The View | China’s petroyuan is going global, and gunning for the US dollar
John A. Mathews and Mark Selden say China’s yuan-denominated oil futures are being taken seriously by traders, suggesting they can help promote renminbi internationalistion to challenge the hegemony of the US dollar in world trade
It is now more than eight months since China launched its oil futures contract, denominated in yuan, on the Shanghai International Energy Exchange. In spite of forebodings and shrill alarms, the oil markets continue to function, and China’s futures have established themselves and overtaken in volume the dollar-denominated oil futures traded in Singapore and Dubai.
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Of course, the volume of trades on the Shanghai exchange still lags behind that of the Brent oil futures traded in London and the West Texas Intermediate oil futures traded in New York. The Chinese oil futures contract is, however, being taken seriously by multinational commodity traders (like Glencore) and is priced in a manner comparable to the Brent and West Texas Intermediate indices. All this suggests China’s oil futures could bring the renminbi 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 renminbi’s internationalisation – or at least the progressive de-dollarisation of the oil market.
Li Qiang (left), the top Communist Party official in Shanghai, and Liu Shiyu, chairman of the China Securities Regulatory Commission, hit the gong together to signal the start of trading of China's yuan-dominated crude oil futures contract at the Shanghai International Energy Exchange on March 26. Photo: Xinhua
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For the past decade, China’s strategy for internationalising the renminbi has involved greater reliance on the International Monetary Fund’s Special Drawing Rights as an alternative international reserve currency. The People’s Bank of China’s then governor, Zhou Xiaochuan, spelt out the strategy in an essay in 2009.
With new allocations of SDR to emerging industrial powers like China, the SDR, based on a basket of currencies including the renminbi, 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-centred international financial system became an enticing prospect for other countries as well.
