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China Readies Yuan-Priced Crude Oil Benchmark Backed By Gold

Beijing

The world’s top oil importer, China, is 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, Nikkei Asian Review reports.

The crude oil futures will be the first commodity contract in China open to foreign investment funds, trading houses, and oil firms. The circumvention of U.S. dollar trade could allow oil exporters such as Russia and Iran, for example, to bypass U.S. sanctions by trading in yuan, according to Nikkei Asian Review. To make the yuan-denominated contract more attractive, China plans the yuan to be fully convertible in gold on the Shanghai and Hong Kong exchanges.

Last month, the Shanghai Futures Exchange and its subsidiary Shanghai International Energy Exchange, INE, successfully completed four tests in production environment for the crude oil futures, and the exchange continues with preparatory works for the listing of crude oil futures, aiming for the launch by the end of this year. ?

“The rules of the global oil game may begin to change enormously,” Luke Gromen, founder of U.S.-based macroeconomic research company FFTT, told Nikkei Asia Review.

The yuan-denominated futures contract has been in the works for years, and after several delays, it looks like it may be launched this year. Some potential foreign traders have been worried that the contract would be priced in yuan.

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But according to analysts who spoke to Nikkei Asian Review, backing the yuan-priced futures with gold would be appealing to oil exporters, especially to those that would rather avoid U.S. dollars in trade.  

“It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either,” Alasdair Macleod, head of research at Goldmoney, told Nikkei.

By Tsvetana Paraskova for Oilprice.com

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  • Baregil on October 07 2017 said:
    The only feasible way to pay oil with gold would be if the price of gold is allowed to go much higher in price (dollar or any other currency terms). Nixon closed the gold window because the US was unwilling to let the price of gold go up and the US gold reserves would have disappeared if oil would have been paid with gold.

    Let's suppose that, for example, Iran accepts its oil being paid in yuan.
    Would Iran's yuans be accepted as payment for gold by the Bullion banks? Not likely, since they only sell gold for dollars.
    If Iran wants to buy gold it will need dollars because nothing else will be accepted as payment by the bullion banks.

    Let's suppose that Iran gives China back those yuans in exchange for gold.
    Would China give Iran the gold it has in reserve to Iran? Not likely.
    Yet, China may give Iran dollars (it has many) in exchange of those yuans that China gave to Iran's as payment for oil, so that Iran may use those dollars as payment for gold. If this happens to be the case, what would the point be having China to pay oil in yuan if sooner or later China will have to receive those yuans back and end up paying its oil bill in dollars?
  • MartinKyle on September 15 2017 said:
    Even Saudi ARAMCO is pivoting towards China and wants to end the US dollar regime. Wait and watch, they will unpeg the dollar once the IPO is released.
  • Ben on September 14 2017 said:
    Go China, well done.
  • Karl on September 12 2017 said:
    Please remember any product or commodity a futures contract is based on, and payment method to settle out the contract, must always have to the fullest extent as possible, Full Transparency. If only one side of the contract (or those in positions of power to effect the settlement price) have the most accurate knowledge of the market, then artificial manipulation can and will corrupt that market. Long story short - there is NO TRANSPARENCY of government and markets in China. Only the Chinese leadership has a clue what is going to happen next. Get on the wrong side on these people and you will loose your shirt. Good luck.
  • bob on September 05 2017 said:
    Saddam Hussein and Omar Qaddafi tried to trade oil with gold. Look where it got them. Granted, Iraq and Libya are minute countries compared to China, but the potential for the US to give China some freedom is still the same.
  • Thomas on September 04 2017 said:
    You ever try to get your money out of China? Even if the account in in another currency you have to buy those bills ... they get you coming and going. And not they exchange the yuan for gold ... ROFL good luck walking out with that !
  • Eduardo on September 03 2017 said:
    Naomi

    China's exports are the most competitive and their banks the most stable of the world, CHINA DOES NOT HAVE EVEN ONE SINGLE UNEMPLOYED and they have an economy increasingly independent from exportations and based mostly in internal consuming

    Unlike U.S., which import its manufactured goods from China and whose economy depends on oil they steal from other countries... The U.S. charade can collapse in an instant
  • Roven on September 03 2017 said:
    Well... that would most likely be the end of China.

    China is still the world's largest export economy, and Triffin's Dilemma still applies.

    ie: The nation with the world's reserve currency must mathematically run a trade deficit, or that currency can't be the reserve.

    So China needs to pick one: They can continue to be the world's largest exporter or they can create a gold backed Yuan.

    The latter option cascades into a regime-ending spike in unemployment and social unrest. And most likely, war with the West -- born of both internal and external causes. It would be a poor choice.

    Meanwhile -- China is the direct beneficiary of the current monetary regime. They are in no hurry to change anything.
  • Naomi on September 03 2017 said:
    After China fixes the Yuan to gold the USA can double or triple the price of gold. China's exports become instantly uncompetitive. China has unstable banks, 150 million unemployed, and a vulnerable export economy. The Chinese charade can collapse in an instant.
  • naxtlaw on September 02 2017 said:
    You would think there would be more fanfare for such an announcement, it basically means the end of the world order that has existed since 1974, the petrodollar. When the Berlin wall came down, I think I saw something on TV.

    No biggie I guess.

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