The petroyuan has launched. Let’s investigate its success or lack thereof, primarily the latter.
Economist and book author Daniel Lacalle pretty much sees things the way I do regarding the petroyuan hype. Lacalle compiled some amusing stats in his post on the Petroyuan’s Lacklustre Birth.
Crash at Birth
Every time I read that the yuan is going to dethrone the dollar and that China is going to monopolize the oil market in its local currency, I remember those films and reports of the late 1980s predicting the imminent Japanese supremacy and how it would absorb the West. Today, more than two decades later, Japan continues in secular stagnation.
The biggest mistake made by China in its launch of the yuan oil contract has been to think that a currency with capital controls and an expensive market that trades for barely a few hours a day would be a fantastic incentive for global oil transactions.
It is monstrously expensive: more than twice the cost per lot compared than US dollar ones. The transaction fee for Shanghai futures is about $3.20 per lot, compared with about $1.50 for U.S. oil contracts, according to Bloomberg.
It is not “backed by gold“. China’s total gold reserves are a fraction of its money supply (less than 0.007%) and if the yuan collapses, the nascent “Petroyuan” falls with it. The mirage of thinking that the yuan is guaranteed by gold reserves is only comparable to Flat Earth theories.
It trades for only a few hours. One hour and a half in the morning, one hour and a half in the afternoon and a few hours at the close of the Chinese market. While the rest of the international oil contracts have twenty-four-hours trading, the Chinese local currency energy market (INE) trades eight hours a day. The implantation and internationalization of a currency does not happen because it is decided by a government
It has excessive margin requirements, more than double those of the equivalent markets in US dollars. The margin required to participate in China’s futures is 7% of the contract value, rising to 10 percent the month before delivery and 20 percent in the last three days before delivery. In the U.S., the margin is 3.4% of the contract value, according to Goldman Sachs and Bloomberg.
To the above, we must add two other barriers. A translation exchange to other currencies of 3% and, above all, an economy that has capital controls in which the Chinese government can decide by decree if you can or cannot get your money back when it pleases you.
The petroyuan is born fatally wounded because it tries to copy the mistakes of the Petrodollar with higher costs and tighter political restrictions.