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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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China Looks To Expand Use Of Yuan In Energy Deals

  • China is looking to increase the use of its currency, the Yuan in oil and gas deals with the Middle East.
  • While Chinese currency has made inroads in global trade, the yuan accounts for just 2.7% of the market versus the dollar at 41%.
  • Experts have warned that China’s efforts to open up its capital markets could end up having an unintended consequence--an even weaker yuan.

As part of China’s ongoing drive to bolster its position in the Middle East, Chinese President Xi Jinping has pledged to increase development aid to the region and has ramped up efforts to promote the use of the Chinese yuan in energy markets, Reuters reports.  Speaking at the just concluded China-Arab States Summit and the China-Gulf Cooperation Council (GCC) summit in Riyadh, Saudi Arabia, Xi Jinping said that China and Gulf nations should make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trades. 

"China will continue to import large quantities of crude oil from GCC countries, expand imports of liquefied natural gas, strengthen cooperation in upstream oil and gas development, engineering services, storage, transportation and refining, and make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade," he said.

Still, it’s not quite the fast-moving threat to the petrodollar that some may have feared. While the Chinese currency has made inroads in global trade, the yuan accounts for just 2.7% of the market versus the dollar at 41%. 

Although China has ramped up imports of heavily discounted Russian crude, it still buys large volumes of the commodity from Saudi Arabia. Last week, Saudi Energy Minister Prince Abdulaziz bin Salman said that Saudi Arabia will remain a trusted and reliable energy partner for China.

Related: Russia Balks At “Stupid” Oil Price Cap, Mulls Production Cut

Prince Abdulaziz told SPA that cooperation between the two countries had helped maintain global oil market stability. Saudi Arabia is the world’s largest oil exporter while China is the world’s largest oil importer.

"The kingdom will remain, in this area, a trusted and reliable partner for China," Prince Abdulaziz told SPA.

Prince Abdulaziz said Saudi Arabia and China would seek to boost their energy supply chains by establishing a regional center in the Gulf Arab state for Chinese factories.

Chinese President Xi Jinping is attending the first China-Arab States Summit and the China-Gulf Cooperation Council (GCC) summit in Riyadh, Saudi Arabia, and paying a state visit to Saudi Arabia from Dec. 7 to 10 at the invitation of King Salman bin Abdulaziz Al Saud.

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The new push by Saudi Arabia has come at a time when Russia has replaced it as China’s biggest supplier of crude. China’s imports of Russian crude have increased massively since the Ukraine war began thanks to the generous discounts Russia is offering for its Urals. 

According to Bloomberg's oil strategist Julian Lee, Russia's flagship Urals crude oil traded at a massive discount of $33.28, or about 40% to the international Brent crude oil. In contrast, a year ago, Urals traded at a much smaller discount of $2.85 to Brent. Urals is the main blend exported by Russia. The result: Moscow is beginning to feel the heat of its war in Ukraine, and could be losing ~$4 billion a month in energy revenues as per Bloomberg's calculations.

Washington is, however, not losing sleep over it. “If Russian oil is going to be selling at bargain prices and we're happy to have India get that bargain or Africa or China. It's fine," US Treasury Secretary Janet Yellen previously told Reuters.

China, India and Turkey are the three key swing consumers of Russian crude. It’s quite likely that the three will continue importing more crude from Russia after the EU and G7 countries introduced a $60 per barrel price cap on Russian crude. The Wall Street Journal has reported that Russian crude exports might have fallen by as much as 50% since the launch of the price cap and additional sanctions.

Opening Up Markets

But it’s not just in the energy sector where China is seeking to boost its presence. With trade tensions between the U.S. and China reaching fever pitch during the Trump era, Beijing started making moves to prove to the world that it’s not the economic or trade pariah that it is frequently made out to be by opening up its markets even further.

After the launch of its “internationalised” iron ore contract in 2018 - the first of its kind for international investors - China expanded the scope of its international commodities trading by adding a host of non-ferrous metals in a bid to hold more sway over global pricing of major commodity imports.

The Middle Kingdom added international futures contracts for aluminum, copper, nickel, lead, zinc and tin to the Shanghai Futures Exchange (ShFE) in 2019--quite a dramatic improvement to the previous tally of only three contracts that were available to foreign investors. Previously, overseas investors could only access iron ore contracts on the Dalian Commodity Exchange; crude oil futures on the Shanghai International Energy Exchange and plastics raw material purified terephthalic acid (PTA) futures contracts on the Zhengzhou Commodity Exchange.

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The international crude oil futures on ShFE were able to hit an impressive turnover of 17.1 trillion yuan (US$2.48 trillion) in the 12 months since their March 2018 launch, proving the market is ready for prime time.

Three years ago, chairman of the Shanghai Futures Exchange, Jiang Yan, revealed that the bourse plans to attain a “new level of openness” as regulators give increased access to yuan-denominated contracts to overseas investors. Jiang said ShFE plans to initially use the TSR 20 technically-specified standard rubber contract to lure in more international investors.

