APR 30, 2018
Once oil-exporting countries start trading in earnest on the Chinese exchange and receiving the petro-yuan as payment, that is currency far more likely to reenter the Chinese market, either via investment or as return payment for Chinese exports.
And with major trade partners such as Russia and Iran, who have a decided interest in undermining the USD as dominant world currency for political reasons well outside that of simple ease of trade, there’s every reason to think the petro-yuan’s wider adoption may happen faster than currently anticipated.
RMB-denominated oil contracts began trading for the first time in Shanghai on March 26. We believe that in the long term this will ultimately change how oil is traded globally, create a Petroyuan currency flow, increase the role of the RMB as a global trading currency, and compel investors to up their allocations to Chinese financial assets.
China passed the US as the world's largest oil consumer in 2016. Accordingly, China wants to pay for its huge import bill in its own currency (RMB) rather than USD.
More importantly, however, China wants the new oil trading plan to promote RMB internationalization, i.e. forcing wider adoption of the RMB as a global trading currency, and switching to RMB payments for major imports is part of this process.
The emergence of Petro-yuan - RMB-denominated revenues collected by the world's largest oil producers - is a natural development from this process
When China's total oil import bill gets priced in RMB, that's going to create large piles of RMB reserves in oil exporting countries that will either be spent on Chinese exports, or recycled into China's financial markets, giving China much more heft in the global economy.
This will have two principal effects: increased demand for RMB assets and a switch out of the USD for trading purposes, which will likely undermine the United States' dominant role in the global economy and create a sea change in global asset allocation to China's financial markets.
ORIGINAL SOURCE: UBS: "The Petroyuan Will Undermine America's Dominant Role And Create A Sea Change In Global Markets" by Tyler Durden at Zero Hedge on 4/29/18