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"It's A Huge Story": China Launching "Petroyuan" In Two Months

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China plans to launch crude oil futures on March 26: securities regulator




BEIJING (Reuters) - China plans to launch its long-awaited crude oil futures contract on March 26, the country’s securities regulator said on Friday, a move that could potentially shake up pricing of the world’s largest commodity market.


Chang Depeng, a spokesman for the China Securities Regulatory Commission (CSRC), gave the launch date at a regular briefing in Beijing, confirming what two sources familiar with the situation told Reuters earlier on Friday.

The launch will mark the culmination of a years-long push by China to create Asia’s first oil futures benchmark, and is aimed at giving the world’s biggest oil importer more clout in pricing crude sold to Asia.

It will potentially give the Shanghai International Energy Exchange (INE), which will operate the new contract, a share of the trillions of dollars each year in oil futures trading.

The Shanghai Futures Exchange (ShFE) and INE, which is part of the ShFE, declined to comment.

Asia has become the world’s biggest oil consuming region, and China hopes its own derivative crude contract will better reflect market conditions in the region.

The two most active oil futures contracts in the world are the West Texas Intermediate (WTI) CLc1 contract offered by the New York Mercantile Exchange (NYMEX), owned by CME Group (CME.O), and the Brent LCOc1 contract offered by the Intercontinental Exchange (ICE.N) from London.

WTI futures are an important component of physical oil prices in the Americas, while Brent plays a vital role for prices for Middle Eastern, European and Asian crude.

Most physical oil trades globally are hedged using those two crude derivatives.


The creation of the yuan-denominated contract, which will be open to Chinese and overseas investors, was originally expected about six years ago, but has run into delays as turmoil in China’s stock markets and other commodity futures raised concerns about its capacity to handle financial turbulence.

The proposal was put on the backburner early last year. Potential international participants worried they would not be able to freely exchange the yuan because of a Chinese clampdown on capital outflows, and were concerned at Beijing’s heavy handed intervention in its commodity markets.

John Browning, chief operating officer of Hong Kong-based futures broker Bands Financial Ltd, which has been approved by the CSRC as an overseas intermediary for the INE, said international participation in the contract was crucial to ensure INE pricing truly reflects global trade flows.

“The principal driver for the choice of this contract is to enable China to develop its own benchmark for oil pricing while increasing the trade of renminbi-denominated oil,” Browning said in a statement, using another name for the Chinese currency.

But while the contract will be quoted in yuan, “the exchange will accept USD as collateral for initial margin,” opening the way for participation by non-Chinese companies, he added.

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Petro yuan

  • And war economics

China in preparing to launch yuan-denominated oils futures contracts. According to some news agencies it may be allowing yuan-based oil contracts in Shanghai Stock Exchange as early as March this year. The move has consequences going far beyond the economic domain. Hitherto, the US dollar has had the monopoly over oil contracts as it enjoyed the status of the only currency in which major oil contracts could be made. This meant that US could get away by having a 20 thousand billion dollars budget deficit as it could print the dollars backed by “black gold”. What does it mean to challenge America by competing against the ultimate economic tool, the petro-dollar?

As the prospect of petro-yuan becomes a reality, China will, in effect, be making a claim to global oil reserves. That would definitely be against American interests as the “black gold” has been practically backing the US dollar as well as humungous US debt. Globally, if you needed oil you definitely needed to have dollar reserves. These dollar reserves could never be materialised unless goods and services made it to American economy or in some cases through expats sending foreign exchange to their home nations. Most global dollar reserves depend on export from dollar starved nations to American consumers. These reserves would always land back in American economy through the banking system. Again, the same dollar would have to be competed for globally by offering goods and services to American consumer as the world is in perpetual need of oil for most of its energy needs. That means that all the economies have to be constantly running for dollar while the US could print at ease in the name of national and foreign debt.

