The anticipated roll-out of what is being termed the Petro-Yuan is expected to be an international game-changer for investors that haven’t paid enough attention to recent de-dollarization moves by China and Russia. Analysts largely consider the move by Beijing, announced in September, as a major move against the global dominance of the U.S. dollar.
Adam Levinson, founder and chief investment officer of Graticule Asset Management Asia, said that China’s planned introduction of the Petro-Yuan is a “huge story” that will serve as a “wake up call” to investors during an interview with Bloomberg.
As one of the world’s top energy importers, China, is planning to introduce a yuan-denominated oil contract as early as this year. Analysts call the plan, announced by Beijing in September, a huge move against the dollar's global dominance – and reserve currency status.
The Chinese government reportedly plans to allow the crude oil futures contract priced in yuan to be fully convertible into gold.
In addition to serving as a hedging tool for Chinese companies, the contract will allow for increased use of the yuan in trade settlement, Levinson said.
These contracts will thus enable the China’s trading partners to pay with gold or to convert yuan into gold without the necessity to keep money in Chinese assets or turn it into US dollars, according to Bloomberg.
Essentially, the new benchmark will allow exporters, such as Russia, Iran or Venezuela to avoid US sanctions by trading oil in yuan that is convertible to gold – thereby negating the hegemony of the petrodollar.
This point was elicited by Russian President Vladimir Putin almost two months ago during the 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 regulation reforms and to overcome the excessive domination of the limited number of reserve currencies.”
As the respected journalist/geopolitical analyst Pepe Escobar explains: ‘to overcome the excessive domination of the limited number of reserve currencies’ is the politest way of stating what the BRICS have been discussing for years now; how to bypass the US dollar, as well as the petrodollar.
Chinese oil companies are likely to be strong anchor investors in Saudi Arabia’s initial public offering of its state oil company, Saudi Aramco, according to Levinson. It’s worth noting that estimates for the valuation of Armaco range in the multi-trillions of dollars.
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Leading economist, Carl Weinberg, managing director at High Frequency Economics, goes even further, predicting a major paradigm shift. Weinberg told CNBC that China will likely “compel” Saudi Arabia to abandon the petrodollar, and instead, begin trading oil in yuan—a move he says is likely to precipitate the rest of the oil market following suit and abandoning the U.S. dollar as the global reserve currency.
Weinberg noted that China is poised to clearly dominate the global landscape in terms of oil demand since surpassing the U.S. as the “biggest oil importer on the planet,” adding that Saudi Arabia will “pay attention to this because even as much as one or two years from now, Chinese demand will dwarf U.S. demand.”
“I believe that yuan pricing of oil is coming and as soon as the Saudis move to accept it—as the Chinese will compel them to do—then the rest of the oil market will move along with them,” Weinberg said.
When Weinberg was asked what would take place if Saudi Arabia and the global oil market move oil trade out of the dollar and begin to use the yuan, he said it would create a dynamic that would result in “lesser demand for U.S. securities across the board.”
“Moving oil trade out of dollars into yuan will take right now between $600 billion and $800 billion worth of transactions out of the dollar,” Weinberg said. “[That] means a stronger demand for things in China, whether it’s securities or whether it’s goods and services. It is a growth plus for China and that’s why they want this to happen.”
Without question, the pace of global de-dollarization is accelerating, as countries are moving away from the hegemony of the petrodollar due to its use as a geopolitical weapon by the United States.
Commensurate with the rise of the U.S. use of the petrodollar as a weaponized financial instrument, numerous states that oppose the dollar holding the status of world reserve currency are actively working to minimize their dependence on dollars in bilateral transactions.
For example, China and Russia have agreed to exclude the dollar, and use the yuan and ruble for bilateral oil trading. Additionally, both states have worked to significantly increase their physical gold reserves in an effort to hedge against petrodollar hegemony.
Similar sentiments were expressed by Venezuelan President Maduro in a recent multi-hour address to a new legislative “superbody”:
“Venezuela is going to implement a new system of international payments and will create a basket of currencies to free us from the dollar,” Maduro said, noting that Venezuela would look to using the yuan instead, among other currencies, instead of the U.S. dollar.
“If they pursue us with the dollar, we’ll use the Russian ruble, the yuan, yen, the Indian rupee, the euro,”Maduro also said.
Make no mistake that widespread adoption of China’s Petro-Yuan contract… as Levinson says “will be a huge story” in Q4 – that could usher in a new global reserve currency to replace the dollar – and challenge U.S. geopolitical hegemony.