China, the world’s largest oil importer, will be buying in RMB now using futures contracts on the Shanghai Energy Exchange. Will they switch off Brent/WTI all at once? No need for dollars to buy oil, won’t that have an impact on the USD, and the RMB? Will any other nations switch to buying oil in yuan? Isn’t this bullish for petroyuan assets as the oil sellers need to park their cash somewhere? This comes as CN have opened the stock market to foreign investment, and soon getting IMF reserve currency status.
Beijing planners making lots of (what would appear to be) smart moves fast, yet I hear very little serious analysis from the West, people just ignoring it, or shrugging. What does it all mean I wonder?
I agree-the article mentioned the saudi contract is the one linked to the Chinese economy so I assume it would have the largest drop in demand, not wti/Brent.
foreign investor futures realized gains will not be taxed per article.
I wonder how large the 14.47 million barrels of capacity for the exchange compares to others.
While it is sensible for China to have its own price benchmark for oil prices, this seems unrelated to the USD standard in trading physical oil. The Chinese futures exist outside the current system. Even in the rare case where an expiration does result in physical delivery of oil on the Chinese exchange, the short investor would have to buy USD, use the USD to buy oil for deliivery, and then receive a payment in CNY. There is no mechanism to directly buy the crude oil on the international market with CNY.
You could perhaps argue that Chinese internal customers would then stockpile oil in China for the specific purpose of delivering the commodity to other Chinese investors. However, why would they do this when the international USD market is so liquid? Dramatic reform of the Chinese government, and probably a complete abolishment of the communist system, would be necessary for China to become an international standard like the USD.
So, I’m no expert on oil and futures which I why I’m asking these questions, but this doesn’t make sense to me.
Isn’t the whole point that they will be buying oil in RMB now? When the futures expire they take physical delivery, and the other party receives RMB. Right? They are currently doing all their buying from Gazprom in RMB also.
“The Shanghai crude contract will be priced and settled in yuan. The contract for the medium sour grade will trade in 100-barrel lots, with crude of 32 degrees American Petroleum Institute gravity and 1.5 percent sulfur content by weight. The contract is priced on a Cost, Insurance and Freight, or CIF, basis. Crude will be delivered in designated bonded warehouses along China’s coast.”
No, it’s because this is not as important as you think it is. CME, for instance, lists many new futures a year, and most never trade in any good volume. Even if commodity futures trade in large volumes, almost no futures are ever settled with physical delivery of the underlier. Furthermore, if international traders and investors are to transition to CNY as a benchmark for trading in the international oil market, China must first dramatically liberalize their economic policies. The listing of a futures contract helps in price discovery, but it does almost nothing for physical oil trade.
pa, you are far too skewed towards china in almost everything you “analyze”. the EU is by far the largest importer of crude, almost 2x as much as China. they have the same currency too remember. the EU is a much bigger factor in the “will the USD fall by the wayside in oil trade?” debate. china accounts for a small amount of oil imports (~10%) so plenty of way to go before the status quo is challenged.
Actually I would encourage Americans to look back at their last 10 years of China “analyses”, it has been wrong wrong and more wrong. The recurring theme is “oh, that can never happen”. Fast forward, it happened.
are you talking about the 8.5 years in which the best case scenario was the Shanghai composite made you no money, despite rapid economic growth? if you stick to this “china will rule the world” theory, you will get financially destoyed in due time, even if you end up being right.
Oh you know, I’m talking about that little thing where CN GDP doubled from $5T in 2009 to $10T in 2014. Then fast shift over to a consumption-driven economy, becoming the largest consumer of luxury goods just like that. The absolutely massive moves this year towards reserve currency, use of the RMB in trade, foreign investment in their financial markets, IPOs, etc. All along it has been “oh that will never happen”, and it all happened.
I think we already talked about the lumpy returns in the world-beating Shanghai market on the other thread, don’t you remember?
I use the term to include all North Americans. Because of their geographically isolated situation, news is slow to reach their shores. “What, those rice hat guys have iPhones???!”.
it’s funny because you think that Americans are inherently racist and thus it makes you racist because you think that Americans, including people from Toronto, one of the most multicultural and tolerant places on earth, mean Mississipians from the 19th century.
I never fully understood the importance of what currency oil is priced in, as long as it is a currency that has sufficient liquidity that anyone who wants oil can exchange and pay for it.
In the run-up to the Iraq Wars, there was always this weird theory that “We’re going to war because Saddam is threatening to price oil in Euros, and that’s going to bring down the entire US system of international domination.” Which was just a bizzarre kind of explanation. Yes, it would mean that it is marginally more inconvenient for US-based companies to hedge oil prices, because there would be a currency component and an oil component, but both oil and usdeur futures are pretty liquid, and it’s not as if oil prices are stable things even when they are priced in USD.
