China, the world’s biggest oil importer, is set this year to implement its plan to end the global dominance of the U.S. dollar by launching a gold-backed futures contract denominated in yuan. Experts say that Beijing’s plan to introduce a gold-backed crude oil futures contract based on the yuan represents an important step in the country’s push to end the dollar’s global dominance. The adoption of the new crude oil benchmark by major players in global oil markets would sound the death knell of the currently dominant dollar-denominated oil futures, according to experts.
Adam Levinson, head of Graticule Asset Management Asia, told Bloomberg that China’s latest move is part of a long-term plan for the yuan to topple the dollar as the currency used to price oil in global markets. Chinese planners correctly believe that setting up the yuan to compete with the dollar in global markets is essential to achieving the status of an economic superpower.
Besides its state-owned oil companies, China hopes that countries, such as Russia, Iran, and Venezuela, targeted by the U.S. with economic sanctions would be the first to adopt the new yuan-based benchmark as part of their strategy to reduce their vulnerability to U.S. foreign policy, which seeks to use economic sanctions to punish countries that refuse to toe the line.
The new benchmark will allow countries, such as Russia, Iran, and Venezuela, whose economies are under the pressure of U.S. economic sanctions, to avoid the penalties of the imposed sanctions by trading crude oil in yuan instead of the dollar. It will allow them to make payments with gold and to convert yuan to gold without having to hold Chinese assets or convert to the U.S. dollar.
Chinese economic planners hope that Chinese state-owned oil companies and the first set of countries that adopt the new yuan-based benchmark will be able to generate the liquidity needed for the takeoff of the new oil pricing benchmark. This will encourage other nations exposed to U.S. currency risk to adopt the alternative oil pricing benchmark which, in the long run, could challenge established benchmarks, such as the dollar-denominated West Texas Intermediate (WTI) and Brent.
The Chinese authorities first announced the plan to introduce a yuan-denominated crude oil futures convertible into gold earlier this year, according to RT.
Although analysts generally agree that the move by China signals the beginning of the decline of the U.S. dollar, most insist that the fall of the dollar is not imminent and that it will take many years before the yuan gains the global market clout that Chinese economic planners seek.
Chinese planners are not alone in the long-term scheming to end the global hegemony of the U.S. dollar. Russian President Vladimir Putin has also called for a concerted effort by emerging economies to break the dominance of the U.S. dollar.
He reiterated the need for the goal during the recent BRICs summit in Xiamen.
“Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners to promote international financial regulatory reforms and to overcome the excessive domination of the limited number of reserve currencies.”
Experts note that a major impediment to the emergence of the yuan as a major competitor with the U.S. dollar is that it is not yet fully convertible. The Chinese authorities also impede their own plans by continuing to exercise tight control over the currency.
[Featured Image by China Photos/Getty Images]