BOFIT Viikkokatsaus / BOFIT Weekly Review 2018/15
China last year surpassed the United States to become the world's largest oil importer. Decade-planned trading in yuan-denominated oil futures finally launched on the Shanghai futures exchange on March 26. The oil futures are the first Chinese derivative contracts in which international investors may freely trade.
Oil sold on global markets is traditionally priced in US dollars, with trading fundamentals set by the price of the benchmark West Texas Intermediate (WTI) grade in New York and Brent oil in London. The new yuan-denominated futures provide an opportunity to establish an Asian benchmark grade based on one of the grades most used by Asian oil refiners. The derivative instruments will help Chinese firms manage costs and hedge from price swings. At the same time, the move should help strengthen the yuan's role in international commerce. Reuters reports that the futures trade is also a first step in China's efforts to internationalise the yuan's use as a viable payment currency for the oil trade alongside the dollar.
The first wave of trading included Chinese investors and international players from e.g. Switzerland and the US. The appeal of yuan-denominated oil futures depends to a great extent on international use of the yuan, which will require a toning down of China's capital controls. Up to now, complex trading rules and barriers to capital movements have effectively prevented foreign investors from participating in Chinese securities markets.