In recent months rumors have swirled that China may be on the verge of launching the PetroYuan, a setup that would allow them to purchase oil without using dollars. Now there are reports from Zero Hedge and OilPrice.com that the contract system is being tested, and conceivably not that far from launch.
According to Zero Hedge, “149 members of Shanghai International Energy Exchange traded 647,930 lots in the drill with total value of 268.2b yuan, according to a statement from the exchange, which added that the system basically met the listing requirements of crude futures after the drill.”
OilPrice.com reports, “In July, the Shanghai International Energy Exchange completed a four-step trial in crude oil futures denominated in yuan and said that it would carry preparatory works for the listing of crude oil futures, and would try to launch the contract by the end of this year.”
That China is growing frustrated with the Petrodollar and U.S. political and financial systems is hardly shocking. They hold a large portfolio of U.S. assets and treasuries, and it’s difficult to imagine them being thrilled with the constant Federal Reserve dollar devaluation.
However to see them introduce the PetroYuan, an arrangement that would seemingly be in direct opposition to the current PetroDollar reign, is a significant step forward in their move away from the dollar.
Most likely had you suggested to someone back in 2010 that we would be talking about a PetroYuan today it would have been hard for most to imagine. Similar to how 10 or 20 years ago, had you had told someone that things like quantitative easing and negative interest rates would exist, it would have seemed similarly unfathomable to most.
Yet the two are not unrelated. After all, if you were holding U.S. dollars or treasuries, and not only saw unprecedented amounts of currency being printed, but additionally noticed how there is little to no inclination by U.S. decision-makers to even address the imbalances, how would you feel? Judging by the fact that you’re reading the Miles Franklin newsletter, probably similar to the Chinese. Who are taking active steps to do something about it.
Keep in mind that we’re not talking about a couple of retail investors, or even a large hedge fund or two. But one of the biggest players in global finance, who is seemingly doing what it can to wrest away control of the oil market and reserve currency status from the United States.
Worth noting is that the move does not come without risk. Whether ultimately true or not, there is a belief in certain corners of the markets that U.S. military action against Iraq and Libya had a lot more to do with Saddam Hussein and Muammar Gaddafi making arrangements to circumvent the dollar, rather than any of the official reasons presented to the public. Whether accurate or not, this is a school of thought that’s been passed around for years, and it’s hard to imagine the Chinese being unaware of the potential ramifications of their actions.
There have also been rumors that the Chinese plan might be linked to a gold-backed futures contract in Shanghai. While definitive clarification on the details remains somewhat vague, it’s a stunning development, that should it manifest would put additional pressure on the dollar while providing a new bid for precious metals.
It’s still very much a developing situation. To my knowledge there has not yet been an officially recognized announcement, although reports of implementation continue to surface. And should the exchange indeed be launched, trading dollars for precious metals would put you on the same side of the trade as one of the world’s biggest and most powerful market participants.
