China says that it is facing a necessity to create an international yuan-based oil pricing and as a first step it plans to negotiate with “African, Middle Eastern and Southeast Asian nations for an increased use of its currency for the settlement of energy, minerals and grains trade.”
“This is an inevitable path for the rise of the yuan’s status in international energy trade. It is also a crucial step toward the yuan’s internationalization,” editorializes China’s government news agency China Daily.
China has already made some moves to internationalize its currency with plans to loosen up its capital account with an eye for developing greater liquidity for the yuan-based debt paper.
In addition to the recent HSBC introduction of yuan-based bond in London, Indonesia announced yesterday that it plans to issue yuan-denominated bonds in 2013. It is to be expected that more countries, particularly in Asia, will follow Indonesia’s example.
While developing the debt market and broadening its liquidity is one of the key ways to internationalize one’s currency, China’s introduction of yuan-based energy pricing is an even broader step that smacks Washington right in its dollar policy it has been conducting for the better part of the last 100 or so years.
With energy taking up greater proportion of global GDP, and China expected to be dominant driver of that expansion, Chinese seek to extract significant gains by pricing energy in yuan.
There is basic gain from seigniorage because Chinese would give the oil producing country paper currency that costs them way less to make then the value of oil Chinese would get in exchange.
More significantly, yuan priced energy exchange would create yuan holdings in the oil producing country and those yuan would need a conservative debt instrument to stash itself into, hence China’s aim at broadening its debt markets.
Now, many have argued that such a broad swipe at the US dollar dominance is sure to create fierce enemies in Washington.
Of course, there is no standing policy in Washington that one can point fingers at and say that attempts to dethrone the dollar from being the sole pricing currency for oil leads to war, but coincidental episodes in the past suggest likelihood of conflict.
Many have noted, for example, that for all the brilliance of Keynes, Washington pushed aside his idea about creating the reserve currency, the so called bancor, an instead foisted the dollar as the anchor for all others at $35 for 1 ounce of gold.
When trade and other flows broke this peg, Nixon de-pegged the dollar and an oil-dollar consensus was created with a tacit agreement between the US and Saudi Arabia to price oil in US dollars.
“The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year,” noted Ron Paul in his 2006 speech in the US House of Representatives.
Many folks, Ron Paul included, have said that countries who decide to price their oil in currency other then dollar get attacked.
“In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA,” says Paul.
Libya’s Khadafy is said to have also contemplated switching to Euro pricing and even though he abandoned the idea, others take note, Khadafy eventually got clipped.
It is said that Iran is current focus of Washington’s scorn because, among other things, it sells oil priced in Euro.
Sure, some are pointing to the emerging Federal Reserve role as the “global” lender of last resort as a way to promote dollar’s dominance citing Fed’s dollar swaps in particular as a way to shore up international desire for the dollar, but apart from crisis, this tool is not particularly well suited for repetitive action… and that leaves energy markets as the perfect vehicle to promote reserve currency.
China’s initiative to price energy in yuan is definitiely a frontal swipe at the US dollar dominance that will elicit many critics in Washington right on top of accusations of currency manipulation, trade, human rights violations …