By Paramjeet Singh Berwal
The dominance of the dollar as the world’s reserve currency is something that gives the US an edge in the world economy. However, China’s ambitious plans to trade oil in yuan have proved to be a threat to the dollar’s supremacy. To worsen the situation, this happens when there is a trade war going on between the two countries. On Sunday, March 26, 2018, China’s yuan-based oil futures showed muscles right after debuting at Shanghai exchange as two of the world’s biggest commodity traders – Glencore Plc and Trafigura Group participated in trading. According to the South China Morning Post, the trading of yuan-based oil futures contracts for September 2018 settlement began at 440.20 yuan per barrel, reaching the highest of 447.1 yuan per barrel for the day, against the reference price of 416 yuan per barrel. This led to an increase in oil prices of Brent Crude in London and West Texas Intermediate (WTI) in New York that serves as major benchmark prices for the purchase of sweet light crude oil at the global level. The rivalry between the Chinese and the US benchmarks is projected to intensify.
China’s dream of making its currency powerful
Since long, the US has been accusing China of manipulating the value of yuan arbitrarily. The denomination of oil futures contracts in yuan gives China an opportunity to make its currency more acceptable in the global economy. The dream is not far-fetched, it seems, given the international participation in the futures contracts trading. Also, by having oil futures traded in yuan China is also setting up its own benchmark and in a way trying to usurp power in the context of pricing particular grades of oil in international market. This will lower the influence and value of the dollar in the global oil market, which is perhaps one of the most crucial sources of greenback’s strength.
China’s attempt at de-dollarisation
China could afford to contribute to de-dollarisation because it became the world’s importer of crude in 2017 importing 420 million tonnes. There were many attempts made by the regimes of Saddam Hussein in Iraq and Gadhafi in Libya to trade oil in a currency other than the US dollar. However, the attempts resulted in those regimes being wiped out completely, as Max Keiser pointed out in a news report on RT in 2017. Regardless, the attempts continue with Venezuela coming up with the private sale of its oil backed cryptocurrency “Petro” in February 2018 and public sale that was intended for March 20, 2018. Each token of Petro was to be backed by a barrel of oil, as promised by the President of Venezuela and reported by BBC, which ostensibly seemed to be a better option than fiat currency. It is needless to mention that President Trump banned all kinds of transactions in Petro.
Also, China has been trying to coax Saudi Arabia into trading oil in yuan, as was reported by CNBC. It becomes a more comfortable situation for Russia that has long been advocating the need for de-dollarisation of oil trading. Though China is likely to continue to be the biggest importer of crude oil, the yuan-denominated trading in oil might pick up and offer to check the prospects of dollar growth, increasing competition in the field. However, whether the US does something to strengthen the already weakening dollar and counter what China just did is yet to be seen.
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