Noida, Uttar Pradesh, India

Till 1974, the reputation of United States Dollar as a global currency was not so established. It was considered at par with Japanese Yen and Pound Sterling. However, an oil pact between Saudi Arabia and the US changed the entire scenario and made US Dollar as the most dominating world currency as on date. 

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Today, out of over 700 Billion Dollar of global oil trade, more than 95% happens in US Dollar and every country desirous of buying oil from its producers, such as ex-Russian Federation countries, Middle East or Latin America must first accumulate its dollars. 

China has strong reasons to start this initiative as they import over 18% of the world oil and, in the last one decade itself, their crude oil requirements have risen by more than 235%. In 2010, China used to import little less than 4 million barrels of crude oil a day which is now touching over 9.5 million barrels per day, currently the highest in the world. This trend is likely to continue as China is primarily a manufacturing based economy and crude oil is an essential item for them. Being the biggest importer and considering the current global scenario where China is engaged in a kind of muscle flexing with the United States, Dragon is trying to work out new ways to reduce its dependence on the US Currency. 

As per recent reports, China is planning to cover its future oil contracts under “Shanghai International Energy Exchange Program” and going to launch it on 26th March 2018. The “Shanghai International Energy Exchange Program” is named by its acronym INE and will include seven kinds of global crude oils. These are primarily from the Middle East and almost all Chinese companies are expected to use INE for their purchase of oil from that region. 

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It will help Chinese buyers to lock the future oil prices and pay in their local currency, giving an answer to Uncle Sam by pitching of Petro-Yuan against Petro- Dollar. The most important part of the Chinese strategy is that they have located this “Shanghai International Energy Exchange Program” in their Free Trade Zone which will facilitate foreign traders also to invest. 

It did not come suddenly but China had been preparing for it since long. Recently, some of the global economies decided to keep Chinese Yuan in their foreign currency stockpile after IMF decided to designate Chinese Yuan as a global currency in 2015. The main agencies which are keeping Renminbi as forex reserve are Deutsche Bundesbank, the German Central Bank, European Central Bank (ECB) and International Monetary Fund (IMF) too. And recently our neighbour Pakistan also decided to make Yuan as a primary Foreign currency. But China has a long way to go. Currently, the share of Renminbi in the global forex reserves is just 1.08% with US Dollar dominating at 63.5% of all reserves. Euro is next with 20%. 

In the current scenario, the use of Chinese Yuan is increasing rapidly due to their export-based economy and this is the main reason why China could take the initiative of launching Petro-Yuan. If we take the global trade, The Renminbi is third largest circulated currency in the world after US Dollar (39%) and Euro (33%) with 28% of the world trade. However, in case of crude and petroleum products, US Dollar is still strong with more than 95% of global trade happening through this. 

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So, what is the Chinese stake In this? They have a long and ambitious plan for this. Let’s see how China expects to be benefitted out of this:

•    Firstly, to dominate global oil market, China would promote its currency in global oil trade. 

•    Secondly, since it will involve future price trading and benchmarking, it will protect them from higher price surges and they will be able to affect global oil prices in the long term. As oil prices are rising once again, the biggest importer of oil will have the future assurance of prices. 

•    Thirdly, many Chinese industries are using a different kind of crude grades for their various applications. And, since, they are having different pricing for these types of crudes they can effectively benchmark the same in the international market and, hence, get benefitted.

China’s previous experience in this regard had been good. In 2015, when they endorsed Nickel as one of the community to be traded in Yuan, it crossed all benchmarks of London Metal Exchange within a short time span of six months. But the stakes are high this time. 

China was ready to launch their INE or “Shanghai International Energy Exchange Program” in 2016 itself but the sudden dip in global oil prices forced them to postpone this move and wait for a right opportunity. With the improvement in global oil index, they are ready to start it. 

So, who will participate in this program and make it a success? 

•    As mentioned earlier, China already has a sizeable share of global trade, including that with the oil-producing nations. China will try to replicate some of it in its energy exchange. 

•    Also, there are many countries like Pakistan who do import oil and are under the influence of China. They will certainly form part of the future trade in INE. Though the value will be small, it will give a push to the program. 

•    Chinese ‘Belt and Road Initiative” is aimed at connecting countries to create a Eurasian Trade corridor. Some of these countries, especially erstwhile Russian Federation, are producers and exporters of crude too. They are likely to join INE to form a syndicate against the global monopoly of US Dollar. Russia has already started by selling some part of its oil to China against Renminbi. 

•    For Middle Eastern countries who are still the biggest producers of oil, the risks caused by the dominance of United States will reduce. This resulted in the fall of global oil prices in the last few years. 

•    Global oil traders see China as the fastest growing market for their oil products. 

Analysts say unanimously that it is an ambitious start for China but it is a highly risky option, keeping in view of the volatility in the global oil trade. It may take years, if not decades, to even establish Renminbi as a global oil currency. Dollar is a fully established and stable currency and it is unlikely that oil traders will put their investments at stake for trying out new ventures. 

The global oil market is controlled by the Middle Eastern countries and their reliance on the United States are much higher than China. Since the number of countries is small, the risks involving the prices are high and, last but not the least, breaking the monopoly of US Dollar is extremely difficult, especially where such unpredictable commodity is involved.

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)