In Unprecedented Move, China Plans To Pay For Oil Imports With Yuan Instead Of Dollars

by | Apr 2, 2018 | Headline News | 31 comments

Do you LOVE America?


    This report was originally published by Tyler Durden at Zero Hedge

    Just days after Beijing officially launched Yuan-denominated crude oil futures (with a bang, as shown in the chart below, surpassing Brent trading volume) which are expected to quickly become the third global price benchmark along Brent and WTI, China took the next major step in the challenging the Dollar’s supremacy as global reserve currency (and internationalizing the Yuan) when on Thursday Reuters reported that China took the first steps to paying for crude oil imports in its own currency instead of the US Dollars.

    A pilot program for yuan payment could be launched as soon as the second half of the year and regulators have already asked some financial institutions to “prepare for pricing crude imports in the yuan“, Reuters sources reveal.

    According to the proposed plan, Beijing would start with purchases from Russia and Angola, two nations which, like China, are keen to break the dollar’s global dominance. They are also two of the top suppliers of crude oil to China, along with Saudi Arabia.

    A change in the default crude oil transactional currency – which for decades has been the “Petrodollar”, blessing the US with global reserve currency status – would have monumental consequences for capital allocations and trade flows, not to mention geopolitics: as Reuters notes, a shift in just a small part of global oil trade into the yuan is potentially huge. “Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s gross domestic product last year.” Currently, virtually all global crude oil trading is in dollars, barring an estimated 1 per cent in other currencies. This is the basis of US dominance in the world economy.

    However, as shown in the chart below which follows the first few days of Chinese oil futures trading, this status quo may be changing fast.

    Superficially, for China it would be a matter of nationalistic pride to see oil trade transact in Yuan: “Being the biggest buyer of oil, it’s only natural for China to push for the usage of yuan for payment settlement. This will also improve the yuan liquidity in the global market,” said one of the people briefed on the matter by Chinese authorities.

    There are other considerations behind the launch of the Yuan-denominated oil contract as Goldman explains:

    • A commercial benchmark and hedging tool. Until now, Chinese oil imports were based on FOB benchmarks, with long-term procurement contracts settling off Platts Oman/Dubai or Dated Brent. The INE contract has therefore the potential to become the pricing reference for CIF China crude oil, enabling corporate financial hedging. Its warehouse structure is however likely to limit its use for physical crude delivery and may in fact at times reduce its hedge efficiency.
    • A new investment vehicle for onshore investors. The majority of China commodity futures trading volumes are from retail investors, yet these had until now little ability to trade oil futures. China’s capital control was the main bottleneck  to trading contracts like Brent as authorities only allow $50,000 outflow a year per person. While several petrochemical and bitumen contracts already trade in China, INE will be the first contract for crude oil, likely drawing significant interest.
    • Direct access to China’s commodity markets for offshore investors. China offers deep and liquid commodity markets to its onshore investors. Due to China’s tight capital controls, however, foreign investors have so far only been able to trade these through qualified onshore subsidiaries. The INE contract opens up the first channel for offshore investors to trade in its onshore commodity market, with both the USD deposit and capital gains transferable back to offshore accounts. The government further announced last week that it would waive income taxes for foreign investors trading these new contracts for the first three years. The obligation to trade in Yuan will also add a currency risk exposure to offshore investors. We illustrate in Exhibit 6 a likely template (amongst others) of how overseas investors will be able to access INE liquidity.

    The danger, of course, is that such a shift would also boost the value of the Yuan, hardly what China needs considering it was just two a half years ago that Beijing launched a controversial Yuan devaluation to boost its exports and economy.

    Still, in light of the relative global economic stability, Beijing may be willing to take the gamble on a stronger Yuan if it means greater geopolitical clout and further acceptance of the renminbi.

    Which is why restructuring oil fund flows may be the best first step: as of this moment, China is the world’s second-largest oil consumer and in 2017 overtook the United States as the biggest importer of crude oil; its demand is a key determinant of global oil prices.

