China Fires Shot Across Petrodollar Bow: Shanghai Futures Exchange May Price Crude Oil Futures In Yuan

With the US shale revolution set to make America the largest exporter of crude, however briefly, the influence of Saudi oil is rapidly declining. This has been felt most recently in the cold shoulder the US gave Saudi Arabia and Qatar first over the Syrian debacle, and subsequently in its overtures to break the ice with Iran over the stern objections of Israel and the Saudi lobby (for a good example of this the most recent soundbites by Prince bin Talal ). But despite the shifting commodity winds and the superficial political jawboning, the reality is that nothing threatens the US dollar’s hegemony in what many claim is the biggest pillar of the currency’s reserve status – the petrodollar, which literally makes the USD the only currency in which energy-strapped countries can transact in to purchase energy. This may be changing soon following news that the Shanghai Futures Exchange could price its crude oil futures contract in yuan, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.

In doing so China is effectively lobbing the first shot across the bow of the Petrodollar system, and more importantly, the key support of the USD in the international arena.

This would be in keeping with China’s strategy to import about 100 tons of gross gold each and every month, in addition to however much gold it produces internally, in what many have also seen as a preparation for a gold-backed currency, which however would require a far broader acceptance of the renminbi in the international arena and most importantly, its intermediation in a crude pricing loop. It is precisely the latter that China is starting to focus on.

Reuters reports:

China, which overtook the United States as the world’s top oil importer in September, hopes the contract will become a benchmark in Asia and has said it would allow foreign investors to trade in the contract without setting up a local subsidiary.

“China is the only country in the world that is a major crude producer, consumer and a big importer. It has all the necessary conditions to establish a successful crude oil futures contract,” Yang Maijun, SHFE chairman, said at an industry conference.

Yang’s presentation slides at the conference stated that the draft proposal is for the contract to be denominated in yuan and use the type of medium sour crude that China most commonly imports.

It is hardly panic time yet: Reuters adds that industry participants with direct knowledge of the plan have said the contract would be priced in the yuan, otherwise known as the Renminbi, and the U.S. dollar. However, one can argue that the CNY-pricing is for now a test to gauge acceptance of the Chinese currency, and will take on increasingly more prominence as more and more countries, first in Asia and then everywhere else, opt for the CNY-denomination and in the process boost the Renminbi to ever greater parity with the USD.

Here are the punchlines:

“The yuan has become more international and more recognised by the financial market,” Chen Bo, Chinese trading firm Unipec’s executive general manager, told Reuters.

“I don’t think it would be unacceptable for the world to use the renminbi for commodities trading.”

Certainly not, although it would also entail a depegging the CNY from the USD, something which China is for now unable and unwilling to do. Because once the Yuan is freely priced, kiss all those Wal-Mart “99 cent” deals goodbye.

Which in retrospect may be just what the US wants: a very gradual and controlled dephasing of the USD’s reserve currency status. Recall that what the Fed wants at any cost is inflation which has so far failed to materialize at the level demanded by the Chair(wo)man thanks in part to cheap Chinese goods and ongoing US exporting of inflation to China. So if that means a spike in the prices of China imports – so key to keeping US inflation in check – so be it. Because we can already see the Fed’s thinking on the matter – certainly it will be able to always restore the USD’s supreme status in “15 minutes” or less when it so chooses.

Of course, by then China, and the Petroyuan, may have a very different view on the world.