China challenging US dollar domination by pricing oil in yuan

China is taking aim at the U.S. dollar as the choice for trading in oil. Since the 1970's almost all oil trade has been in U.S. dollars even when trading does not involve Americans.

As a result of the U.S. dollar being used to price and trade oil there is a huge demand for U.S. dollars, giving the U.S. great economic and strategic power. China is reported to be setting up a futures market using its own yuan currency and also will introduce an oil benchmark priced in yuan in coming months moves that may help lessen the dominance of the U.S. dollar in the oil trade.

Renminbi refers to the currency and yuan is the basic unit but they are sometimes used interchangeably. The relation is like that of sterling and pound in U.K. currency. Renminbi is referred to in the appended video.

Changing the international currency game

Having an oil futures market in yuan should increase the demand for Chinese currency and the money may very well be recycled into the Chinese economy. Because of the dominance of the dollar the U.S. has been able to borrow money at low rates as its currency has been in demand. Petrodollars also often flow back into the U.S. economy creating economic growth. The U.S. dollar has also become a safe haven for many investors around the world.

In March of this year, China imported 9.17 million barrels of oil per day breaking its previous record of 8.57 million bpd. This was more than the U.S. imported for March and for the year, making China the top global oil importer. Given this record it makes sense to price oil in yuan.

China plans to launch oil futures contracts on the Shanghai International Energy Exchange. However China must convince major countries such as Saudi Arabia and Russia to participate in the exchange or the market will be not deep and liquid enough to make a difference and attract investors.

Another problem is that the yuan does not float freely but is itself fixed to the dollar and adjusted each day. John Dricscoll, director of ITD Energy Services said: "My biggest reservations are the role of the Chinese central government, potential state intervention and favoritism toward Chinese companies."

However, China has been gradually loosening its grip on the yuan. Gai Luft, of the Institute for the Analysis of Global Security said:"Game changer it is not — at least not yet. But it is another indicator of the beginning of the glacial, and I emphasize the word glacial, decline of the dollar."

The beginning of the end for dollar dominance?

Other analysts see the decline of the dollar's domination happening quicker. Juerg Kiener of Swiss Asia Capital said that the use of the yuan in oil trading is well advanced with the launching of the Shanghai benchmark.

There have already been some transactions in yuan particularly with Iran which early-adopted yuan-based sales to avoid the U.S. Treasury Dept. Russia too agreed to some yuan-based transactions due to U.S. sanctions. Venezuela has also begun to price its oil in Chinese yuan.

Some believe that the success of the Chinese benchmark project depends upon convincing a country such as Saudi Arabia to agree to yuan-based transactions. Saudi Arabia sells more than a million barrels a day to China. However Russia is the top supplier exporting 1.545 million bpd in September to China. Russia has been taking market share away from the Saudis. The Saudis may eventually be forced to trade in yuan if they do not want to lose even more market share to Russia.

There are also reports that Chinese state-owned oil companies are considering an outright purchase of five percent of Aramco the Saudi state-owned oil company. The Saudis are said to be considering the offer as an alternative to issuing an IPO.

Carl Weinberg of High Frequency Economics said: "I believe that yuan pricing of oil is coming and as soon as the Saudis move to accept it — as the Chinese will compel them to do — then the rest of the oil market will move along with them.” If the Saudis did this it could face the ire of the U.S. but if it does not do so it could lose the Chinese market.

Cryptocurrency vs real currency

The role of cryptocurrency in the decline of the dollar may become significant. The Kremlin has announced that it will create a new state-supported cryptoruble. However according to Oil Price:.".the Kremlin announced that it will be creating a new state-endorsed cryptocurrency backed by gold. The goal of this coin is to allow free exchange between the cryptoruble and the ruble, and to reduce dependence on foreign currency while stimulating the domestic online economy."

A Kuwaiti finance firm suggested at a Gulf Cooperation Council(GCC) meeting that the GCC could benefit from trading oil for bitcoin. The firm claimed that that the GCC could save money with faster, cheaper, and more efficient transactions. Some also like the anonymous feature of transactions through bitcoin.

The dispute between Qatar and Saudi Arabia may also involve trading in yuan. Over the past two years, Qatar has conducted more than $86 billion worth of transactions with China in yuan. Qatar also shares the world's largest gas field with Iran which allows the two countries to expand their own trade deals.

Economist James Rickards explains why both China and Russia are interested in stocking up on precious metals:“They are stuck with their dollars. They fear, rightly, that the U.S. will inflate its way out of its $19 trillion mountain of debt. China’s solution is to buy gold. If dollar inflation emerges, China’s Treasury holdings will devalue, but the dollar price of its gold will soar. A large gold reserve is a prudent diversification. Russia’s motives are geopolitical. Gold is the model 21st century weapon for financial wars.The US controls dollar payments systems and, with help from European allies, can eject adversaries from the international payments system called Swift. Gold is immune to such assaults. Physical gold in your custody cannot be hacked, erased, or frozen. Moving gold is a simple way for Russia to settle accounts without US interference.”

For now, movement away from the dollar appears gradual but in future the dollar appears likely to become less and less central and this will weaken the power of the United States in global finance.

Russia to vastly increase use of Chinese credit cards

Russia is planning to vastly increase the use of China UnionPay credit cards to compete with Visa and Master Card which provide almost all credit card services in Russia at present.