    If China’s plan to push the Petroyuan’s acceptance proves successful, it will result in greater momentum across all commodities, and could trigger the shift of other product payments to the yuan, including metals and mining raw materials.

    Besides the potential of giving China more power over global oil prices, “this will help the Chinese government in its efforts to internationalize yuan,” said Sushant Gupta, research director at energy consultancy Wood Mackenzie. In a Wednesday note, Goldman Sachs said that the success of Shanghai’s crude futures was “indirectly promoting the use of the Chinese currency (which, however as noted above, has negative trade offs as it would also result in a stronger Yuan, something the PBOC may not be too excited about).

    Meanwhile, China is wasting no time, and Unipec, the trading arm of Asia’s largest refiner Sinopec already signed a deal to import Middle East crude priced against the newly-launched Shanghai crude futures contractwhich incidentally is traded in Yuan.

    The bottom line here is whether Beijing is indeed prepared and ready to challenge the US Dollar for the title of global currency hegemon. As Rueters notes, China’s plan to use yuan to pay for oil comes amid a more than year-long gradual strengthening of the currency, which looks set to post a fifth straight quarterly gain, its longest winning streak since 2013.

    In a sign that China’s recent Draconian capital control crackdowns have sapped market confidence in a freely-traded Yuan, the currency retained its No.5 ranking as a domestic and global payment currency in January this year, unmoved from a year ago, but its share among other currencies fell to 1.7 percent from 2.5 percent, according to industry tracker SWIFT.

    A slew of measures put in place in the last 1-1/2 years to rein in capital flowing out of the country amid a slide in yuan value has taken off some its shine as a global payment currency.

    But the yuan has now appreciated 3.4 percent against the dollar so far this year, with solid gains in recent sessions.

    “For PBOC and other regulators, internationalization of the yuan is clearly one of the priorities now, and if this plan goes off smoothly then they can start thinking about replicating this model for other commodities purchases,” said a Reuters source.

    Still, it will be a long and difficult climb before the Yuan can challenge the dollar and for Beijing to shift the bulk of its commodity purchases to the yuan because of the currency’s illiquidity in forex markets. According to the latest BIS Triennial Survey, nearly 90% of all transactions in the $5 trillion-a-day FX markets involved the dollar on one side of a trade, while only 4% use the yuan.

    * * *

    Still, not everyone is convinced that the new Yuan-denominated contract will create a “petro-yuan” as the following take from Goldman highlights:

    The launch of the INE contract is not just about oil, as it will also be the first Yuan denominated commodity contract tradable by offshore investors. Such a set-up meets the PBOC’s monetary policy committee goal to raise the profile of its currency in the pricing of commodities. It has raised however the question of whether the INE contract is an incremental step in achieving the currency reserve status for the Yuan. We do not believe so.

    While the INE launch does represent an additional step in the CNY internationalization, the CNY denomination of the INE contract does not in itself imply CNY investments. The INE contract does not represent an opening of China’s capital accounts since foreign deposits operate in a closed circuit, deposited in designated accounts and not to be used to purchase other domestic assets. In practice, the collateral deposit and any capital gains can be transferred back to offshore accounts. The potential for greater foreign ownership of Chinese assets is therefore not impacted by CNY oil invoicing and would require instead oil exporters to recycle their proceeds in local assets, for example. The incentive to do this has not changed with the introduction of the INE contracts. In particular, most Middle East oil producers still have currencies pegged to the dollar and limited ability to hedge CNY exposure.

    Whether or not Goldman is right remains to be seen, however it is undeniable that a monumental change is afoot in global capital flows, where the US – whether Beijing wants to or not – will soon be forced to defend its currency status as oil exporters (and investors in this highly financialized market) will now have a choice: go with US hegemony, or start accepting Yuan in exchange for the world’s most important commodity.


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      1. This is the beginning of the end of USA domination, the petrol-Dollar (a rigged game) kept us in a unique position to do a lot of silly things… that is over now.