So China now has a few contracts that let them buy oil without changing to USD. Given that they are nearly pegged (banded) to the USD anyway (though they are loosening it up gradually), does this really make a difference? How does this benefit them or harm us, other than the fact that we can’t cut off their supply of dollars to oil-strangle them (and I’m not sure we could really do that anyway)?
To me, the bigger question is “What are those oil guys going to do with all the CNY that they now have their hands on? How many cheap microwave ovens can one Emir buy, anyway?”
This “oil is priced in USD/EUR/CNY/JPY” stuff always sounded like people making mountains out of molehills. This stuff is still priced by supply and demand, as are (mostly) the currencies. And if political considerations affect how much oil goes to whom, what currency the stuff is traded in is unlikely to make much of a difference, because the leaders are going to do those deals no matter what currency they require from their other customers.
completely agree. at the very most, it ever so slightly increases the amount of Yuan demand. it’s not like it means people are holding Yuan everywhere now so they can buy oil. before you could buy in Yuan, you’d exchange Yuan for U.S. and on the same day buy your barrel of oil. so with this change, you’re basically adding about 1 billion in extra Yuan demand for about 1 second to a couple of hours a day. oooh, big demand increase. what matters to the Yuan is the size of Chinese government bond issuance and marketability of securities. the reason why the U.S., EU and Japan have the world’s leading currencies is because they have the three largest and liquid bond markets. buy bonds in Yuan, you own Yuan for years. buy oil in Yuan, you own Yuan for part of a day at most.
Yes it does. When we step back and see the larger picture, CN moves are always small steps which add up to a big deal over time, and they are never isolated moves but accompanied by a well planned symphony of small moves (see next post). Which is how Westerners miss it, each step is “no big deal”.
Right, that’s my question. So we can look at what they currently buy with USD; expensive appartments in NY, stocks, treasuries, gambling in Vegas, high priced escorts, luxury goods, etc. You can do a heck of a lot more partying in Shanghai (Barbarossa and other expensive joints), plenty of swanky places to live in Pudong, SH exchange is now open to foreigners, yuan bonds. Also everyone is looking to diversify away from holding so much USD, it’s a risk to be holding that much when the USG is bankrupt, and this is one way to do that.
The currency is going to end up in the SDR basket. As IMF’s Lagarde says, “it’s when, not if”. As far as when, probabilities are all over the place, EU banks estimating 60-70% chance of it happening this year, while CN/HK estimates are much lower. After Xi’s visit the US announced a more positive position on it joining the basket, although the US doesn’t actually hold many votes. Since CN defending the RMB means selling UST, you can see why the US would suddenly change their tune (the master strategists in Beijing quietly stike again). Given the global dynamics I think it joins this year, it’s best for everyone, and I think they see that now (after a little nudge from CN). “The IMF’s reserve endorsement could lead to about $1 trillion of global reserve assets being switched into yuan-denominated assets , Standard Chartered and AXA Investment Managers estimated in May. The bulk of fund movements of late have largely been the other way…” http://www.bloomberg.com/news/articles/2015-09-27/biggest-yuan-reforms-in-a-decade-did-little-for-china-s-imf-push So when this happens, I wonder how this moves the RMB in the short-term? That’s a heck of a lot of assets shifting into RMB, how rapidly does the switch occur I wonder? Right now all the traders are pushing against the RMB, futures have it priced around 6.60 by mid next year, even though CN has clearly said “it might move either way”. Do all these dummies panic suddenly, short squeeze, and it moves sharply stronger? Not a currency guy, but there are a lot of interesting things happening in unison here (also RMB bond sales, central banks can now buy directly, talk of a Europe yuan-bond sale).
Yep, a currency of an authoritarian government with as much transparency as granite and a history of jingoism/xenophobia is exactly where I’d want to be putting my safe assets.
Sure, you can add CNY to the mix, and it will affect things, but it’s still going to take at least a generation or two to replace the other dominant currencies, and that depends on nothing going wrong on the social unrest side of things.
You basically say “it’s not a big thing but it is a big thing because China will be big in the future.” But when that future arrives, I’m willing to bet that we’re not going to look at this particular issue as the key deciding factor on anything. Instead, there will be some other watershed event that we will point to, such as China staking territorial claims and no one having the guts or ability to challenge them."
Sure, you can say “This shows that China is more directly integrated into the global economy,” but no one is really doubting this, which is why this is not that big a thing.
You realize how it sounds when an American is labelling a ‘history of xenophobia’ charge at the Chinese saying it is an impediment for general investors right?
Other than that, I don’t disagree with your post though I don’t think they key moment will be China staking territorial claims while everyone watches. That is already happening.
It will probably be when they manage to succesfully transition towards middle and high end manufacturing. There are quite a few signs that this will happen sooner than expected.
