Yuan-based crude futures face uncertainties
As Venezuela gathers fees in renminbi, experts query conversion into gold
A Chinese energy expert on Thursday expressed his doubts over reports that the nation is planning to launch a Shanghai-based yuan-denominated gold-convertible crude futures market.
The comment came after media said that Venezuela’s government is telling oil traders that it will no longer receive or send payments in US dollars and is instead taking in other currencies, including yuan.
Oil-rich Venezuela is looking for ways to circumvent US sanctions and is switching payments into a mix of currencies, The Wall Street Journal reported on Wednesday.
Also, the Nikkei Asian Review reported on Thursday that China is expected shortly to launch a yuan-denominated crude oil futures contract that is backed by gold in an effort to circumvent a dollar-based crude pricing system.
However, a Chinese energy market expert has said the reported yuan-based crude futures trading system backed by gold is still facing fundamental issues.
The chunk of the world’s oil trade is currently priced off two crude derivatives – the US West Texas Intermediate and London’s Brent.
“The reported system aims to use gold to give confidence to traders who are wary of the risks of yuan depreciation and exchange losses, but it overlooked the fundamental issues in a global futures trading platform: the free flow of the currency across the border,” Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the Global Times Thursday.
As the world’s top crude importer, China has been contemplating building the Shanghai International Energy Exchange to reflect market conditions in the region.
But efforts to build such an exchange have been confronted with global traders’ concerns over a range of issues, including China’s regulatory intervention.
“Given the currency controls imposed in China, large quantities of capital cannot move freely in and out of China at the moment, but this is needed as traders settle their futures contracts and get their profit back,” Lin said.
“Even if they convert the yuan payment into gold, I doubt they can move gold out of the country due to the control in place,” Lin noted.