China could benefit from US Iran deal exit
Nation may use withdrawal as leverage to demand yuan-priced oil imports
China could be a chief beneficiary of the US decision to withdraw from the Iran nuclear deal, as it would give China leverage to demand oil imports be priced in yuan, several currency experts said.
US President Donald Trump is preparing to impose new sanctions on Iran, the White House said on Wednesday, following the US withdrawal from the multinational 2015 agreement that stalled Iran’s nuclear program.
The sanctions would aim to limit global trade of the oil producer’s crude. However, the effects may be muted, as major Asian importers, including China, are likely to continue buying Iranian oil.
China stands to benefit if it can use its leverage as the world’s largest importer of crude by insisting that its oil purchases from Iran be priced in yuan.
Oil is priced and traded in US dollars because of the dominance of the dollar-denominated Brent and West Texas Intermediate (WTI) benchmarks. Pricing imports in yuan would therefore spare China the cost of exchanging dollars, and would increase the use of the yuan in global financial trade, which could ultimately reduce the dollar’s international clout.
Iran’s exports are expected to decrease, as are foreign investments in the country. That would hurt not just Iran’s economy but also the dollar’s liquidity, as the global trade of oil undergirds the greenback, said Edward Al-Hussainy, senior analyst, global rates and currency at Columbia Threadneedle in Minneapolis. This provides Iran with an incentive to approach the People’s Bank of China, the country’s central bank, to discuss a yuan-denominated deal.
During the last round of sanctions prior to the nuclear deal, Iran’s oil supplies fell by around 1 million barrels per day. But the country’s oil minister said Thursday that Trump’s decision to quit the pact would not affect Tehran’s exports.
In the interest of exerting more control over the price of oil imports, China in March launched its own crude futures exchange that could become a yuan-denominated benchmark to rival Brent and WTI.
“China is the largest commodity producer in the world and the largest commodity consumer in the world, so it would make sense that Chinese futures that are close to the areas of supply and demand would be a more natural benchmark than the US markets,” said Marwan Younes, founder and chief investment officer of New York-based Massar Capital Management.
Shortly after the exchange launched, Reuters reported on March 29 that Chinese regulators had informally asked a handful of financial institutions to prepare for pricing China’s crude imports in the yuan, according to three sources at some of those financial firms.