Sat, Dec 08, 2018 - Page 9 News List

‘Petroyuan’ aiding the international adoption of China’s currency

By John Mathews and Mark Selden

It has been 10 months since China launched its oil futures contract, denominated in yuan, on the Shanghai International Energy Exchange (INE). In spite of forebodings and shrill alarms, the oil markets continue to function, and China’s futures contracts have established themselves and overtaken in volume terms the US dollar-denominated oil futures traded in Singapore and Dubai.

Of course the volume of trades on the Shanghai INE still lags behind that of the Brent oil contracts traded in London and the West Texas Intermediate (WTI) oil futures traded in New York. However, the Chinese oil futures contract is being taken seriously by multinational commodity traders — such as Glencore — and is priced in a manner that is comparable to the Brent and WTI indices.

As we have argued in The Asia-Pacific Journal, these results suggest that China’s oil futures could bring the yuan to the core of global commodity markets.

The launch of the oil futures contract can be anticipated to widen the scope for yuan-denominated commodity trading. As more of China’s oil imports come to be priced in its domestic currency, foreign suppliers will have more yuan-denominated accounts with which they can purchase not only Chinese goods and services, but also Chinese government securities and bonds. This can be anticipated to strengthen Chinese capital markets and promote the yuan’s internationalization — or at least the progressive dedollarization of the oil market.

For the past decade, China’s strategy for internationalizing the yuan has involved greater reliance on the IMF’s Special Drawing Rights (SDR) as an alternative international reserve currency. Then-People’s Bank of China governor Zhou Xiaochuan (周小川) in 2009 spelled out the strategy in an essay.

With new allocations of SDRs to emerging industrial powers like China, the SDR, based on a basket of currencies including the yuan, could serve not only as a development tool, but also as a means of international payment to rival the US dollar. In the wake of the 2008 global financial crisis, an SDR-centered international financial system became an enticing prospect for other countries as well.

Zhou’s 2009 essay galvanized these efforts, as he pointed to the evident inadequacies of the US dollar-centered system (such as the impact of chronic US deficits) and outlined the SDR’s advantages as an alternative means of international financial settlement.

The establishment of yuan-based oil trading at a time when China and many other economies confront aggressive US tariffs, and possible further development of yuan-based trade in other commodity markets, suggests that the US dollar could face an unprecedented challenge to its hegemony. It might in the near future no longer be seen as the anchor of the international monetary system, bringing to an end what former French president Valery Giscard d’Estaing famously called the “exorbitant privilege” enjoyed by the US as a result of the dollar’s centrality in international trade.

If China’s ultimate goals include internationalizing the yuan, its more immediate objective, prompted in part by US tariffs or sanctions on China and other countries, is dedollarization of the international system. This is reflected in the shift to promoting an oil futures contract traded in Shanghai, which represents a decisive break with China’s SDR-focused strategy.

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