Western sanctions and tariffs are forcing countries to cooperate more strategically with China on what is becoming the seed of a genuine alternative to the current Petrodollar system. And while challenging the dominant status of the U.S. Dollar (aka the Petrodollar) will be a slow-moving process, China is providing an alternative which has been gaining steam.
Fast forward from the historical piece Rise of the Petrodollar from OUTLOOK 2018...
- Russian Debt Denominated in Yuan - In 2017, the Russian Ministry of Finance announced the first sale of Russian debt in the form of bonds denominated in Chinese Yuan. The size of the first offering will be 6 billion Yuan - it's significance lies beyond the nominal amount. The new Yuan bond will be traded on the Moscow Exchange and will primarily target mainland Chinese investors, as well as international and Russian borrowers.
- China Petro-Yuan - Being the biggest buyer of oil (overtaking the U.S. in 2017), it's only natural for China to push for the usage of Yuan for payment settlement. In December 2017, Chinese regulators completed final testing in preparation for the launch of its Yuan-backed oil futures contract traded on the Shanghai Futures Exchange. Until now, control of the financial oil futures markets has been the tightly-guarded province of Wall Street banks.
- Saudi Oil Benchmark Change - Saudi Aramco announced its plans to change the formula used to price its long-term crude oil sales to Asia starting in October 2018. This marks the first change in benchmarks for its official prices since the mid-1980.
- Avoiding Sanctions - Oil exporters such as Russia, Iran or Venezuela-all targets of U.S. sanctions-may now be able to try to nullify those sanctions by avoiding oil trades in U.S. Dollars. This past September, Venezuela responded to U.S. sanctions by ordering the state oil company and traders to make oil sale contracts into EURO and not to pay or be paid in U.S. Dollars any longer.
Bottom-line
The emergence of the Shanghai Futures Exchange and Yuan-denominated debt can be huge tailwinds for the Yuan and in turn huge headwinds for the U.S. Dollar. The China Yuan oil futures contract allows 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 U.S. Dollars (think the beginning of the Petrodollar). Shifting just part of the global oil trade into the Yuan has potentially huge implications for the U.S. Dollar.