China sits in a comfortable position as it owns almost 1,200 billion dollars of American debt. It, therefore, does not have to fret about launching the petro-yuan, as, at-least in its initial stages, practically the petro-yuan will itself be backed by the American debt owned by China. On the other hand, Russia has been ever more willing to back the idea of global trade independent of the dollar. Also, the initiative of BRICS alliance already targeted the dollar-heavy world of trade and economics. While Russia and China have stepped up their alliance to a level where the Russian ruble is an acceptable tender at many places in China, many other countries sitting on oil reserves are naturally averse of petro-dollar. Among these nations Iran and Venezuela are those who have to constantly battle sanctions hurled at them from the cross-Atlantic “moral” police. These sanctions limit the trade potential of these oil rich nations. As a result these countries face constant currency depreciation while an America whose extravagance far exceeds its inland oil output and depends on global oil reserves for its huge debt has got its currency-power dictating sanctions on these countries. Both Iran and Venezuela could have a great economic outlook had it not been for the petro-dollar and the power of hindering other nations’ claim to their own resources it has bestowed upon US. While Iran and Venezuela don’t enjoy the independence to live within their own “means”, America reserves the right to live beyond its while putting the burden of its lavish spending on global economy courtesy petro-dollar.

To delay or halt its economic death, America has every reason to trigger a war in Syria, for example, whose oil industry was well penetrated by Russia before American backed militants stepped in to essentially protect the American lust for oil

Therefore, Iran and Venezuela shall be happy participants in petro-yuan’s success and shall also have an opportunity to avoid the oppressive sanctions they are subjected to banning on them their own natural wealth. Would this practically mean putting a stop to American economic tyranny? Has the petro-dollar been potentially checkmated? We are far from that I believe. If the dragon is “sanctioned” from the tool that has propped up its belly, at the expense of others’ appetite, it may leash out brute force against the competition. Since petro-dollar is not a moral tool in global economic competition, we don’t expect it to be defended and protected in a moral way. To delay or halt its economic death, America has every reason to trigger a war in Syria, for example, whose oil industry was well penetrated by Russia before American backed militants stepped in to essentially protect the American lust for oil. This western agenda has been pushed so explicitly that while Bashar-al-Assad had to face the European Union import ban on oil and petroleum products in September 2011, in April 2013 the same European Union would decide that member states could support the Syrian opposition by buying oil from militant controlled areas; Hence, the birth of petro-terrorists to protect the petro-dollar. If that is the depth of immorality that Europe and America can go to protect their oppressive economic hold on the world it would take more than petro-yuan to thwart their malicious agenda. When it comes to the “black gold”, western bloc will be ready to engage any power by attacking its global interests be it through a false flag operation through ISIS and a “reaction” thereafter, or by pushing North-Korea or Syria against the wall.


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Fight for global oil market

Oil Pipes

 Oil Pipes In 2010, China used to import a little less than 4 million barrels of crude oil a day which is now touching over 9.5 million barrels per day , Reuters





Updated: Feb 25, 2018, 08:05 AM IST

Till 1974, the reputation of United States Dollar as a global currency was not so established. It was considered at par with Japanese Yen and Pound Sterling. However, an oil pact between Saudi Arabia and the US changed the entire scenario and made US Dollar the most dominating world currency as on date.

Today, out of over 700 billion Dollar of global oil trade, more than 95 per cent happens in US Dollar and every country desirous of buying oil from its producers, such as ex-Russian Federation countries, Middle East or Latin America must first accumulate its dollars. 

China has strong reasons to start this initiative as they import over 18 per cent of the world oil and, in the last one decade itself, their crude oil requirements have risen by more than 235 per cent. In 2010, China used to import little less than 4 million barrels of crude oil a day which is now touching over 9.5 million barrels per day, currently the highest in the world. This trend is likely to continue as China is primarily a manufacturing-based economy and crude oil is an essential item for them.

As per recent reports, China is planning to cover its future oil contracts under “Shanghai International Energy Exchange Program” and going to launch it on March 26, 2018. The “Shanghai International Energy Exchange Program” is named by its acronym INE and will include seven kinds of global crude oils. These are primarily from the Middle East and almost all Chinese companies are expected to use INE for their purchase of oil from that region. 

It will help Chinese buyers to lock the future oil prices and pay in their local currency, giving an answer to Uncle Sam by pitching of Petro-Yuan against Petro-Dollar. The most important part of the Chinese strategy is that they have located this “Shanghai International Energy Exchange Program” in their Free Trade Zone which will facilitate foreign traders also to invest. 

It did not come suddenly but China had been preparing for it for long. Recently, some of the global economies decided to keep Chinese Yuan in their foreign currency stockpile after IMF decided to designate Chinese Yuan as a global currency in 2015. The main agencies which are keeping Renminbi as forex reserve are Deutsche Bundesbank, the German Central Bank, European Central Bank (ECB) and International Monetary Fund (IMF) too. And recently our neighbour Pakistan also decided to make Yuan as a primary Foreign currency. But China has a long way to go. Currently, the share of Renminbi in the global forex reserves is just 1.08 per cent with US Dollar dominating at 63.5 per cent of all reserves. Euro is next with 20 per cent.

