Could the Petroyuan One Day Oust the Petrodollar?

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The launch of renminbi-denominated crude contracts in March could eventually see the petroyuan emerge as a viable rival to the petrodollar, expanding China’s ability to influence international oil markets.

China is currently the world’s largest buyer of crude oil, giving it strong motivation to control import prices for the commodity, which are currently dominated by the greenback-denominated Brent and West Texas Intermediate benchmarks.

The expanded use of the renminbi for oil transactions could also advance Beijing’s efforts to internationalise the Chinese currency, conferring it with greater sway over global trade.

Observers point out, however, that China still has a long way to go before the petroyuan becomes a viable rival to the petrodollar.

A recent paper by Citigroup analysts Tracy Liao, Edward Morse and Anthony Yuen published in he Oxford Institute for Energy Studies points out that established crude contracts enjoy a number of key conditions that are vital to their success, including sizeable physical trading volumes, broad market acceptance, consistent quality and quantity of supply, as well as demand for hedging from market participants.

“Success of the crude contract requires participation by a broad range of producing and refining companies that engage in hedging and can provide or take physical delivery as settlement,” the paper said.

Anjli Raval points out in the Financial Times that while Chinese market participants, including state-owned refiners, traders and retail investors, have already leaped on board the new contract, foreigners are feeling far more trepidation.

They are concerned about the Chinese government’s penchant for market intervention and the imposition of currency controls, ┬ápotential regulatory responses to the remittance of large sums abroad, as well as the seven grades of crude deliverable against the contract.

They’ve also been put off by the daily restrictions on price movements, as well as limited trading hours and market shutdowns during Chinese vacations.

China will need to overcome these hurdles and effectively attract more foreign participants if it hopes for the petroyuan to enjoy international clout.

“Should foreign investors stay away longer term, their absence could hinder China’s push to become a big pricing hub, let alone price-setter for the world,” writes Raval.

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