        My advice would be 1)Do not panic 2)If you have serious money you need to diversify your investments in around the world assets backed by around the world currencies. Nothing fancy or difficult, simply have your assets in many different currencies so they rise and lower with the tide…. versus having all your egggs in one basket of Dollar backed assets. The Dollar is going to be in for a bad time as the Petro-Dollar goes away. 3)Do not freak out and put all your money in gold or bitcoins or battery stocks (no matter what hype you may read on any websites 4)If you do not have serious money there is nothing to be done. You are a pawn, a worker bee. Just keep doing what you are doing, keep your job, do a good job and… hope for the best.

        It is a shame the people in charge of things in the USA did such a poor job of selling us all down the river in exchange for their personal gain. We were the best in the world, the envy of all nations, had the Petro Dollar deal to keep the game rigged in our favor… and what did we do? We allowed the people to ruin it.

        Good luck everyone, I have dreaded this headline for 20 years. This is not hype, this is serious. I will be interested to see in the MSM says one word about this…. and I wont be surprised when they dont.

        Bottom line- if you have enough wealth then diversify diversify diversify… if not, make some popcorn and watch the show.

        • You said it all – plain truth – TG. The dollar will be abandoned like coyote-ugly gal the morning after 25 cent tequila shot night at the border bar. About time. It’s gone on way too long. Batten your hatches folks, the drop into the oblivion we’ve ignored is about to begin.

          • TPTB need an enforcer an its the US Military. This requires having unlimited by normal mathematical constraints funding. TPTB will go to WWIII if necessary to maintain their control.

        • You are correct, and your advice should not be taken lightly.

          During 1997 at work, a Chinese national with a green card came up to me and sat down during lunch break.

          Her words haunt me to this day, since she revealed she knew exactly what was going to destroy the U.S. and place China on top.

          She started straight out with her questioning me:

          Oh, you find girl. You live together. Then you get married.


          No, I don’t believe in that. I’m a believer in Jesus and the Bible.

          I then started questioning her about China, she told me the place was exploding with growth. I commented that I viewed the U.S. was declining, and she just smiled.

          Her: Oh, you move to China when China is on top?

          Me: No, (laughing) I’m going down with the ship. She never spoke to me again.

          Her point was well taken by me, America is declining due to total immorality. She easily identified that.

          You see, China is a nation that has denied Christianity. The U.S. on the other hand was founded as a Christian nation.

          China’s rise is purely due to Satan, and his coming New World Order. The West is clearly dying, morality is on it’s way out, and evil is exploding.

          The U.S. is dying because we are no longer are a Christian nation.

          We also may be headed into WWWIII that will dwarf WWII.

          The Bible mentions knowledge will be increased, and many will be going to and fro at the time of the end. This is the prediction of modern technology that we are experiencing right now.

          And it also describes medieval types of weapons being used in the end times.

          Armor, swords, shields, helmets etc., men fighting on horseback. I fully believe St. John was describing what he saw.

          Big changes are ahead of us.

          • There is no Jesus, there never was a Jesus. God himself wouldn’t give a shit about the US or any other country if there was a singular God (which there isn’t one anyway).

        • Why? Will the sky fall if China pays its own Yuan money?
          Not just a dollar in the world.

        • Why? Will the sky fall if China pays its own Yuan money? Not just a dollar in the world.

        • Hey, don’t forget to buy explosives! No end of the world party is complete without them! 😀

        • No surprise here. Integrating the Yuan into a world currency alongside the dollar and Euro has been a longstanding plan of the NWO which is how the WEST locks China into the CLUB that is played by American Rules.

          The USA still holds the majority voting rights in the IMF and can pull the rug out from under China at any time. As it stands China is still on “double secret probation” until it meets the RULES REQUIREMENTS: particularly the free flow of investment capital and a market based yuan instead of a PEGGED Yuan.

          Neither of which has happened yet, but this move will make the Yuan A BIT MORE FUNGIBLE and these Yuan will accumulate in the accounts of the BIG BANKS until such time as the Yuan INCREASES in Value against the dollar, delivering a massive profit to the holders of the cheap Yuan.

