Friday, January 12, 2018

Dubai publication calls for Gulf Cooperation Council (GCC) to adopt the Petroyuan to replace dollar

On Jan. 9, a former chief economist of the DIFC, and the former vice governor of the Bank of Lebanon published an editorial in a Dubai newspaper where he not only reflected on China's growing influence in the global monetary system, but is now calling for the Gulf Cooperation Council (GCC) to integrate and adopt the Petroyuan into their economies.

Citing the Far Eastern power's growing influence in the global banking and energy sectors, Nassir Saidi provided strong reasons and evidence why moving away from the Petrodollar and into the Petroyuan would be much more beneficial for Middle Eastern and oil producing nations.

China has taken multiple steps to internationalise the yuan, including some 32 currency swap agreements with central banks with a combined value of 3.33 trillion yuan (Dh1.85tn), as well as swap agreements with Egypt (18bn yuan), Qatar (35bn yuan) and the UAE (35bn yuan). The swap agreements are an instrument to finance and facilitate trade and issuance of debt and equity in yuan in foreign markets. 
Capital market liberalisation is proceeding through the implementation of the Qualified Foreign Institutional Investor Scheme and RMB Qualified Foreign Institutional Investor Scheme, which allows designated institutional investors into yuan-denominated domestic markets. The planned relaxation of capital controls will be the next policy step to allow the use of the yuan to finance investment. 
The path of yuan internationalisation starts with its use for financing trade with China, to investment in China’s financial markets, to the yuan being used as a store of value and as an international reserve currency. For the yuan to become a truly international means of payment, an asset currency and alternative to the US dollar and the euro, China needs to gradually move to full capital account convertibility, provide access to foreign issuers and investors, remove internal distortions (notably through interest rate liberalisation), achieve greater exchange rate flexibility and deepen its financial markets through the development of yuan money market instruments and debt capital markets, the Redback Market. This is part of China’s strategy. 
Given China‘s dominant role in world trade, the yuan will increasingly be used to finance trade with China, in particular along One Belt- One Road, and including energy and oil. The petroyuan will signal the gradual emergence of the yuan to become the world’s second most important currency, gaining market share from the dollar and the euro. 
Currently, GCC oil sold to China is priced and settled in the US dollars, through dollar-regulated clearing banks. This is an inefficient process, in that it increases transactions costs and involves exchange rate and payment risk. In addition, participants in the dollar-based payment system have also been subject to fines and penalties arising from politically motivated US sanctions. Given China’s dominance of GCC energy export markets, it is advantageous for both parties to price oil and gas and settle in yuan instead. 
Chinese banks (which are the top four biggest global banks in terms of assets) and GCC banks –supported by the currency swap arrangements – can efficiently finance China-GCC trade, including oil. It is in the strategic interest of the GCC to be part of the growing yuan zone, use petroyuan for China oil trade, be active in the AIIB and integrate into the New Silk Road and the One Belt-One Road initiative. - The International


Post a Comment