China’s move to price oil in national currency

China has not waited too long for its proposal to link oil futures contracts and pricing them with its national currency — the yuan. It recently announced this step was taken at a time when trade relations between China and the US are going through the worst period due to Trump’s decision to impose customs duties on Chinese exports to the US to the tune of $60 billion, igniting a trade war between the two countries.
This decision represents a major shift in energy markets around the world and is likely to trigger a response from some countries exporting oil to China by adhering to it.
Moreover, the move seeks to invest yuan adoption as a global currency alongside the dollar, yen, pound and euro by the International Monetary Fund.
China has long sought to convert yuan into an international currency to conduct trade exchanges and facilitate global intra-regional trade depending on the provision of direct platforms linking the yuan and the country’s currency trading directly with it.
In an effort to raise the value of yuan and maintain its stability, China boosts its gold reserves from time to time, putting it today in the second place, just behind the US, globally.
According to oil experts, the move will boost Beijing’s efforts to play a bigger role in international economy, while the last step of the dollar’s control in world trade will be held back and help to correct imbalances of energy markets.
The idea of China issuing yuan-denominated contracts dates back to 2012 when the price of crude oil exceeded $100 a barrel. The Chinese believe the move for pricing oil futures contracts denominated in their local currency, the yuan, is a step long overdue, and represents a challenge to oil, which is priced in US dollars.
A total of 23 foreign agencies have registered their names to provide brokerage services to overseas investors on the Shanghai Stock Exchange.
Liu Shiyu, Chairman at China Securities Regulatory Commission, said the commission has the confidence and the ability to build a future oil contracts safe market, pointing out that it will play an important role in his country’s economy.
It is no secret that oil is the highest traded among primary commodities in world trade volume, estimated at $14 trillion annually, 99 per cent of which is traded in US dollar. The strategy of China’s decision lies in oil which it depends on for economic and industrial development.
It is a well-known fact that China is one of the largest importers of oil (8.8 million barrels a day), surpassing that of the US, whose oil imports ranges around 7.5 million barrels a day.
Moreover, China is seeking to expand its influence on the price of black crude sold in Asia and make its currency a bigger player across the world to extend its influence on global economy.
Since oil is the mainstay of the economy and the growth of the Chinese economy, the Chinese move is a strategic step to secure oil supplies in the long term as well as building strategic oil reserves based on current oil prices denominated in its local currency rather than the dollar.
The recent Chinese move may be a real threat to America, which dominated with its currency for years on the price of crude oil. All previous statements on issuing oil denominated in a currency other than the dollar ended with failure. In 2015, Russia, the biggest oil producer, announced plans to carry out all crude purchase operations with China in the yuan, which does not preclude the issuance of a Russian decision in this regard in the upcoming period.
Experts rule out the emergence of economic implications from the Chinese move at present, stressing that it is too early to evaluate the experiment, as it requires more time to judge.