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A Nightmare Before Christmas: China Set to Launch Yuan-Denominated Oil Contracts

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China wants to dethrone the dollar and it could take a step in that direction before the end of the year.

According to numerous reports, China is prepared to launch a yuan-denominated oil futures contract before Christmas. Last week, the Shanghai International Energy Exchange successfully completed a fifth round of yuan-backed oil futures testing. According to a report by RT, the organization has met all the listing requirements and is set for an official launch. 

Chinese trader Yuan Quwei told Bloomberg the holiday season would be the perfect time to get oil trading in yuan off the ground.

An official launch during Christmas would be appropriate. The Western market would be quiet and allow the Shanghai exchange as well as Chinese investors to adjust in the early days.”

This could be a nightmare before Christmas for the petrodollar.

In June, China took the first step toward establishing a “petroyuan” when it launched a direct trade relationship with Russia, allowing oil purchases to be made strictly in the Chinese currency. But China faces hurdles as it tries to establish similar relationships with other oil exporters. The yuan is still widely viewed as unstable and illiquid. Economist Yao Wei told Bloomberg the yuan-based contract “has the potential to greatly help China’s push for yuan internationalization,” but Bloomberg noted the hurdles the Chinese face.

As the world’s largest energy consumer and an increasing source of investment capital for oil-producing nations, China has an interest in using its own currency rather than that of a geopolitical competitor. One hurdle for setting up a rival to Brent or West Texas Intermediate: Overseas oil producers and traders would need to swallow China’s capital controls and penchant for occasional market interventions.”

To help allay international fears, China may back some yuan-based oil contracts with gold. Last fall, the Chinese announced the launch of a gold-backed, yuan-denominated oil futures contract.  These contracts would be priced in yuan, but convertible to gold. As Alasdair Macleod, head of research at Goldmoney, told the Asian Review, including an option to have the contract paid in physical gold would 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.”

A successful gold-backed Chinese petroyuan could be bad news for the US dollar and for the broader US economy. The dollar’s strength is highly dependent on its use as an oil-trade vehicle. If the yuan begins to undermine the dollar’s position, we could see a steady decline in the greenback.

While the rise of the petroyuan is a nightmare for the dollar, it could be good news for gold. If the Chinese gold-backed, yuan-denominated oil futures contracts prove successful, it could push the yellow metal higher as the petroyuan further erodes the strength of the dollar. And as NewsMax reported, the Chinese move is significant for gold in a more basic sense.

For the first time since our nation abandoned the gold standard decades ago, physical gold is being reintroduced to the global monetary system in a major way. That alone is incredibly good news for gold owners.”

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