Renminbi Oil Futures To Challenge Petrodollar

These futures would be China’s first such contract open to direct trading by foreign enterprises. If successful, the countrycould create similar contracts for otherstrategic commodities.

Oil is priced in dollars just about everywhere, which props up the greenback, but could soon be priced in renminbi instead.

The new International Energy Exchange (INE) in the Shanghai Free Trade Zone has admitted more than 150 Chinese futures companies and is registering foreign firms to trade an oil-futures contract denominated in renminbi, according to a client bulletin from Linklaters in Hong Kong. The law firm says that after nearly two years of preparation, it now expects that INE’s trading platform will be officially launched before the end of 2017.

“Given China’s preeminent role in the international energy markets, the huge interest generated by the Shanghai Free Trade Zone and the price differential between onshore and overseas energy markets, the establishment of INE as an international trading platform will have considerable significance both globally and regionally,” Linklaters says.

In 2013, China became the world’s largest oil importer. “China has developed the power to challenge the universal dollar pricing of oil,” comments John Browne, a senior economic consultant for Euro Pacific Capital. “By creating a domestic oil contract denominated in renminbi and traded internationally, China will be able, potentially, to divert the petrodollars now held by oil-producing countries toward its renminbi, thus eroding much of the current crucial support enjoyed by the US dollar.”

These futures would be China’s first such contract open to direct trading by foreign enterprises. If successful, “China could create similar contracts on other internationally traded strategic commodities, such as copper,” Browne says.

Carl Weinberg, chief economist and managing director at High Frequency Economics, says he expects China to force Saudi Arabia to trade oil in renminbi. If that happens, Weinberg says, the rest of the oil market will follow suit and abandon the dollar. Russia agreed in 2015 to sell crude to China for renminbi so as not to lose the deal to Saudi Arabia.

“The ideal way for China to replace the dollar as the dominant currency for her cross-border trade is to encourage her oil suppliers to accept payment in her own currency,” says Alasdair Macleod, head of research at Goldmoney, a gold-based financial-services company in Toronto.

Other vehicles will turn those renminbi assets. An exporter to China using RMB oil futures could, for example, use a separate futures contract to swap the renminbi for gold.