So, what is the Chinese stake in this? They have a long and ambitious plan for this. Let’s see how China expects to be benefitted out of this:

Firstly, to dominate global oil market, China would promote its currency in global oil trade. Secondly, since it will involve future price trading and benchmarking, it will protect them from higher price surges and they will be able to affect global oil prices in the long term. As oil prices are rising once again, the biggest importer of oil will have the future assurance of prices. 

Thirdly, many Chinese industries are using a different kind of crude grades for their various applications. And, since, they are having different pricing for these types of crudes they can effectively benchmark the same in the international market and, hence, get benefitted.

China was ready to launch their INE or “Shanghai International Energy Exchange Program” in 2016 itself but the sudden dip in global oil prices forced them to postpone this move and wait for a right opportunity. With the improvement in global oil index, they are ready to start it. 

So, who will participate in this programme and make it a success? 

  • As mentioned earlier, China already has a sizeable share of global trade, including that with the oil-producing nations. China will try to replicate some of it in its energy exchange.   
  • Also, there are many countries like Pakistan who do import oil and are under the influence of China. They will certainly form part of the future trade in INE. Though the value will be small, it will give a push to the program.   
  • Chinese ‘Belt and Road Initiative” is aimed at connecting countries to create a Eurasian Trade corridor. Some of these countries, especially erstwhile Russian Federation, are producers and exporters of crude too. They are likely to join INE to form a syndicate against the global monopoly of US Dollar. Russia has already started by selling some part of its oil to China against Renminbi.   
  • For Middle Eastern countries who are still the biggest producers of oil, the risks caused by the dominance of United States will reduce. This resulted in the fall of global oil prices in the last few years.   
  • Global oil traders see China as the fastest growing market for their oil products. 

The global oil market is controlled by the Middle Eastern countries and their reliance on the United States are much higher than China. Since the number of countries is small, the risks involving the prices are high and, last but not the least, breaking the monopoly of US Dollar is extremely difficult, especially where such unpredictable commodity is involved.

The author is a veteran from an elite unit of Armed Forces, having keen interest in defence, internal security, strategy and international relations

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How China Is About to Shake Up the Oil Futures Market

Sungwoo Park
March 7, 2018, 7:10 PM CST


China, the world’s biggest oil buyer, is opening a domestic market to trade futures contracts. It’s been planning one for years, only to encounter delays. 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. There are implications for the U.S. dollar’s well-established role as the global currency of the oil market.


1. When will trading begin?

From March 26. Daytime trading hours will be from 9 a.m. to 11:30 a.m. and 1:30 p.m. to 3 p.m. local time and at night from 9 p.m. through 2:30 a.m. The push for oil futures gained impetus in 2017 when China surpassed the U.S. as the world’s biggest crude importer. The Asian nation’s purchases reached a record high last month. Seven grades will be deliverable, including Dubai crude, Oman crude, Basrah light oil and China’s Shengli oil. The contracts will have 36 delivery months with the first 12 months as rolling contracts.


Top Oil Buyer

China surpasses U.S. as world's biggest crude importer

Sources: China's General Administration of Customs, U.S. EIA


2. Why is this important for China?

Futures trading would wrest some control over pricing from the main international benchmarks, which are based on dollars. Denominating oil contracts in yuan would promote the use of China’s currency in global trade, one of the country’s key long-term goals. And China would benefit from having a benchmark that reflects the grades of oil that are mostly consumed by local refineries and differ from those underpinning Western contracts.


3. How do oil futures work?

Futures contracts fix prices today for delivery at a later date. Consumers use them to protect against higher prices down the line; speculators use them to bet on where prices are headed. In 2017, oil futures contracts in New York and London outstripped physical trading by a factor of 23. Crude oil is among the most actively traded commodities, with two key benchmarks: West Texas Intermediate, or WTI, which trades on the New York Mercantile Exchange, and Brent crude, which trades on ICE Futures Europe in London.


