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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Dollar Remains Strong In Spite Of Petro-Yuan Threat

Federal reserve conference

Next month may finally see the launch of the long-awaited, much-delayed Chinese oil futures priced in yuan, to be traded on the Shanghai International Energy Exchange. The idea to launch its own oil futures first emerged in China in 2012, but the nation has encountered a seemingly endless list of hurdles through the years, dampening expectations that the contract will ever materialize.

But it would appear that the time has finally come. Now, according to sources quoted by Reuters last week, the launch date has been set for March 26. The yuan-priced contract should give the world’s top crude oil importer more clout in crude pricing and promote its currency as a truly global one. However, there seems to be certain skepticism regarding the yuan’s ability to truly replace the dollar as the global oil currency.

First, analysts interviewed by Bloomberg’s Sungwoo Park note that the dollar has been the currency that oil trade is done in for decades — and old habits die hard. But it’s not just about habit; it’s also about transparency. Beijing has been open about its intentions to make the yuan an international currency, but the government’s grip on capital flows from and into the country is unlikely to woo foreign investors despite efforts that China is making to assure them its financial markets are transparent and free.

In the long run, it would make sense for many oil trades to be carried out in the currency of the top importer. But it would take years for the yuan to undermine the dollar as the ultimate petrocurrency and it would also involve risks, some observers familiar with Robert Triffin’s Dilemma have noted. Related: Is This The Beginning Of A Downturn In Oil?

China seems to want the yuan to become the new international reserve currency. But, as goes the dilemma, this would mean that China would have to transform from a major exporter to an importer, which would strengthen the currency but necessitate it to generate a trade deficit. The reason the U.S. dollar became the global reserve currency was the country’s ever-growing trade deficit, said Triffin back in the 1950s, and it is the reason it is still maintaining this position.

An unavoidable consequence of an international yuan would be the lower competitiveness of locally produced, export-bound goods, which is hardly something Beijing wants to happen, at least in the short term. Yet it is very unlikely that President Xi is only thinking about the short term. The Belt and Road initiative is a long-term comprehensive plan to expand China’s presence in the world and its clout across industries.

Yes, it would take years for the yuan to replace the greenback as the petrocurrency the world uses. And it better take years — a lot of them — so the local industries have time to adjust. China is already moving from heavy industries to services. Now it will have to accelerate and expand this process. But skeptics say this won’t save it from falling into the trap of the Triffin Dilemma. Well, it wouldn’t — but judging by the American economy’s growth, despite the 2017 trade deficit that hit the highest since 2008, the trap may not be too uncomfortable to sit in.

By Irina Slav for Oilprice.com

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  • Douglas Houck on February 14 2018 said:
    Not sure China wants the Yuan to completely replace the dollar as China is concerned about Triffin's dilemma. It wants to diminish the importance of the dollar with the resultant use of economic sanctions by the US. Think of it as an alternative economic system not a replacement.

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