China challenges Europe, US benchmarks with launch of first oil futures contracts
Long anticipated debut of yuan-denominated contracts comes after China surpassed the US to become the world’s largest crude importer in 2017
China has launched its first ever oil futures contracts denominated in the local currency, a crucial step by the world’s biggest oil importer that will allow it to wield greater pricing power and challenge industry benchmarks in Europe and the United States.
Liu He, the newly appointed vice-premier taking charge of the finance portfolio, has underscored the role of the contracts and has given directions on how to build a sound market, Liu Shiyu, chairman of the China Securities Regulatory Commission, said before trading opened on Monday. He added that the futures contracts were another milestone for Shanghai as it bids to become a global financial centre.
Amid the mainland’s increasing reliance on imported oil, the introduction of the crude futures contracts is being viewed as a significant move by Beijing to exercise its pricing power, ensure national energy security and promote the use of the yuan around the world. The move also comes as strained Sino-US trade relations threaten to cast a shadow over the global economic outlook.
“The contracts, denominated in yuan, can technically help China gain pricing power and internationalise the yuan, if a mature market with strong trading activities by global investors is set up,” said Shao Yu, chief economist at Chinese securities company Orient Securities. “But it takes some time before global investors recognise the contracts as benchmarks.”
China surpassed the US as the world’s biggest oil importer in 2017, giving the Chinese government an additional impetus to wrest pricing control from offshore markets, as well as to promote the international use of the yuan in commerce.
“Crude oil futures give Shanghai a new boost in developing a global financial centre,” said Liu Yang, an analyst at Citic Futures. “Trading volume will appear to be huge based on China’s economic scale and the commodity’s wide use. More importantly, it is the first internationalised commodity futures where foreign investors are warmly welcome.”