In January 2018, China started trading oil futures for the first time in many years
Oil futures in RMB can move the US dollar as a global currency, but not immediately.
In December 2017 the State Council of China gave permission for trading futures (Crude oil future). That was reported by the Shanghai information resource Jiemian.
The trading started at the Shanghai International Energy Exchange – a branch of the Shanghai Futures Exchange (under the acronym INE).
Futures contracts fix prices today for later delivery, hedging possible risks. The most important consequences of the Shanghai trading for the world oil futures market are:
- Chinese buyers will be able to pay futures in local currency;
- For the first time for China, foreign traders will be allowed to invest in futures trading.
In China there are 3 key commodity exchanges:
- Shanghai Futures Exchange, established in 1999;
- Dalian Commodity Exchange, established in 1993;
- Zhengzhou Commodity Exchange, established in 1990.
None of them previously allowed foreign capital to participate in the work due to the capital control by the state Chinese regulators.
The reaction of foreign oil companies and traders is not yet clear, because over the last 2 years followed the devaluation of the Yuan in 2015, China experienced a massive outflow of capital from the country, despite the giant local stock and bond market.
The market in China, like in any eastern country, is quite volatile, and requires constant attention of the authorities.
In 1993, China’s authorities already introduced oil futures, but after 1 year they were forced to suspend trade because of too much volatility.
Trade in oil futures in China was first planned back in early 2017, but it took almost a year to test the platform and comply with comments.
In 2017, China surpassed the US as the largest importer of oil in the world, so the activation of futures trading on the domestic market was quite predictable.
At the initial stage, there will be some control over pricing based on international benchmarks quoted in US dollars.
Consolidation of oil contracts in RMB will help to increase the use of China’s currency in the world trade.
But this can take years, because while the exchange of China is not a key player at the oil futures market.
But this will happen if China continues to revive the Silk Road project – “One Belt and One Road”.
China plans to participate in the IPO of Saudi Aramco, which could strengthen RMB as a tool for global payments.
China’s oil and gas will only benefit from using RMB in oil futures trading, because the benchmark will be the valuation of the oil used by local refineries, so Shanghai futures may differ in price from Western contracts.