          Then the roles of China and the West will be reversed, with China the PRIMARY IMPORTER of the world’s goods and services. This is the PLAN. This has been the Plan, but it’s likely that war and earth changes will change the Plan down the road.

          I told this community last week, that China would piss and moan about TRUMP’S TARIFFS ($60B) and that China, while protesting adamantly, would yield to a FAIRER trade deal. Note that China’s “retaliation” amounted to a mere ($3B).

          That’s a PERFECT example of what’s to come. 🙂

      2. This is one big, “shot across the bow”. Its inevitable as China’s manufacturing and hence wealth creation grew (complements of the USA). The US is either run by idiots (unlikely), they are bought by globalist banksters (guaranteed), satan is inspiring intentional chaos (I’m not religious but this is highly likely regardless) or some combination of all.

        War is coming, “You can take that to the bank”, quite literally.

        • OK that does it. I’m spending ALL my fed notes on explosives! (anyone got some fer sale?) 😛

        • Kevin
          Organized religion is a creation of man. You don’t have to be religious to realize that evil is rampant. We are in a war with evil. It’s nvr been about religion it’s always been good vs evil. Just seems as if things are escalating to the point that of final battle.

      3. More fear porn.
        Money is a means to transfer wealth, it is not wealth.
        resources are. If Russia will accept Yuan for oil fine.
        The Chinese can deflate the value of the Yuan at any time
        and in the past they have done so. They could also inflate it,
        buy lots of oil and then turn around and deflate it.
        Get it? They aren’t operating as a free market.
        We cannot manipulate the dollar as easily. That
        is the main reason the world uses it. Swiss Francs
        would be a good second choice.

        • Ball Park franks are good too……
          When the shtf or similar the world is going to be shit.
          And if you survive it it will be even shittier.
          In fact it will be super shitty for a looonnnnggg time.
          If we are on our knees here we will just be conquored easily by russia or china or whatever.
          How long do you really want to live through shit like that?
          Like the pope said (and another one before him) There is NO hell.
          Unless your hell is living through decades of bad ass shit….

        • The US economy survives because of the false demand created by its special privilege of the US dollars reserve currency status. 75% of dollars are overseas largely because of this “Special Status”. Let it end an they come back here having no demand there with an extreme rise in prices as, “Too many dollars chase too few goods”. The US also loses its “heat sink” (power plant analogy) to absorb dollars create here; in essence exporting inflation.

          “Money is a means to transfer wealth, it is not wealth.”

          The US gave up wealth creation some time ago and has substituted money as its replacement. If the US operated financially by its wealth creation we would have at least a 50% to 70% reduction in standard of living. We have been literally ripping off the entire world to maintain our lifestyle. Its a fact.

          • Spot on about the false demand for dollars. The only reason people hold them is because they are forced to do so for trade settlement. Those dollars are held as in the form of Treasuries, which act as nothing more than glorified trade settlement paper. Once the Petro-Yuan goes full throttle, the dollar is, at best, nothing more than a regional currency. For someone selling oil, when they see that they’ll be able to convert a quarter to a third of their Yuan to physical gold bullion in their hands, they’ll dump the dollar in a heartbeat.

            The one thing that’s not being explained clearly in this whole process is how those dollars are going to bounce back to the US. First, no one is going to be shoving shrink wrapped pallets of dollars out the bung hole of an airplane and onto the tarmac of Reagan International.

            When those Treasuries get bounced, the Fed is going to effectively “buy” them vis Exchange Stabilization Fund through JPM. The US has next to nothing in gold bullion, but JPM is sitting on hundreds of millions of ounces of silver for the express purpose of being the ESF pay window for when these Treasuries get bounced. Whoever bounces the Treasuries is going to want to be paid in something real, and all the US has in that department is silver.

            What happens next? Silver will go parabolic. The wild card in all this is Mexico. If they settle Pemex oil in Yuan and stand for delivery on gold, they’ll slam the silver window on the US/Mexico border shut. Mexico produces almost 200m ounces of silver annually, and much of that goes into the US in return for dollars to service debt. Settle Pemex for gold, and Mexico no longer needs to squander its silver for dollars. They’ll keep their silver home, which would be the trigger that sends silver parabolic.

