Many countries that are oil importers have to maintain a stock of US Dollars in order to buy Crude Oil, and many oil exporters are paid in US Dollars, based on the WTI index. This means trading for USD on FX markets to get US dollars, and parking their US Dollars in US Treasury bonds until they need them. All this creates fees for Wall Street, and helps prop up demand for the US Dollar. By breaking that linkage, China stands to not only receive those fees itself, but to get out from under the threat of being sanctioned by the US, and/or being excluded from the SWIFT international banking system
This could be seen as preparations for splitting the world into 2 trading blocs when WW3 happens, as seems to be a top priority for the US.
China Readies Yuan-Priced Crude Oil Benchmark Backed By Gold
The world’s top oil importer, China, is preparing to launch a crude oil futures contract denominated in Chinese yuan and convertible into gold, potentially creating the most important Asian oil benchmark and allowing oil exporters to bypass U.S.-dollar denominated benchmarks by trading in yuan, Nikkei Asian Review reports.
The crude oil futures will be the first commodity contract in China open to foreign investment funds, trading houses, and oil firms. The circumvention of U.S. dollar trade could allow oil exporters such as Russia and Iran, for example, to bypass U.S. sanctions by trading in yuan, according to Nikkei Asian Review. To make the yuan-denominated contract more attractive, China plans the yuan to be fully convertible in gold on the Shanghai and Hong Kong exchanges.
Last month, the Shanghai Futures Exchange and its subsidiary Shanghai International Energy Exchange, INE, successfully completed four tests in production environment for the crude oil futures, and the exchange continues with preparatory works for the listing of crude oil futures, aiming for the launch by the end of this year. ?
“The rules of the global oil game may begin to change enormously,” Luke Gromen, founder of U.S.-based macroeconomic research company FFTT, told Nikkei Asia Review.
The yuan-denominated futures contract has been in the works for years, and after several delays, it looks like it may be launched this year. Some potential foreign traders have been worried that the contract would be priced in yuan.
But according to analysts who spoke to Nikkei Asian Review, backing the yuan-priced futures with gold would be appealing to oil exporters, especially to those that would rather avoid U.S. dollars in trade.
“It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either,” Alasdair Macleod, head of research at Goldmoney, told Nikkei.