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The geo strategic significance of the ‘Petro-Yuan’

The geo strategic significance of the ‘Petro-Yuan’
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Image: Shan Hu Zuo crude oil tanker courtesy FleetMon.com

By Charles F Moreira, Editor

China, the world’s largest energy importer is expected to launch a crude oil futures contract priced in Yuan by the end of 2017.

According to figures from energy research and consultancy firm Wood Mackenzie, China altogether imported 212.4 million tons of crude oil in January through June 2017. 14% up on the corresponding  six month period in 2016.

By country, China imported 29.2 million tons from Russia in the first half of 2017, 27.1 million tons from Angola, 26.5 million tons from Saudi Arabia, 17.8 million tons from Iraq, 17.0 million tons from Oman, 14.5 million tons from Iran, 12.4 million tons from Brazil, 11.3 million tons from Venezuela, 8.0 million tons from Kuwait, 6.2 million tons from the United Arab Emirates and 42.0 million tons from other countries.

This will be China’s first commodities futures contract open to foreign companies such as investment funds, trading houses and petroleum companies.

According to Nikkei Asian Review, most of China’s crude imports, which averaged around 7.6 million barrels a day in 2016, are bought on long-term contracts between China’s major oil companies and foreign national oil companies. Deals also take place between Chinese majors and independent Chinese refiners, and between foreign oil majors and global trading companies.

As an incentive to encourage oil trade in Yuan, this “petro-yuan” will also be convertible into gold on exchanges in Shanghai and Hong Kong.

This move also lets oil exporters such as Russia, Iran or Venezuela to circumvent U.S. sanctions by trading oil in Yuan.

On 2 August 2017, The White House, Office of the Press Secretary published a statement by President Donald Trump on his signing of the “Countering America’s Adversaries Through Sanctions Act”

“Today, I signed into law the “Countering America’s Adversaries Through Sanctions Act,” which enacts new sanctions on Iran, North Korea, and Russia.  I favour tough measures to punish and deter bad behaviour by the rogue regimes in Tehran and Pyongyang.  I also support making clear that America will not tolerate interference in our democratic process, and that we will side with our allies and friends against Russian subversion and destabilization”, said President Trump.

“That is why, since taking office, I have enacted tough new sanctions on Iran and North Korea, and shored up existing sanctions on Russia”.

However, Trump’s appears to have signed this act rather reluctantly.

“Since this bill was first introduced, I have expressed my concerns to Congress about the many ways it improperly encroaches on Executive power, disadvantages American companies, and hurts the interests of our European allies”, Trump added.

Meanwhile, this contract will allow China’s trading partners to either pay with gold of to convert Yuan into gold without having to keep money in Chinese assets or convert them into U.S. dollars.

The Shanghai International Energy Exchange had begun to train potential users and had conducted systems tests following substantial preparations in June and July.

 

“Petro-Yuan” versus the “Petrodollar”

Several industry analysts and geo-strategic commentators regard China’s move towards what they sometimes refer to as the “petro-yuan” to be the most important Asia-based crude oil benchmark which will challenge the current global practice whereby crude oil is usually priced in relation to the West Texas Intermediate or Brent Crude oil futures markets, both of which are denominated in U.S. dollars, or what has been dubbed as “petrodollars”.

Following U.S. president Richard Nixon taking the U.S. dollar off the gold standard in early 1970 thus making it no longer convertible to gold, Nixon’s national security advisor Henry Kissinger negotiated an agreement with Saudi Arabia that all oil would be traded in U.S. dollars, hence the so-called “petrodollar”.

“Petrodollar” payments were later adopted by all other Organisation of Petroleum Exporting Countries (OPEC) member countries and by other oil producing countries as well.

According to Bloomberg, Adam Levinson, head of Graticule Asset Management Asia regards the “petro-yuan” as a “wake up call” for investors who haven’t paid attention to the China’s plans.

Levison also said that new contract would be able to serve as a hedging tool for Chinese corporations and also support the government’s broader plans to extend the use of the national currency in trade settlement.

He also believes that Chinese companies may also grow into anchor investors in Saudi Arabia’s initial public offering of its national oil giant, Saudi Aramco.

Meanwhile, Nikkei Asian Review of 1 September 2017 quoted Luke Gromen, founder of U.S.-based macroeconomic research company FFTT as saying that this move by China may see the rules of the global oil game begin to change enormously.

According to Nikkei, Alan Bannister, Asia director of S&P Global Platts, an energy information provider, said that the active involvement of Chinese independent refiners over the last few years has created a more diverse marketplace of participants domestically in China, creating an environment in which a crude futures contract is more likely to succeed.

China has long wanted to reduce the dominance of the U.S. dollar in the commodities markets and Yuan-denominated gold futures have been traded on the Shanghai Gold Exchange since April 2016, and the exchange is planning to launch the product in Budapest before the end of 2017.

Yuan-denominated gold contracts were also launched in Hong Kong in July 2017, after two unsuccessful earlier attempts, as China seeks to internationalise its currency. The contracts have been moderately successful.

However, some analysts are sceptical of China’s ambitious plan to create its own benchmark.