          • K2,
            ” Its a fact.” No, it is an opinion.
            Source your facts and I may agree.
            America and Canada can and do provide
            all I need.
            I do take advantage of cheap China crap, but
            I don’t need to.

            • Its a fact that the US exports its inflation to a pool of money around the world due to the US reserve currency status where 75% of US money is overseas. Lose that it comes home with catastrophic inflationary effect. Its as much of a fact as one plus one equals two and its the reason the US overthrows nations (Iraq & Libya) that attempt to break from the oil peg arrangement.

        • As you said, “source your facts” instead of personal opinions. Coming from the financial background, the biggest manipulated currency is the US dollar. As if your silly diatribe is not enough, you actually believe we have a “free market” economy? Wow, just wow. I bet you believe Trump is a second coming of Christ…..goodness sake….

      4. With all of the Chinese dumped goods in this country the yuan should be worth more than a few pennies. Chinese labor a corportists wet dream.

      5. I t’s not a unprecedented move. Its been tried before. and every country that dared to trade oil for something other than USA petro Dollars some excuse was made for the US military to bomb and make war upon them. Its a new ball game the USA military cannot bully China. I think in the long run its a good thing.

        • Old Guy

          Right you are as that is the US MO. China is untouchable but not the nations taking Chinese payment. A coup here and there; expect Angola (supposedly willing to accept Chinese currency) to be in the news demonized as a terrorist nation as the US covertly imports terrorists upon them. If China is serious they’re likely to have very close ties with Angola including a base. I would expect them to replicate Russia’s strategy in Syria. I envision Chinese troops standing along side Angolan troops fighting “insurgents” funded an armed by the US.

      6. What would happen if we stopped selling them our oil?


        • They would stop selling us their crap and people would FREAK OUT!

        • Nothing. They would buy it from someone else and the US would fill that void. Its like water, it seeks its natural level. The US being an exporter of oil isn’t entirely accurate as the US is still a NET importer.

          • K2,
            The thing you leave out is we don’t have to be a Net importer.
            Kill off the EPA and Democrat Eco nuts and we have more than enough energy resources. Our energy problems have always been political.

            • The US oil demand is roughly 20 million bbl/day while we produce 10 million bbl/day. It would be a herculean effort to double production. Is it possible at a cost comparable to work oil price? Unknown. Sustainable? Also unknown.

              The environmental movement is funded, funds come from big money. The Keystone pipeline is a prime example. If its thwarted by the “environmentalists” the oil will be sold to China instead. This makes China dependent upon a supply that the US can cut off. Things are not always as they appear.

              • world not work

          • Check out a Reluctant Preppers Rob Kirby video to get a real picture of how the US became an “exporter” of oil. It’s a 56 minute video, and it’s probably the best Kirby video you’ll ever see.

            The US buys Canadian shale oil at roughly a $30 discount to WTI. The cost for the US to produce a barrel of its own oil is higher than the discounted price for a barrel of Canadian. What does the US do? Sell its own higher cost oil into a low margin market, giving the appearance of the US being an oil exporter, and a low margin one at that. It’s a lame-brained attempt at oil price arbitrage that’s bound to fail.

            If Canada gets rid of the moron that’s running their country into the ground, this game ends. Oil being priced in RMB also ends this game. What happens to US oil “exporters”? They’ll collapse very quickly.

      7. Too bad no one is building electric cars that the working stiffs can afford.

      8. We live in a world that is in effect a big chess game. The real players are disguised. The pieces are on occasion likewise. The “rules” of the game are variable, the reporting largely false. One can better figure out what is going on by looking at the effects of actions not the actions themselves nor the ostensible justifications which are virtually always bullshit. As FDR said, “Nothing in politics happens by accident, if it happened it was meant to happen that way”.

        The US is hoarding is own oil and the environmentalists are the ostensible excuse.

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