China is hoping to increase its clout in the global oil market. On Feb. 9, a spokesperson for the China Securities Regulatory Commission announced that the country's oft-delayed futures contracts for crude oil will finally launch March 26. Crude oil futures are, essentially, contracts in which buyers agree to accept a delivery of crude oil at a later date for a predetermined price. In this instance, the contracts will be traded in yuan at the Shanghai International Energy Exchange. In doing so, Beijing is hoping to establish an Asian price standard for its own oil and gas imports and take pricing power away from benchmarks in the Middle East, Europe and North America.
Today, China is the world's largest crude oil importer after surpassing the United States in oil imports for the first time in 2017. But China's isolated financial system has prevented many Chinese consumers and companies from accessing the world's financial markets for energy trading. Currently, the U.S. dollar is still the backbone of the international financial system, particularly because of its use as a reserve currency and as the main currency used in international trade. But the primary reason the dollar remains a cornerstone of international business is the petrodollar, or the fact that oil is internationally traded primarily in dollars. Through crude oil futures — as well as a slow liberalization of the country's financial system — China is hoping to break the dollar's stranglehold on the global financial system.
In that respect, launching the futures contract is the next step in Beijing's push to internationalize the yuan and establish it as a reserve currency. By setting up a domestic futures contract, Chinese consumers will be able to hedge their bets against surprises from the global oil market by locking in the prices they will pay. But, down the road, China may also try to use the contract to force Middle Eastern oil suppliers — such as Iran, Iraq, Saudi Arabia, or Kuwait — to base sale prices on Chinese benchmark prices, or even eventually force them to list prices in yuan and accept the Chinese currency as payment.
But there are constraints on achieving this goal. China's liberalization process is a slow one, and Beijing has delayed it several times to ensure that volatility and market speculation don't upset the country's fragile economic and social balance. China is also a net importer of oil, so its leverage may be limited as long as Middle Eastern exporters prefer dollars to yuan. And changing their minds will be difficult given the yuan's low liquidity abroad and the high degree of control Beijing exerts over it at home. But as China continues to ascend economically, its heft will grow. Moreover, if China can succeed in making its mark through its ambitious One Belt, One Road initiative, then the yuan could become an important currency for Middle Eastern countries to hold.
