Far beneath the surface of the international monetary system a tectonic shift could be unfolding. China is increasingly insisting that its oil imports be denominated in Chinese yuan instead of U.S. dollars. If successful, this could make the yuan into the globe’s second or third most important currency overnight.
It is still very early days in this process. Most observers are less than sanguine about the yuan’s prospects. The progress of “internationalization” of the yuan has largely stalled. The yuan will remain, for the foreseeable future, a currency under tight state management.
Nonetheless, there are other possible pathways to monetary prominence. Carl Weinberg, chief economist and managing director at High Frequency Economics, recently argued that yuan pricing of oil is coming. China and Russia reached an agreement to establish a direct-trade relationship allowing for oil purchases to be made strictly in yuan during June 2017. To abolish the “tyranny of the dollar,” the Venezuelan government announced on September 15, 2017 that it will publish the price of its oil and fuel in Chinese yuan. Reports indicate that Chinese officials have begun negotiations with Saudi Arabia to price their oil imports in yuan.
Even more importantly, plans have been announced by China to start a crude oil futures contract in Shanghai that is priced in yuan and possibly convertible into gold.It could lead to the emergence of a new Asia-based crude oil benchmark and, ultimately, allow the yuan to be perceived as a primary currency for trading oil, allowing oil exporters to bypass U.S. dollar denominated benchmarks by trading in yuan.
This evolution is certainly still in its early stages. At best, the above trends give a rather speculative picture. The emergence of the petroyuan might in this manner create a novel pathway to monetary power.
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