We argue that China, like many other countries, is developing a three-prong strategy for dealing with the Trump Administration. First, push back against tariffs, retaliating selectively. Second, challenge the US actions at the WTO. Third, some US demands that are perfectly consistent with President Xi’s agenda for China.  

In March, China launched a yuan-denominated oil futures contract. We think that some observers put too much weight on the OPEC’s pricing of oil in dollars. It may have been more important in the early 1970s when the decision was made, but 45 years later, as the international financial order has evolved, the depth, breadth, and transparency of the US Treasury market is understood to be more significant than the vehicle currency and unit of account for oil. Early indications suggest that the yuan-denominated futures contract is primarily used by the domestic industry rather than speculators.  

Rather than the internationalization of the yuan, or the demise of the dollar, as some suggested, the yuan-oil contract, the main beneficiary may be Iran if the US puts new sanctions on it. A yuan oil futures contract could help Iran minimize the impact of the sanctions.  

At the end of last week, China made it easier for foreign investors to trade the Dalian iron ore futures contract. Previously, foreign investors could only access the futures contract by having a domestic account and this often required having a physical presence in China. This is no longer needed.  There was an immediate response by some foreign accounts.  

The main rival is an iron ore futures contract that trades in Singapore.  Dalian volume is typically much higher than Singapore, but it is seen as a more retail market. Last year, trading volume of the Dalian futures contract was 20-times the global trade in iron ore and saw 20x the turnover of the Singapore-based contract. To put that in perspective, consider that in 2017, China imported a billion tons of iron ore and the turnover on the Dalian exchange was for nearly 33 bln tons.