4. Why didn’t China begin trading futures until now?

Lower crude prices have played a part. Chinese oil futures were proposed in 2012 following spikes above $100 a barrel, but prices in 2017 have averaged little more than $50. There’s also concern over volatility. China introduced domestic crude futures in 1993, only to stop a year later because of volatility. In recent years, it repeatedly delayed its new contract amid turmoil in equities and financial markets. Such destabilizing moves have often prompted China’ government to intervene in markets in one way or another.

5. What’s China’s track record in commodities?

Nickel was the last major commodity to be listed there in 2015; within six weeks, trading in Shanghai surpassed benchmark futures on the London Metal Exchange, or LME. In China, speculators play a far greater role, boosting trading volumes but making markets susceptible to volatility. In early 2016, the then-head of the LME said it was possible some Chinese traders did not even know what they were trading as investors piled into everything from steel reinforcement bars to iron ore. Steep price rises relented when China intervened with tighter trading rules, higher fees and shorter trading hours.

6. Will foreigners buy Chinese oil futures?

That remains to be seen. Overseas oil producers and traders would need to swallow not just China’s penchant for occasional market interventions but also its capital controls. Restrictions on moving money in and out of the country have been tightened in the past two years after a shock devaluation of the yuan in 2015 prompted a surge in money leaving the mainland. Similar hurdles have kept foreign investors as bit players in China’s giant stock and bond markets. In another shift in for commodities markets, China recently approved a plan to allow overseas investors to trade directly in mainland iron ore contracts.

7. Could the yuan challenge the dollar’s dominance in oil?


Not any time soon, since paying for oil in dollars is an entrenched practice, according to some analysts. Shady Shaher, head of macro strategy at Dubai-based lender Emirates NBD PJSC, says it makes sense in the long run to look at transactions in yuan because China is a key market, but it will take years. Bloomberg Gadfly columnist David Fickling argues that China doesn’t have “nearly the influence in the oil market needed to carry out such a coup.” On the other hand, paying in yuan for oil could become part of President Xi Jinping’s “One Belt, One Road” initiative to develop ties across Eurasia, including the Middle East. Chinese participation in Saudi Aramco’s planned initial public offering could help sway Saudi opinion toward accepting yuan, which is used in only about 2 percent of global payments.

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China expects yuan to play greater global role

Published: March 11, 2018
Has inked currency swap agreements with over 30 countries and regions since late 2008 PHOTO: REUTERS

Has inked currency swap agreements with over 30 countries and regions since late 2008 PHOTO: REUTERS

BEIJING: As China plans to further open up its market and promote free global trade and investment, its currency yuan is expected to play a greater global role.

“The drive will make further progress after China gradually makes its capital account convertible and ease other restrictions,” central bank Governor Zhou Xiaochuan told a press conference on the sidelines of the first session of the 13th National People’s Congress.

Chinese yuan’s globalisation journey generally started from piloting renminbi settlement in cross-border trade in 2009 and picked up pace in 2016 when the International Monetary Fund included yuan in the basket of currencies that make up Special Drawing Rights, an alternative reserve asset to the dollar.

China has inked bilateral currency swap agreements with over 30 countries and regions since late 2008 to facilitate cross-border trade and investment.

The internationalisation of yuan had slowed down amid depreciation pressure since August 2015, when the People’s Bank of China (PBOC) reformed the yuan’s mid-point rate determination mechanism, but the momentum picked up in 2017 with a stronger-than-expected yuan.

Data from international financial transaction agency SWIFT showed that about 1.66% of global payments processed in January were denominated in yuan, edging up slightly from the previous month but still lower than a record high of over 2%.

In January, Pakistan’s central bank adopted the yuan as a currency for trade with China. Central banks in European countries including France and Germany are including the yuan in their forex reserve mix.

Published in The Express Tribune, March 11th, 2018.

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The Future of China's Yuan vs. the U.S. Dollar;

The expectations of a weaker yuan against the dollar have been replaced by expectations of a revaluation. So, what happens next?

    Mar 11, 2018 4:30 AM  PT
author: Karen Liu   

The central parity rate of the Chinese yuan (RMB) has appreciated around 10 percent against the U.S. dollar, from 6.95 to 6.34, since the start of 2017. In turn, it seems the expectations of a weaker renminbi against the dollar have been replaced overnight by expectations of a revaluation.

So, what is the reason behind the sudden appreciation of the RMB exchange rate? And where will the future RMB exchange rate go?


(Source: XE Exchange Rates)


One reason for the strength of the yuan against the dollar, obviously, is the greenback's weakness.