Visa and MasterCard froze accounts associated with several Russian banks last March without any notice. In response to these actions Russian President Putin signed a law that would create a national payment system and also allow a security fee of up to 10 percent of a foreign companies' daily turnover.This would be to compensate banks for any service disruption. The law takes effect on January 1 next year. The percentage is much lower than the original 25 percent contemplated at first. The concession was made at the St. Petersburg International Economic Forum. Even so Visa said it did not rule out leaving the Russian market as it found the security deposit demand unacceptable. 

  China's UnionPay could easily replace Visa if it departs. The company hopes to have 2 million cards in Russia within three years. Although UnionPay emerged in China only in 2002 as a domestic alternative to Visa and MasterCard it is now number one in terms of the number of cards issued in the world. Since then UnionPay has had a huge international expansion: Now UnionPay cards can be used in 141 countries and regions around the world (second-largest payment network by value of transactions processed, behind Visa.). Some UnionPay Credit Cards are also affiliated with either American Express, MasterCard or Visa, and they can be used abroad as an American Express, MasterCard or Visa. UnionPay Debit Cards, however, can only be used in the UnionPay network and other networks that have signed contracts with UnionPay. Since 2006, China UnionPay cards can be used in over 100 countries outside China.[5]  

Russia's biggest banks are already making technical preparations for use of the UnionPay cards and running tests on them. Denis Fonov, Deputy Chairman at LightBank(LaitBank) a small bank based in Moscow said; “Visa and MasterCard have 100 percent trust, but right now, there is no trust in the system, and many, even our clients, have shifted their transactions from American dollar and Euro to Yuan. They are eager to receive this card- we already have a big list of people waiting to get this card instead of MasterCard and Visa,” LightBank has been working with UnionPay for some time and had ordered 10,000 cards for its clients already. There are already 20,000 cards in Russia and another 100,000 are planned for September. LightBank reportedly is to issue 10,000 cards next week. 

UnionPay claims to have about 30 partner banks in Russia. While many large Russia banks are planning to begin issuing the UnionPay cards the huge Sberbank is planning to concentrate on developing the Russian "Pro 100" payment system. UnionPay will be required to pay a security deposit at the same rate as Mastercard and Visa.

 Russia is also seeking to become less dependent on dollars and Euros by increasing its gold stock. At the end of July it held gold stocks worth $45 billion. Yaroslav Lissovolik, chief economist at the Deutsche Bank in Moscow said: "The fact that Russia has intensified its diversification process reflects the fact that a fairly high proportion of reserves were held in dollars and euros, while the share of gold was low,” In the first half of this year Russia has reduced its foreign currency reserves by 2.5 per cent. It is also buying Chinese yuan, and the Japanese yen rather than US dollars and Euros. I wonder if a US PR firm produced the enclosed promotional video for UnionPay.

UN warns US about debt and decline of US dollar

There are continual warnings about this debt but it does not seem to have any effect on stock markets. They are doing fine. The US dollar is certainly declining against the Canadian dollar. Our dollar will soon be at par. The result is even a great decline in manufacturing which has lost 250,000 jobs over the last while. For the US the declining dollar should help export industries and make the US more competitive. However, the cost of imported goods for US consumers will go up so it could be inflationary as well.


US debt could trigger dollar collapse, UN warns
Submitted by Desha Priya on Thu, 2007-05-31 16:47.Global | Americas | United States | News
The United States dollar is facing imminent collapse in the face of an unsustainable debt, the United Nations warned today.

United States debt, which had now deepened to well over $3 trillion, might turn out to be unsustainable in the rest of 2007 or next, putting further downward pressure on the United States dollar, Rob Vos, the Director of the Development Policy and Analysis Division of the Department of Economic and Social Affairs (DESA), told correspondents at a Headquarters press conference.

He pointed out that since its peak in 2002, the dollar had depreciated vis-à-vis the major currencies by some 35 per cent and by 25 per cent against a broader range of other currencies.

Vos made these comments at the launch of the 2007 World Economic Situation and Prospects report midyear update.

With that increased debt the risk of a sharp depreciation of the dollar continued, he warned. If countries willing to invest in United States dollar assets expected further depreciation, they might be less willing to hold dollar assets, triggering a much sharper fall in the United States dollar. The risk of disorderly adjustment and the steep fall of the dollar existed. The policy challenge was how to prevent a hard landing of the United States dollar and forge a benign adjustment of the global imbalance.

In terms of the United States housing sector, he noted that a recession in the housing sector had continued in 2007, with a slowdown in activity and a large number of unsold homes. While house prices had not fallen, that might happen in the months and years to come if the recession continued as expected. A decline in prices would affect the domestic market, particularly household consumption in the United States, resulting in the risk of a serious recession in its economy, slowing growth from 2.1 per cent to 0.5 per cent in 2007 and 2008. That would then significantly slow the world economy and transmit the recession into the rest of the world.

The United States deficit had increased to $860 billion at the end of 2006, and was expected to fall to $800 billion in 2007. That deficit was basically being financed by surpluses in the developing and oil exporting countries, as well as some major developed countries, in particular Japan and Germany. The European Union,at large, was projected to continue to have a slight deficit on its current account.

Continuing, he said the current tendency in macroeconomic policy was not all in the right direction, particularly in the surplus countries where there had been a tightening of monetary and fiscal policies, particularly in Germany and Japan, making it more difficult for the United States to lower its external deficits by export growth. The United States would also need to adopt some contractionary policies to slow down its deficit, he recommended