Petrodollars have dominated the global energy markets for more than 40 years. But now, China is looking to change that by replacing the word dollars for yuan.
Nations, of course, have tried this before since the system was set up by former US Secretary of State Henry Kissinger in tandem with the House of Saud back in 1974
Vast populations across the Middle East and Northern Africa quickly felt the consequences when Iraq’s Saddam Hussein decided to sell oil in euros. Then there was Libya’s Muammar Gaddafi’s pan-African gold dinar blueprint, which failed to create a splash in an oil barrel.
Fast forward 25 years and China is making a move to break the United States petrodollar stranglehold. The plan is to set up oil-futures trading in the yuan, which will be fully convertible into gold on the Shanghai and Hong Kong foreign exchange markets.
The Shanghai Futures Exchange and its subsidiary, the Shanghai International Energy Exchange (INE), have already run four simulations for crude futures.
It was expected to be rolled out by the end of this year, but that looks unlikely to happen. But when it does get off the ground in 2018, the fundamentals will be clear – this triple oil-yuan-gold route will bypass the mighty green back.
The era of the petroyuan will be at hand.
Still, there are questions on how Beijing will technically set up a rival futures market in crude oil to Brent and WTI, and how China’s capital controls will influence it.
Bejing has been quite discreet on this. The petroyuan was not even mentioned in the National Development and Reform Commission documents following the 19th National Congress of the Communist Party last October.
What is certain is that the BRICS, the acronym for Brazil, Russia, India, China and South Africa, did support the petroyuan move at their summit in Xiamen earlier this year. Diplomats confirmed that to Asia Times.
Venezuela is also on board. It is crucial to remember that Russia is number two and Venezuela is number seven among the world’s Top 10 oil producers. Beijing already has close economic ties with Moscow, while it is distinctly possible that other producers will join the club.
“This contract has the potential to greatly help China’s push for yuan internationalization,” Yao Wei, chief China economist at Societe Generale in Paris, said when he hit the nail firmly on the head.
An extensive report by DBS in Singapore also hits most of the right notes, linking the internationalization of the yuan with the expansion of the grandiose Belt and Road Initiative.
Next year, six major BRI projects will be on the table.
Mega infrastructure developments will include the Jakarta-Bandung high-speed railway, the China-Laos railway and the Addis Ababa-Djibouti railway. The other key projects will be the Hungary-Serbia railway, the Melaka Gateway project in Malaysia and the upgrading of Gwadar port in Pakistan.
HSBC has estimated that the expansive Belt and Road program will generate no less than an additional, game-changing US$2.5 trillion worth of new trade a year.
It is important to remember that the “belt” in BRI is a series of corridors connecting Eastern China with oil-gas rich regions in Central Asia and the Middle East. The high-speed rail networks, or new “Silk Roads”, will simply traverse regions filled with, what else, un-mined gold.
But a key to the future of the petroyuan will revolve around the House of Saud, and what it will do. Should the Crown Prince, Mohammad bin Salman bin Abdulaziz Al Saud, also known as MBS, follow Russia’s lead? If it did, this would be one of the paradigm shifts of the century.
Yet there are signs of what could happen. Yuan-denominated gold contracts will be traded not only in Shanghai and Hong Kong but also in Dubai. Saudi Arabia is also considering issuing so-called Panda bonds, with close ally, the United Arab Emirates, taking the lead in the Middle East for Chinese interbank bonds.
Of course, the prelude to D-Day will be when the House of Saud officially announces it accepts the yuan for at least part of its exports to China. But what is clear is that Saudi Arabia simply cannot afford to alienate Beijing as one of its top customers.
In the end, it will be China which will dictate future terms. That may include extra pressure for Beijing’s participation in Aramco’s IPO. In parallel, Washington would see Riyadh embracing the petroyuan as the ultimate red line.
An independent European report pointed to what might be Beijing’s trump card – “an authorization to issue treasury bills in yuan by Saudi Arabia” as well as the creation of a Saudi investment fund and a 5% share of Aramco.
