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As Trade War Heats Up, China Hints at Early ‘Petro-Yuan’

Yuan Dollar

In its efforts to make its currency more international and break the U.S. dollar’s global dominance, China is in the early stages of preparing to paying for oil imports in yuan, Reuters reported on Thursday, quoting three people with knowledge of the issue.

China could launch a pilot program to pay for oil in yuan as early as the second half of this year, two of Reuters’ sources said. Local regulators have asked a few financial institutions to get ready for pricing Chinese oil imports in yuan, the three sources at some of the financial institutions said.

One of the sources speculated that China could begin the test with paying in yuan for the oil it imports from Russia and Angola, although the source said they had no details of anything so specific being discussed.

The Chinese plans to pay in yuan for oil are at early stages and officials at some of the Chinese state-held oil companies told Reuters they were not aware of such plans.

China is the world’s biggest oil importer and the volumes of its imports are closely watched by market analysts to gauge the pace of oil demand growth, the key growth driver of the global oil market.

Related: Mexico May Have Just Held Its Last Oil Auction

The world’s top crude oil importer switching to yuan for oil payments could have potentially huge implications on global oil trade, on the internationalization of the yuan, and on the U.S. dollar oil trade.

Oil—the world’s most actively traded commodity—has an annual trade worth $14 trillion, which is roughly equivalent to the value of the Chinese gross domestic product (GDP) in 2017, according to Reuters calculations.

The report of China planning to test paying for oil in yuan as early as this year comes as the country this week launched its yuan-denominated crude oil futures in Shanghai—a move that analysts see as helping China to internationalize and promote its currency.

By Tsvetana Paraskova for Oilprice.com

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  • Michael Su on April 20 2018 said:
    It's a tall order. Only if there was real peace in the middle east would the petro dollar be truly threatened.

    Us arms Iraq with chemical weapons and hardware. It makes them volatile and dangerous. They then wage war on Iraq and other battles in the middle east. War goes crazy but it's war that increases demand and benefits the excessive arms industry.

    The typical customers are oil rich arabs states that sells oil for US dollars and use them to buy a lot of arms from america. As long as there's tension and fighting - the arms industry will continue to profit from arab states like Saudi Arabia.

    * Shockingly Saudi Arabia really is a bad nut but cos they are a close US ally, alot of their horrid stuff gets ignored in the news relatively.

    But it's not the arm industry that benefits the most. It's the fact that arab state clients become depedant on US arming services and stick to the petro-dollar system which helps keeps the us dollar place as the most prolific reserve currency globally.

    Unless China finds a way to make peace in the middle east, it's a truly uphill battle for sure as the petro dollar is strengthened by war.
  • Mamdouh G Salameh on March 29 2018 said:
    A very famous Chinese scholar, Professor Lanxin Xiang, said once: “The only indispensable superpower is also a super-indebted power, and its biggest external creditor happens to be its presumed chief strategic rival. Is it logical and workable to encircle one’s own bank militarily” (source: China & the Pivot, p. 119).

    China technically began using the petro-yuan from the day it launched its crude oil futures contract with the intention of establishing the yuan as an international currency and also challenging the petrodollar for dominance in the global oil market.

    The continued imposition of tariffs on Chinese goods by President Trump is raising the risk of a trade war with China.

    If a trade war between China and the United States heats up, China will not only be using the petro-yuan to undermine the petrodollar but could also retaliate by offloading $1.3 trillion worth of treasury bill it is holding.

    I am of the opinion that the imposition of tariffs by President Trump on China is the first shot in a potential petro-yuan/petrodollar confrontation. But the global oil market estimated at $14 trillion is big enough to accommodate both the petrodollar and the petro-yuan leaving it up to the exporters of the oil to determine which currency they want to use. This is far better than damaging the global economy by a trade war between the two titans, the United States and China.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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