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China Aims to Dethrone the Dollar

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Last month, the Nikkei Asian Review reported on a move by China that could take a first step toward dethroning the US dollar. The proposed launch of a gold-backed, yuan-denominated oil futures contract got a lot of attention in alt-media circles, but didn’t make much of a splash in the mainstream. But now the mainstream is sitting up and taking notice.

During an interview with Bloomberg TV Tuesday, Graticule Asset Management Asia CEO Adam Levinson said China rolling out a yuan-denominated oil contract within the next few months will be “a wake-up call” for investors who haven’t paid attention to the plans.

The move potentially creates a way for oil exporters to circumvent US dollar-denominated benchmarks by trading in yuan. The contracts will reportedly be priced in yuan, but convertible to gold.

Levinson said besides serving as a hedging tool for Chinese companies, the yuan-backed oil contracts will aid a broader government agenda of increasing the use of the yuan in trade settlement.

CNBC also picked up on the story this week, proclaiming China has grand ambitions to dethrone the US dollar.

Beijing may introduce a new way to price oil in coming months — but unlike the contracts based on the US dollar that currently dominate global markets, this benchmark would use China’s own currency. If there’s widespread adoption, as the Chinese hope, then that will mark a step toward challenging the greenback’s status as the world’s most powerful currency.”

China, as well as other countries including Russia, desperately want to reduce their dependence on the dollar, not only to minimize exposure to US currency risk, but also to escape the prospect of economic sanctions and control exerted by the West.

As the world’s top oil importer, China can leverage significant power in the market, but it faces a myriad of challenges as it tries to dethrone the dollar. State control over both its oil market and its currency make global investors uneasy. Analysts say that will hinder China’s drive to build a viable yuan-based oil benchmark that can compete with the dollar-denominated Brent and West Texas Intermediate benchmarks.

Volatility in the yuan also throws up roadblocks in front of China’s plan. As CNBC pointed out, the yuan is not yet fully convertible, making it a relatively illiquid currency. It is also fixed daily, making it prone to intervention and subject to capital controls.

Enter gold.

According to earlier reports, the yuan-backed oil contracts will be fully convertible to the yellow metal. The stability of gold is the key to China’s drive to dethrone the petrodollar.  As Alasdair Macleod, head of research at Goldmoney, told the Asian Review, including an option to have the contract paid in physical gold will ease some of the wariness oil exporters have about the yuan.

It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either.”

Institute for the Analysis of Global Security co-director Gal Luft told CNBC the proposed Chinese gold contracts won’t be a game-changer. 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.”

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