In September, China announced its plans to launch an RMB-dominated crude oil futures contract that will be also convertible to gold. The move allows Beijing to extend RMB’s reach in global energy markets, increase RMB-denominated transactions, and subsequently reduce dollar’s dominance as one of the world’s leading reserve currencies.
However slow the process, the energy exchange, a subsidiary of the Shanghai Futures, enables China to expand its sphere of influence in the energy-rich Middle East, Central Asia, North Africa, and Russia, posing a direct challenge to Brent and West Texas Intermediate futures, both of which are denominated in US dollar. It also allows oil-exporting countries that have been the target of US sanctions like Iran and Russia to bypass US sanctions by trading in yuan.
Geopolitically, Beijing seeks to scrap the US ability to use the dollar as an economic weapon against countries that challenge what they regard as US hegemony in their respective geostrategic articulations.
The launch of the RMB-denominated crude oil futures, expected to start before year-end, is the continuation of a policy by China and Russia to push the global trade toward de-dollarization. Earlier this year in March, Russia’s central bank started to issue federal loan bonds denominated in Chinese yuan. The Russian move in March followed a bilateral decision in 2014 to sell Russian energy to China in RMB and rubles.
There is also a geostrategic angle to this. China’s Belt and Road Initiative (BRI) will be a chief benefactor of this development as massive Chinese investment in infrastructure across Eurasia behooves Chinese policymakers to enable a web of transactions for energy import-export in yuan.