The dollar index, a gauge that measures the U.S. currency's strength against six other major currencies, has declined more than 5 percent since last December. The index will more likely continue the losing streak as macroeconomic and policy factors are expected to restrain the strength of the U.S. dollar, ICBC International economist Cheng Shi said in a report.

Another reason for the yuan's appreciation, more importantly, comes from the sequential reforms of the central parity price mechanism of RMB. After the so-called "8/11 currency reform" launched on August 11, 2015, China adopted the "the managed floating" exchange rate regime characterized by its "peg to a currency basket" and "reference to the previous day's closing price."

In detail, the former means, for example, if the RMB is pegged to the basket of currencies consisting of 1 unit of the U.S. dollar and 6 units of Japanese yen, then because of changes in the U.S. dollar/Japanese yen exchange rate, which is out of China's controls, China has to change the U.S. dollar/Chinese yuan exchange rate correspondingly.

While the latter means, for example, if today's closing price falls, tomorrow's central parity rate would be set lower. Hence, the official exchange rate, which is set by the People's Bank of China (PBOC), would move in line with the changes in supply and demand in the foreign exchange market with very strong pro-cyclicality, which indicates an important step towards a floating exchange rate.

These two factors usually "restrict" with each other to cause an "inertial" decline in the RMB exchange rate, which is always in a downtrend, regardless whether the U.S. dollar rises or falls. Because of this, we have the continued depreciation after the 8/11 reform.

Limitations of Flexibility

As Zhang Ming, researcher at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences, believed, the RMB exchange rate still lacks sufficient flexibility.

To fix the limitation of this pricing mechanism, the PBOC last May deepened the reform and introduced a third factor, known as the counter-cyclical factor, into the exchange rate formation mechanism. This new factor weakens the significance of the daily closing price against the dollar in the central parity calculation by hedging against the sustained depreciation pressure.

Correcting the "pro-cyclical" trend makes the currency more market-oriented and helps stabilize expectations. It's observed that more than 80 percent of the yuan's appreciation last year occurred after the introduction of the counter-cyclical factor. That is the main reason for the rapid appreciation of the RMB in 2017.

The aforementioned reforms on pricing mechanism are important in explaining the fluctuation of the yuan against the dollar in recent years, but the mechanism itself is just a price regulation tool with the aim of showing the "true" market-oriented exchange rate as much as possible.

Theoretically, the "true" exchange rate should be determined by economic fundamentals and should reflect the market supply and demand. When China's GDP expanded 6.9 percent last year, picking up for the first time in seven years and well above the government's annual target of around 6.5 percent, global investors became more optimistic about China's economic outlook and the appreciation expectation was strengthened. As a result, higher demand for the Chinese yuan pushed up the central parity rate of RMB.

Points to Consider

Looking into the future, with expectations of further reforms to support a more flexible exchange rate, we still have to consider the following situations in predicting the "true" exchange rate:

1. Balance of payments. When the income is larger than the expenditure (i.e., a surplus), the demand for the currency of the country exceeds its supply, and the exchange rate will rise. Conversely, when a scenario of deficit occurs, the exchange rate will fall.

2. Inflation. Inflation will inevitably lead to the devaluation of the currency, causing the fluctuation of exchange rate.

3. Interest rate. The country-specific interest rate level can directly affect the short-term capital flow across countries and affect the exchange rate.

4. Market expectations. Investors' (irrational) expectations about a country's economic situation, balance of payments, inflation, and interest rate prospects will cause the country's currency to be bought or sold in large quantities, driving the exchange rate to fluctuate.

5. Macroeconomic policies. Macroeconomic policies of a country, especially fiscal and financial policies, have a greater impact on exchange rates.

6. Intervention by monetary authorities.

Based on the viewpoint of fundamentals, during the year, the RMB may still have room for appreciation against the U.S. dollar because of a more optimistic expectation about China's economic outlook.

But in the long run, China's economy is facing many challenges, such as high debt levels and fast debt growth, industrial overcapacity, an imbalanced real estate market. Sustained appreciation of the yuan might not occur, but fluctuations would be normal given uncertainties in China's economic situation and in global economic situations as well.

As Guotai Junan Securities pointed out from a trend point of view, "we think the RMB exchange rate against the US dollar may be 6.4-6.6, the US dollar index is likely to fluctuate in the 90-92 range, the volatility may be longer."

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