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Hedge Fund: China’s Petro-Yuan Plan Could Upend Oil Markets

China launching a yuan-denominated oil futures contract by the end of this year will shock those investors who have not been paying attention to the Chinese plans, Adam Levinson, managing partner and chief investment officer at hedge fund manager Graticule Asset Management Asia (GAMA), told Bloomberg Television on Tuesday.

In July, the Shanghai International Energy Exchange, INE, a subsidiary of Shanghai Futures Exchange, completed a four-step trial in crude oil futures denominated in yuan and said that it would carry preparatory works for the listing of crude oil futures, and would try to launch the contract by the end of this year.

This would be a “wake up call” for traders and investors who haven’t been paying attention to Chinese plans to create the so-called petro-yuan and shift oil trade out of petrodollars, according to Levinson.

The yuan-priced oil contract will be a kind of a hedging tool for Chinese firms, Levinson told Bloomberg. The yuan crude futures contract will also help the Chinese in their push to make their currency more international and widely used in global trade settlements, Levinson noted.

In addition, the fund manager expects Chinese oil firms to be key investors in the upcoming IPO of 5 percent in Saudi Arabia’s oil crown jewel, Saudi Aramco.   

In its bid to establish the petro-yuan, 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.

By Tsvetana Paraskova for Oilprice.com

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  • Naomi on October 25 2017 said:
    Saudis will be selling Yuan to buy dollars. Either the Yuan loses value of the price of oil falls. Saudis need to buy food. China does not export much food.
  • Bill Simpson on October 24 2017 said:
    Price everything on a currency which isn't free floating. Sure, that's going to happen. No risk there, right?

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