In a move sure to threaten the dollar’s global reserve currency status, China plans by year end to allow foreign companies to trade in a yuan-backed oil futures contract with the option of being paid in physical gold.
As the world’s biggest oil importer, it’s no secret that countries such as China have been looking for ways to circumvent U.S sanctions as and limit excessive domination of the dollar.
And despite much of the media’s attention on the exploding growth of cryptocurrencies and their future impact on evading capital controls it looks by year end the next step in China’s quest to be a leading global power will come to fruition that will be a gamechanger immediately.
“It is a mechanism which is likely to appeal to oil produces that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either.”
China Setting New Rules of the Global Oil Game
China’s crude imports averaged close to 8 million barrels a day in 2016 and are currently bought on long term contracts between Chinese oil companies and foreign oil companies in U.S-backed futures that continue to give strength and priority to the dollar in the global commodities markets.
With its newest attempt to establish a viable oil pricing benchmark, many are excited but hesitant on what makes this time different when it comes to crude oil contracts. Although originally intended to be available two decades ago, a domestic crude contract backed in Yuan was released in 1993 but was shortly taken down after an overhaul of the energy industry close to a year later.
With the success of the Yuan-dominated gold futures contract that has been trading on the Shanghai Gold Exchange since April of 2016, as well as the active involvement of Chinese refineries to financial regulatory reforms, insiders boast that since there is a more diverse marketplace of participants a crude futures contract is more than likely to succeed.
To prepare for the transition, the Shanghai International Energy Exchange has started to train users and is carrying out internal tests as part of this new contract offering. They have even opened more than 6,000 trading accounts in preparation for high demand.
Downfall of the Dollar?
Although the Yuan based futures contracts has been in the works for years, it looks like by the end of this year it will finally become a reality.
And despite concerns as to how much gold China really has on hand the ability for another option for oil futures will be sure to add fuel to the discussion that the worlds reserve currency status is up for grabs and how China may just be the lead player who dictates the stability of the global financial system.
How do you think the United States will respond if countries such as China, Russia and Iran bypass U.S sanctions by trading oil in yuan?
Images via King World News, Wonderful Engineering