The Strategist

China oil futures: bad news for the dollar

03/27/2018 - 12:04

On March 26, China has formally launched trading in oil futures in yuan, which became the first futures on the mainland of China for foreign investors. The volume of the first day of trading in yuan oil futures exceeded $ 2.9 billion, according to China Central Television.

Fuzzy Gerdes via flickr
Fuzzy Gerdes via flickr
Shanghai International Energy Exchange began trading in oil futures, hoping to compete with the main targets of the oil market - contracts for oil Brent and WTI. The futures will receive the abbreviation INE.

China has already had the experience with commodity futures: in 2015, the country started trading in contracts for nickel, and contracts for gold in terms of physical supplies exceed futures on European and American exchanges.

Earlier, the Ministry of Finance of the People's Republic of China said that non-residents working with the instrument are free from paying income tax for a period of up to three years. According to observers, China as the largest importer of oil in the world needs the futures to control the pricing of this energy carrier.

In 2017, China overtook the US and became the largest importer of oil in the world - the volume of purchases was about 8.43 million barrels per day on the back of strong demand and the continuing formation of a strategic reserve.

Wood Mackenzie expects an increase in Chinese oil imports by an average of 2.1 million barrels per day from 2017 to the end of 2023. The volume of trade can reach about 200 billion yuan (almost $ 32 billion) with the current scale of purchases abroad, which will contribute to the internationalization of the country’s national currency.

It took 25 years for China to finalize such a contract. The first attempts were made on the domestic market back in 1993, but failed, and a year later the auctions stopped because of high volatility.

The transition to "petroleum" can become one of the most important events in the oil and currency markets. If foreign investors adopt new futures and include them as one of the main landmarks of the world oil market in addition to Brent and WTI, China can count on a significant increase in the role of the renminbi in world trade and economy.

The most optimistic experts say that over time, the Chinese national currency will be able to squeeze out the dollar thanks to such contracts and the overall strength of the PRC economy. And although it will not happen soon, there are prerequisites for this.

Probably, this is bad news for the dollar, as its stability in recent decades was largely based on the simple fact that the bulk of the world's oil trade is conducted in American currency.