The world’s top crude oil importer and key oil demand growth driver is now determined to get as many oil exporters as possible on board with accepting yuan payments for their oil.
China is now trying to persuade OPEC’s kingpin and biggest exporter, Saudi Arabia, to start accepting yuan for its crude oil. If the Chinese succeed, other oil exporters could follow suit and abandon the U.S. dollar as the world’s reserve currency. Pulling oil trade out of U.S. dollars would lead to decreased demand for U.S. securities across the board, Carl Weinberg, chief economist and managing director at High Frequency Economics, tells CNBC. Weinberg believes that the Chinese will “compel” the Saudis to accept to trade oil in yuan.
Other analysts warn that the true test of China’s push for a yuan oil trade will be if the Saudis are willing to risk the anger of the U.S. by accepting yuan payments.
The other option isn’t much better for the Saudis—if they continue to resist trading in yuan, they risk losing further market share of the world’s top crude oil importer and possibly the snub of Chinese investors for the much-hyped IPO of Saudi Aramco next year. Chinese sovereign wealth funds and major state companies have deeper pockets than major institutional investors in the West. For China, an Aramco investment could increase Beijing’s bargaining power to convince Aramco to accept yuan payments. Although there’s no indication yet that Aramco would want yuan for its oil, the Saudis say they’re willing to consider issuing yuan-denominated bonds, in what could be a break from the practice to issue debt only in U.S. dollars.
The Chinese scored a success for their currency last year when the International Monetary Fund (IMF) included the yuan in its Special Drawing Right (SDR) basket—an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. The yuan joined the U.S. dollar, the euro, the yen, and the British pound sterling in the basket as the IMF recognized “an important milestone in the integration of the Chinese economy into the global financial system.”
China is also reportedly preparing to launch a crude oil futures contract denominated in Chinese yuan and convertible into gold, potentially creating the most important Asian oil benchmark and allowing oil exporters to bypass U.S.-dollar denominated benchmarks by trading in yuan.
The Chinese are on an aggressive path to have not only Russia on board with yuan settlements for oil trade.
“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,” Weinberg told CNBC this week.
“Moving oil trade out of dollars into yuan will take right now between $600 billion and $800 billion worth of transactions out of the dollar,” the economist noted, adding that the yuan oil trade would also mean stronger demand for Chinese securities, goods, and services.
“A rising China is eyeing the benefits of having its own currency play a larger role and to supplant the USD’s role in global trade,” John J Hardy, head of FX strategy at Saxo Bank, said in the bank’s quarterly outlook earlier this month.
The initial focus of that trade is oil trade, Hardy said.
“And if China, having built massive gold reserves in recent years, allows any trade partner to exchange their yuan revenues from oil directly into gold, it would likely vastly reduce the interest in holding foreign exchange reserves in US dollars, increasing the interest in holding gold and yuan,” the analyst noted.
“Important oil exporters Russia and Iran, long suffering at the hands of U.S. financial and trade sanctions, will be happy participants in this scheme and could provide critical mass,” said Hardy. “The bigger test will be whether traditional US allies, such as Saudi Arabia, would be willing to risk the ire and financial might of the U.S. by agreeing to receive yuan for oil. There are certainly risks to the approach, though the wind is at China’s back.”