Published: Thu, March 29, 2018
Money | By Michele Stevens

Death of U.S. dollar? China launches petro-yuan to challenge greenback's dominance

Death of U.S. dollar? China launches petro-yuan to challenge greenback's dominance

"China has used this contract in an innovative way, to fill in the void of a voice representing buyers in Asia", said Li Li, an analyst with Shanghai based commodities researcher ICIS-China.

Shanghai spot crude futures jumped to a high of 447.1 yuan (S$93.41) per barrel shortly after its debut, before easing back to a close of 429.9 yuan at 0700 GMT.

The price for Brent crude oil, the global benchmark, was moving erratically before the start of US trading.

West Texas Intermediate crude for May delivery fell as much as 69 cents to $64.56 a barrel on the New York Mercantile Exchange, and traded at $64.68 at 2:46 Singapore.

Shanghai Crude aims to rival the world's two crude benchmarks, luring overseas traders with the promise of a deep pool of liquidity and the chance for arbitrage between Asian, U.S. and European markets. This is the first in Asia and it allows foreign companies to participate, with contracts being settled in renminbi.

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It past year surpassed the U.S. as the world's biggest buyer of foreign oil.

On the other hand, China is not leaving everything to market forces.

The Shanghai Futures Exchange is playing down speculation that the aim is to create a global oil benchmark, stressing that it will be a long time before the contracts become a major hedging tool for global and domestic oil producers, refiners and consumers. To attract greater trade participation, Beijing plans to exempt foreign traders and organizations from income tax. About 19 foreign brokers had registered to trade the contracts as of last week, the exchange said.

Brent and WTI, in contrast, were down by that time, weighed down by concerns over a looming USA trade dispute with China.

Still, China offers the potential for a deep, liquid market, buoyed by an explosion of interest from mom-and-pop investors that has supported its vast commodities derivative markets from apples to iron ore in Shanghai, Zhengzhou and Dalian.

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"It's hard to see it becoming a major driver of oil prices in the short to medium term", Australia & New Zealand Banking Group senior commodities strategist Daniel Hynes said.

The yuan-denominated contract will also help Beijing's efforts to internationalise the nation's currency, said Woodmac's Gupta.

Crude oil futures slipped on Monday, but losses were capped by a rebound in stock markets and escalating Saudi-Iran tensions.

WTI is now trading above $64.60.

"The trade war story should be taken into account when trying to quantify the potentially bullish effect of the geopolitical element in oil markets", said analysts at consultancy JBC Energy.

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