Home Aperçus The Great Petro-Yuan Temptation

The Great Petro-Yuan Temptation

The world’s biggest oil importer, China is preparing to launch gold-backed Yuan-denominated oil futures, possibly creating the most important Asian benchmark in the oil sector, allowing oil exporters to switch from US dollar-denominated assets by transactions in Yuan[1]. To make the Yuan-denominated contracts more attractive, China plans to have the Yuan fully convertible into gold on the Shanghai and Hong Kong foreign exchange markets. Last month, the Shanghai Futures Exchange and its subsidiary, the Shanghai International Energy Exchange (INE) successfully completed four production environment tests for crude oil futures; also, the exchange continues with preparatory work for crude oil futures contracts, aiming to launch operations at the end of this year. China’s Yuan asset value – coupled with the Hong Kong Stock Exchange’s plan to sell Yuan-denominated physical gold futures – will create a system helping countries to bypass the US banking system.

The countries which will immediately benefit from this revolution are, of course, the countries under Western sanctions, such as Russia, Iran, Venezuela… Those mentioned countries are, by the way, sitting on the world’s largest reserves of gas and oil, that is the reason why we are talking of petro-gas-Yuan, knowing that gas represents the energy of the future much more than oil does.

Figure 1 – World gas reserves. Source: EIA, 2015

Figure 2 – World oil reserves. Source: Wikimedia Commons, 2014

Iran and Venezuela have particularly suffered from their isolation from the international system which stopped them from investing significantly in production infrastructures, their potential being therefore largely untapped; these two countries will lose no time in using the opportunity opened by the petro-Yuan. Iran[2] and Russia[3] mainly, but also other smaller producers like Angola[4] and Nigeria[5], are already selling their oil and gas for Yuan to China. But the inconvertibility of the Yuan leads to the development of a Yuan zone outside the international system, without any official existence, with all the uncertainties for the producers concerned about the future of this share of monetary reserves. But everything will change with these new futures, which now come with clear instructions from China, a country already sick of the almighty dollar reign: “From now on, we will favour producers who agree to sell us their energy in Yuan!” … (fragment – GEAB 117 / September 2017)

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[1]  Source: Nikkei Asian Review, 01/09/2017
[2]  Source: BBC, 08/05/2012.
[3]  Source: Financial Times, 01/06/2015.
[4]  In 2015, Angola adopted the Yuan as the second official currency of the country… and its first currency, the Kwanza, is accepted by China as exchange currency. Source: MacauHub, 05/08/2015
[5]  Since 2011, Nigeria has opened its exchange reserves to the Yuan. Source: CSMonitor, 06/09/2011.

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