NEWSJan 03, 2018

A Yuan-Priced Crude Futures Contract Challenges “Rules of Game” (I)

After years of setbacks and delays, in early 2018, China will launch a yuan-priced crude oil futures contract to make Renminbi (RMB) more international and challenge the dominance of the petrodollar.


According to the Russian Satellite News Agency, the Shanghai International Energy Exchange (INE) is expected to launch a yuan-priced crude oil futures contract in early 2018, in addition, any oil exporter, who accepts RMB as currency of settlement, will be allowed to convert RMB into gold at Shanghai Gold Exchange. As oil and gold act as carriers, the new futures contract will gradually rewrite game rules of the crude oil market which is dominated by petrodollar. This will also weaken the hegemony of the "oil dollar" and will greatly promote the internationalization process of RMB.


Economic benefits brought by yuan-priced crude futures


1. The "recycling" of oil sales revenue flows into China’s economy


Since the economies of most oil exporting countries are not well developed, some of them cannot effectively digest large-scale liquidity. American experience shows that in an encouraging investment environment, since a dollar-centered international monetary system was formed by the "Bretton Woods system",oil dollars tend to eventually "settle down" in the securities of American banks and companies in order to achieve high returns. Over the years, the inflow of oil dollars has provided stability for US economic and investment activities. In addition to drawing lessons from American experience (attracting foreign capital), China can also attract domestic venture capital to maintain its economic growth.


2. Price formation, hedging and risk aversion


Due to the dependence on imports of crude oil more than 60%, China is the currently world's largest oil importer, and the world's second largest oil consumer.  However, China does not have power of discourse in pricing crude oil. From now on, due to the low oil price, relatively stable and oversupply market, Chinese government seizes the opportunity to launch yuan-priced crude futures, China will have certain pricing power in crude oil market as the largest demand party in the world.


3. Risk reduction of domestic crude oil companies and trading enterprises


Since 2017, China's independent oil refineries have gained the quota of crude oil imports, therefore, the volume of purchases has increased sharply. Under this circumstance, enterprises will have hedging and risk avoiding tools, which can effectively prevent risks when oil prices fluctuate greatly. If they have themselves own-controlled crude oil futures, it is good for these market participants to be more confident about the future price trend. In this way, these independent refineries are able to make plans of production and effective risk management, then reduce transaction costs.
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