For instance, CNBC quoted Gal Luft, co-director of the Institute for the Analysis of Global Security as saying that this move by China will not be a game changer, well at least not yet, but it is another indicator of the beginning of “the glacial” (very gradual) decline of the U.S. dollar.

In an interview with Russia Today published on 15 September 2017, investment guru and financial commentator Jim Rogers said, “This is just another step in that direction. Many people do not like using US dollars because if the US gets angry at you, they just set enormous pressure on you that can even get you out of business. China, Russia, and other countries understand this, and they are trying to move world trade and world finance away from that”.

“The world has been moving that way. Iran will accept Renminbi (Yuan) from China now. The world is moving that way. China and Russia currently have swaps in Rubles and Renminbis. It is happening. But it is happening slowly. It takes a lot of time.

“In this case, there are so many people that actively want it, I would suspect that in less than ten years you will see a major shift into the trading of oil to Asia.

“When US dollar replaced the pound sterling, there was no one really going around trying to do it quickly. But now you have major economies: Russia, China, Iran and others – very much want this to happen. So, it will happen faster”, Rogers added.

In his column on economics in the online magazine, New Eastern Outlook, Australia-based Barrister at Law, James O’Neill wrote:-

“The objective (of the U.S. ‘dollar for oil’ strategy) was always fundamentally the same: to undermine and if necessary replace governments that were insufficiently compliant with US geopolitical aims. As and when necessary, U.S. troops and their ‘coalition’ allies would be inserted into the target countries. The destruction of Afghanistan (2001 and continuing) Iraq (2003 and continuing) Libya (2011 and continuing) are only three of the better-known examples.”

“The huge financial cost of these military and geopolitical ventures did not impose a proper price upon the US because of the hegemonic role of the US dollar. The U.S., in effect, had their multiple wars of choice paid for by other countries as the dollar’s role in world trade created a constant demand for U.S. Treasury bonds.

“The role of the U.S. dollar also permitted the U.S. to impose sanctions on recalcitrant countries. The selective nature of the sanctions, always directed toward a U.S. geopolitical or commercial advantage, were clearly an instrument of repressive power. Notwithstanding claims that they were to ‘punish’ the alleged misconduct of the specified country, their actually use betrayed their geopolitical purpose.

“Sanctions against Russia for its ‘invasion’ of Ukraine ‘annexation’ of Crimea, and against Iran for its ‘nuclear programme’ are two of the better known illustrations of sanctions being justified on spurious grounds.

“The use and abuse of the dollar’s power is clearly unacceptable, but the capacity to invoke countermeasures was until quite recently severely limited. The single most important countervailing force is the rise of China as the economic powerhouse of the world, and importantly, the creation of alternative structures in trade, finance and security, that translate China’s economic power into a force for major change.

“That change is assisted by the number of collateral developments. In 1990, the G7 nations (Canada, France, Germany, Italy, Japan, the US and UK) had a combined GDP approximately six times greater than the seven economically most important emerging nations (Brazil, China, India, Indonesia, Mexico, Russia and South Korea).

“By 2013 the ’emerging seven’ had surpassed the G7’s GDP total and according to the IMF’s estimates for 2017, the GDP of the two groups will be $47 .5 trillion and $37.8 trillion for the emerging seven and the G7 respectively. Turkey, which is growing at 5% per annum, has replaced Mexico in the top emerging seven.

“BRICS (Brazil, Russia, India, China and South Africa), which contains four of the emerging seven nations and the Shanghai Corporation Organisation (SCO), which includes China, India and Russia, are working together on the architecture of a monetary alternative to the dollar. The SCO alone contains 42% of the world’s population.

“India’s role in BRICS and the SCO is one reason it is being assiduously cultivated by Australia, Japan and the United States in an attempt to set up a “quadrilateral four” to slow and undermine the role of China and Russia in creating an alternative to long standing western domination and exploitation”, O’Neill added.

According to Russia Today, the end of US dollar hegemony has been a consistent message from Russian President Vladimir Putin.

“Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulatory reforms and to overcome the excessive domination of the limited number of reserve currencies,” Putin said during the BRICS summit in Xiamen, China held on 3 to 5 September 2017.

Meanwhile, according to RIA Novosti, Russia’s Deputy Foreign Minister Sergey Ryabkov said that the Russian government will intensify efforts to cut the country’s dependence on U.S. payment systems and the dollar as a settling currency.

“We will, of course, speed up the work on import substitution, reduce dependence on U.S. payment systems, on the dollar as a settling currency and so on. It is becoming a vitally important,” said Ryabkov.

“The U.S. is using its dominating role in the monetary and financial system to impose pressure on foreign business, including Russian companies,” Ryabkov  added.

Meanwhile, several analysts expect China to pressure Saudi Arabia to sell oil to her in Yuan.

On 11 October 2017, Russia Today quoted  chief economist and managing director at High Frequency Economics Carl Weinberg saying, “Beijing is likely to ‘compel’ Saudi Arabia to sell crude oil in Yuan, and others will follow. This will hit the US dollar”.

Saudi Arabia has “to pay attention to this because even as much as one or two years from now, Chinese demand will dwarf US demand,” Weinberg told the media.

“I believe that Yuan pricing of oil is coming and as soon as the Saudis move to accept it — as the Chinese will compel them to do — then the rest of the oil market will move along with them,” he added.

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