Petroyuan’s stature grows on Shanghai exchange, helping world’s largest energy importer cut dependence on US dollars
- Crude oil contracts traded in Shanghai accounted for 10.5 per cent of the global volume at the start of June compared to 6.2 per cent in the second quarter of 2018
- Traders appear to embrace yuan oil futures contracts, pricing them similarly to the Brent and WTI benchmarks, says analyst
According to Bloomberg Intelligence, the volume of crude oil contracts traded on the Shanghai International Energy Exchange (INE) accounted for 10.5 per cent of the global volume at the start of June compared to 6.2 per cent in the second quarter of 2018. The average daily trading volume of yuan-denominated crude oil contracts this month more than doubled to 162,053 lots compared to the daily average of 63,238 lots in 2019.
Analysts say that yuan’s use will increase alongside trading volumes on the INE rise as China spearheads a move to revive economic growth after the Covid-19 pandemic eases.
China has been striving to accelerate the pace of yuan’s internationalisation by liberalising the capital and futures markets over the past decade. As the world’s biggest net importer of crude oil, Beijing hoped to attract more international investors to participate in trading of the contracts on the INE, a move to widen the use of yuan in settlement of the most important source of energy.
“Traders appear to embrace yuan oil futures contracts, pricing them similarly to the Brent and West Texas Intermediate (WTI) benchmarks, signalling China’s burgeoning impact on global oil demand growth,” Henik Fung, an analyst with Bloomberg Intelligence wrote in a research report. “Increasing worldwide political conflict could limit Chinese investment, convincing domestic investors to embrace INE than New York Mercantile Exchange (Nymex) and Intercontinental Exchange (ICE).”
However, the move was eyed with suspicion on the international oil market as there were some well-established global benchmarks, such as WTI and Brent, traded on Nymex and ICE, respectively. Crude oil sold in Asia is mainly priced against the Dubai, Oman and dated Brent benchmarks or Oman crude futures on the Dubai Mercantile Exchange.
“China’s success in controlling the Covid-19 early [has] added lustre to the yuan-denominated crude oil contracts as demand recovers,” said Huang Lei, an independent futures market analyst, adding that some mainland traders had returned to the domestic after the Crude Oil Treasure crisis.
They ploughed 4.23 billion yuan last quarter into the open-ended funds managed by E Fund Management, China Southern Asset Management, Harvest Fund Management and Guotai Asset Management. The funds invest in offshore exchange-traded funds (ETFs) that primarily track the performance of West Texas intermediate (WTI) futures.
The inflow was the biggest in at least five quarters, and reversed three straight quarters of net withdrawals through last year. Overall, net withdrawal in 2019 was US$27.8 million.
China’s domestic oil futures contracts are opened to individual investors who can pony up 500,000 yuan in minimum capital, and allow professional traders to execute the transactions. Positions have to be closed out before the contracts expire, according to the trading rules.
Bloomberg Intelligence’s Fung said that the yuan’s reserve currency status should rise further in the coming years as the world moves away from the dollar.
“There is room for the yuan’s share to grow,” he said.