Nations hit hard by US sanctions, such as Russia, Iran and Venezuela, will be among the first to embrace the petroyuan. Smaller producers, such as Angola and Nigeria, are already selling oil and gas to the world’s second largest economy in Chinese currency.
As for nations involved in the new “Silk Roads” program that are not oil exporters such as Pakistan, the least they can do is replace the dollar in bilateral trade. This is what Pakistan’s Interior Minister Ahsan Iqbal is currently mulling over.
Of course, there will be a “push back” from the US. The dollar is still the global currency, even though it might have lost some of luster in the past decade.
But the BRICS, as well as the Shanghai Cooperation Organisation, or SCO, which includes prospective members Iran and Turkey, are increasingly settling bilateral and multilateral trade by bypassing the green back.
In the end, it will not be over until the fat (golden) lady sings. When the beginning of the end of the petrodollar system becomes a fact, watch out for a US counterpunch.
Pepe Escobar,
This well written article makes no sense at all to people who are not economists or involved in international trade.
It would assist if you explain that this arrangement called ‘petrodollar’ is an artificial and deceitful device by the U.S. after it abandoned the dollar-gold conversion by tying its fiat dollar currency to Saudi global dominance in oil supply and protecting the security of the Saudi Royal Family. Basically it forced a swap of Saudi ‘oil’ for ‘gold’ to secure global financial hegemony.
In fact what the Chinese is doing or going to do is just lubricating the current market economic forces at play to arrive at a new global currency that is more realistic in global trade terms like the Yuan and the Euro in alignment with other sources of oil or a coterie of oil suppliers – that is substitute the Saudis with a coterie of the 2nd tier oil producers like Russia, the former Soviet Republics in the Caucasus and the South Americans or the West Africans or even Indonesia and Malaysia
It is not as if China is doing anything covert. It is just how business and commerce and the global market works. It is all about Supply and Demand!
The U.S. cannot determine the global economy through military prowess and Cold War propaganda. The citizens of the world are not naive like they used to be. The Chinese are a clear example. Less than 20 years ago they were mainly all walking or pedalling around in bicycles, and a flush toilet was a total luxury and most homes had no high tech TV and whitegoods and other modern conveniences let alone computers.
Now if you are a manufacturer and the Chinese are not buying your product, you will not be a global success but rather you are a nobody!
Common sense tells you that if you want your currency to be globally eminent then among other things you have to be big in the supply of goods and big in the consumption of goods.
How difficult is it to understand that it has nothing to do with whether you are a democratic nation or otherwise.
It comes down to who is the best promoter, facilitator and exponent of global trade.
Actually I found the article easier to understand and less biased than your subsequent writing.
The US doesn’t believe the world to be stupid I might add and judging from its new plan of global action, I’d say it has alot more respect for China than you do for America.
What I enjoy about Americas new aims is that it is well aware of the need to change and evolve in order to remain strong and competitive. So I wonder if the critics will evolve with it and quit complaining about petrodollars and gulf wars and realize that America will grow and evolve to keep up with Chinas challenges to its dominant position in the world.
Stuart Budgen …Mr. Budgen, would you explain this statement: "The plan is to set up oil-futures trading in the yuan, which will be fully convertible into gold on the Shanghai and Hong Kong foreign exchange markets."?
What I don’t understand is the quantity of gold. If the Chinese yuan was convertible to one ounce of gold this year, will the same yuan be convertible to one ounce of gold next year?
The article said the Chinese yuan is "convertible into gold", does this mean the Chinese yuan will be convertible to a fixed quantity of gold all the time?
CrytoRuble is perhaps the one which can be breakout that is backed by gold.
Wood Wu I can’t explain the fine tune details of the deal. Obviously the people involved would worry about the details in order to make it interesting for investors.
Thomas Daniel Kuhn Not enough gold at current price. What about at higher prices?
there are 2 variables: quantity of gold, and price of gold.
It’s hard to change quantity of gold, how hard to change price of gold?
Ahhh, grasshopper, may be easier said than done.
