and Russia potentially creating oil-backed cryptocurrencies, the “huge news” of China’s launch of the Petro-Yuan has fallen off the front page… until now.
This week saw the Shanghai Futures Exchange complete its fifth yuan-back oil futures contract trading drill successfully…
As Bloomberg reports, 149 members of Shanghai International Energy Exchange traded 647,930 lots in the drill with total value of 268.2b yuan, according to a statement from the exchange, which added that the system basically met the listing requirements of crude futures after the drill.
While this was a success, it’s not all plain-saling…
As Bloomberg notes, as the world’s largest energy consumer and an increasing source of investment capital for oil-producing nations, China has an interest in using its own currency rather than that of a geopolitical competitor.
One hurdle for setting up a rival to Brent or West Texas Intermediate: Overseas oil producers and traders would need to swallow China’s capital controls and penchant for occasional market interventions.
Similar hurdles have kept foreign investors as bit players in China’s giant mainland stock and bond markets, and the share of payments in Yuan in the Global SWIFT system has fallen…
“This contract has the potential to greatly help China’s push for yuan internationalization,” said Yao Wei, chief China economist at Societe Generale SA in Paris.“But its success will hinge critically on the degree of freedom allowed for the capital flows related to the contract,” she said.
“It is not unreasonable to envision a world in which the overwhelming share of commodity contracts, especially for oil, are no longer denominated just in dollars,” said Eswar Prasad, a former China division chief at the IMF.
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