China launched yuan-denominated oil futures contracts on Monday, marking the first time foreign investors will
have access to Chinese commodity futures as the world’s top crude importer seeks greater influence over global prices.
But analysts said the long-delayed Shanghai-traded futures are unlikely to challenge the primacy of New York and London-based futures any time soon due to Chinese capital controls and the entrenched position of the dollar- denominated contracts.
Futures contracts allow investors to hedge exposure to physical prices, and offering them in yuan could allow energy-hungry China — which last year surpassed the United States as the world’s largest crude importer — to exercise more control over prices of the type of oil it consumes most.
It also is the latest in a series of steps by China to raise the world profile of the yuan.
The new contracts are “rooted in China’s ambition to increase its bargaining power to price energy supplies amidst an increasing reliance on oil imports,” energy industry information provider ICIS said in a research note.
“If the demand for (yuan contracts) came at the expense of the US dollar, there is always a chance, however slim, that the Chinese yuan could displace the US dollar as the main petro-currency.”
But analysts said Chinese capital controls will likely discourage hefty foreign engagement, as will wariness of the often wild gyrations in China’s still relatively immature financial markets.
– Impact unclear –
“For now there is more curiosity than actual interest in participating in the contract,” Michal Meidan, a London-based analyst with Energy Aspects, told AFP.
“Over time… it could become at least a domestic Chinese benchmark. But for it to become a global benchmark — we are a way away from that.”
The current global standards are London-trade Brent futures, and West Texas Intermediate (WTI), which is traded in New York.
They mainly trade higher-quality light sweet crude oil, while the yuan contracts on the Shanghai International Energy Exchange involve mainly medium-sour crude.
The Shanghai contract traded higher than its London and New York counterparts shortly after debuting, at 432.2 yuan ($68.43) per barrel for September settlement at around 0145 GMT, according to Bloomberg News.
Bloomberg said September contracts for Brent traded near $68.72 a barrel, and WTI at $64.37.
China has already taken steps that it hopes will help to internationalise its currency.
Last July it widened foreign access to its $10 trillion bond market — the world’s third-largest after the United States and Japan — and in recent years has allowed link-ups between the stock exchanges of Hong Kong and mainland China that allow foreign and Chinese investors to buy shares listed on each other’s markets.
But foreign investor response to those openings has been tepid, and while analysts say the yuan oil futures will help further internationalise China’s markets and increase crude price transparency in Asia, the dollar’s position as the world’s petro-currency remains solid.
The existing benchmarks are “highly liquid, (have) been trading for decades, denominated in US dollars and include a large portion of physical deliveries,” said Jonty Rushforth, head of oil pricing at S&P Global Platts.
“With this in mind, it is likely to take some time before any effects become clear. It is also worth remembering that, as the world’s largest importer of crude, China already has a strong voice in global oil markets,” Rushforth said.