In 2018, Beijing lifted a cap on foreign ownership in Chinese finance firms, allowing foreign investors to own up to 51 percent interest in financial firms including securities firms, investment managers and life insurance providers. China's policymakers have for long imposed highly restrictive foreign ownership caps on many of its sectors, resulting in huge trade imbalances between the country and its major trading partners. For instance, due to caps in China’s financial sector, leading Wall Street banks such as JPMorgan Chase, Wells Fargo, Bank of America and Citigroup derived less than a percentage point of their revenues in China, far less than the 10 percent average by S&P 500 companies.

Shanghai and Shenzhen stock exchanges have also launched Chinese depositary receipts, or CDRs, that will allow Chinese investors to invest in Chinese tech giants such as Alibaba, JD.com, Baidu and Weibo that have preferred to list on American exchanges thus denying their homeland a chance to enjoy their often wild success.

Beijing’s sudden benevolence is partly self-serving though since its biggest concern is the large number of Chinese companies that have been listing on foreign soil. 

This opening up is two-way though, with Wall Street doing its part to increase access to the Chinese market. In June 2018, leading index compiler MSCI added Chinese A-shares - yuan-denominated stocks that are traded on the mainland - to the Emerging Markets Index.

But perhaps even more significant, American investors can now play in China’s $17.7-trillion bond market after Bloomberg kicked off the process of onboarding 364 bonds to the Bloomberg Global Aggregate Index.

Weaker yuan

Yet, experts have warned that China’s efforts to open up its capital markets could end up having an unintended consequence--an even weaker yuan. As the People’s Bank of China (PBOC) allows more market forces to play a greater role in determining the value of China’s currency, the yuan is likely to become more volatile and likely weaken even further. 

Indeed, the currency is down more than 10 percent against the dollar this year, and is at its lowest level against the American currency since the 2008 global financial crisis. However, the yuan has remained fairly resilient against a basket of currencies of China's major trading partners.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Steven Conn on December 13 2022 said:
    Russian Urals "might have", "could have", "should have". While growing China and India are getting more affordable energy, and most of the world is ignoring the price cap, US officials are trying to keep good appearances as sanctions not only fail but are ignored from day one. They have neither changed Russian policy in over eight years nor put the Russian economy "in tatters". Moscow is selling all of its blends, not just Urals, to willing and eager buyers in Asia and the Middle East. While the EU has seen reduction of metal, chemicals, and fertilizer production, along with record inflation, the rising Asian economies now can get more affordable energy to add to their low labor and production costs. Meanwhile, the discount on Russian oil has not prevented Moscow from earning profits because the price is still well above the break-even level and there is a steady supply of willing buyers. Record high prices for gas and coal have also done their part for Russia, so have those for wheat, mineral fertilizer, aluminum, nickel, copper, and palladium. Moscow registered a budget surplus through first 10 months and a record trade surplus to boot. The "drop in tanker oil exports" from Russia is likely little more than a drop in reporting and tracking of vessels. The price cap has been ignored from the first day it was announced. Unfortunately for the public, Washington and the EU will talk up the "price cap" for months.
  • Mamdouh Salameh on December 13 2022 said:
    China’s rising influence in the Arab Gulf region is already eclipsing by far the United States traditional influence as evidenced by its growing trade in the region and the fact that it has become the ultimate destination for the oil and gas exports of the Gulf Cooperation Council (GCC) countries. This has been crowned by Chinese President Xi Jinping’s official visit to Saudi Arabia and the China-Arab States Summit in Riyadh in December.

    Speaking at the just concluded China-Arab States Summit, the Chinese leader said that China and Gulf nations should make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trades effectively demanding that they accept the petro-yuan as payment for China’s oil imports and also gas imports (from Qatar) from the region.

    It was inevitable that President Jinping would make such demand because China is the world’s largest economy based on purchasing power parity (PPP), it is the largest importer of crude oil and gas, it accounts for the largest share in global trade and its currency the Yuan has been one of five global reserve currencies since October 2019. Therefore, China believes that the Yuan should reflect these realities.

    China and Saudi Arabia are establishing a strategic partnership between them going beyond energy and soon the GCC and China would be signing a free trade agreement.

    Against this background, Saudi Arabia and other GCC countries will have to consider seriously accepting the petro-yuan as payment for Chinese crude oil imports. They can’t refuse such a legitimate request given that China is the ultimate destination for their oil exports.
    Such a decision will have huge geopolitical implications for the United States. Were Saudi Arabia and other GCC countries to accept the petro-yuan for payment, this would cut the petrodollar’s share in global oil trade by an estimated 21%.

    And with Russia selling its oil exports in rubles and China paying for its almost 12 million barrels a day (mbd) of oil imports in petro-yuan, the petrodollar share could plummet by 60%. This could easily lead to a devaluation of the dollar by a quarter or a third against other major currencies and will undermine the US financial system which is the core of the US economy.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

Leave a comment




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