China is merely offering a more stable alternative to the petrodollar.
Americans should welcome the competition which will force their politicians to be more fiscally responsible and concentrate on the real economy instead of runinous military misadventures.
QE or printing fiat money will be harder and cause the U$ to drop. This will make imports more expensive and foster more exports. The US real economy will grow and there will be more employment as well as smaller trade deficits. The global financial system will be more stable. Pensioners will not have their savings confiscated by negative interest rates anymore and get modest positive returns.
This may be too hard for the weeping CIA trolls here to understand.
This is bad news only to those that benefit, or believe so, from the current monopoly.
China make an important step in the right direction. Next should be to make the Yuan more available and make a MEGA capital increase in AIIB. AIIB is an interesting investment and huge pension funds will line up to provide capital. Huge investment is needed in Asia and to rebuild the Middle East from decades of war.
Haha . They are already sleeping with Israel , aren’t they?
The USA is on the verge of, as the President might say, huge oil production, since the regulations stopping it are being systematically removed. America may become one of, if not the top exporter of oil to the world in a short time. Of course, those export deals will be in the US dollar. It will be interesting to see how all of this plays out. If China backs its oil futures with physical gold we may see the US return to some sort of gold standard for the dollar which would probably run the price of gold to 10000 an ounce if you figure the dollar debt, dollar quantity with the amount of physical gold in existence according to Jim Rickards. Would that be competitive with Chinese gold prices? This may end very badly. Possibly world war.
Everybody likes gold, no worries about it being seized, or sanctioned.
The US deal with Iran, was in part to shut down the oil for gold trade Iran was undertaking. To get the sanctions removed Iran had to stop the gold trade.
Obviously not.
At the current value of the US dollar, American oil would be too expensive to be competitive on the global market.
However if the US dollar value was cut by 2 thirds, it would be competitive with Russian oil.
A so called expert has suggested that a gold price of 30 thousand US dollars would be needed to cover the money supply.
Yes, I also think the US will start WWIII to keep the empire afloat.
GOOD NEWS
Vince Cheok i fully concur. This little indian yashad is a retard and a total moron. He is racist and offensive, thats why he put up a faceless fake profile, is ever so afraid of be recognised and got his face slammed in the mud. LoL
Wood Wu A yellow idiot kowtowing to whites in Ontario. Thats what real subjugation is about, you little wu.
Allan Jeffreys I agree. I think this will not end well.
The Chinese are not silly enough to do this. It makes absolutely no sense.
The Chinese have trouble spending the US$ they accumulate via the trade and current account surplus. Why would they throw gold at oil exporters?
The ‘petro-dollar’ doesn’t really exist anyway. That oil is traded in US$ benefits the US banks that create the loans.
But that’s about as far as it goes.
Wood Wu
What are you? Asian canadian person or asian hater? I checked you lut on facebook and from what I read you seemed a chinese hater. What happened to you? Or are you one of those Canadians – non Asians pretending to be one?i But, if you are really Asian – i would say you have strong racial issues with yourself.
In the past I read some of your comments on some articles and found them to be hateful or inaccurate, to say the least. Your comment on this one it is not different.
Why is it so hard for you to understand the world is changing and it is very possible the world would be governed not by the Western countries like China and others similar countries?
Pepe, I always enjoyed your early almost psychedelic stream of consciousness ranting musings, as this century began with insanity of an international variety it was always great to encounter reason and logic in so unlikely a place as your columns. And now I appreciate the maturity and experience that inform your work, and wish that, since you’ve stressed the importance of the Silk Road Initiative for more than a decade you would report on the actual physical progress of what has to be an incredibly difficult generational change. tks
Wood Wu Is the price of oil in US dollars static?
Well we all know that it isn’t, so why would expect the price of oil to be static in any other currency?
Being able to swap your holdings from oil, to Yuan, to gold and back again would appeal to speculators, and the futures market is speculation.
Thomas Daniel Kuhn I don’t hear many people talking about Fractional Reserve Banking, you are maybe the first I’ve heard of!