BANGKOK (THE NATION/ASIA NEWS NETWORK) - China, the world's largest oil importer, has launched its first ever yuan-denominated oil futures on the Shanghai International Energy Exchange - a first in Chinese commodities.
This is an extremely important development with many implications for both China and global markets.
One short-term benefit of the new benchmark is that it will reflect the grades of oil that are consumed by local refineries, so it will be more closely tailored to China's needs than existing Western contracts.
Moreover, it will be welcomed by investors both in China and outside as they will have new investment opportunities.
In the longer term the new futures market will encourage the trading of oil in yuan, rather than dollars.
Already, Unipec, the trading arm of Asia's largest refiner Sinopec, has signed a deal to import Middle East crude priced against the newly launched Shanghai crude futures contract.
Chinese regulators have also advised financial institutions to prepare for pricing China's crude imports in yuan later this year.
Oil is the most world's most traded commodity with an annual trade value of around US$14 trillion (S$18.42 trillion). Currently, almost all global crude oil trading is in dollars. If oil starts being sold for yuan in a big way, this would have a major impact on yuan liquidity in the market.
So far China has established agreements with countries such as Russia and Angola to buy their oil in yuan and it is seeking to encourage other countries to do the same.
While countries such as Iran and Venezuela are likely to follow, there has also been speculation over whether Saudi Arabia might one day sell its oil for yuan.
China is the biggest market for Saudi oil and China is also looking to invest in Saudi Aramco, the world's largest oil-producing company.
The debut of the yuan oil futures on the Shanghai Exchange was hugely successful.
On the first day of trading, prices jumped, and contracts were made for 15.4 million barrels of crude for delivery in September.
However, the next few days were hectic with a sharp price drop on the second day followed by extreme volatility.
If China succeeds in establishing a yuan-priced oil market this will set a precedent for paying for other commodities in yuan and help China achieve its long-term goal of promoting the use of China's currency in global trade which is currently less than 2 per cent.
Indeed, in the past year the use of the yuan in global trade fell from 2.5 per cent of global payments to 1.7 per cent.
This was partly in response to China's tougher capital controls and partly due to lack of liquidity.
The oil for yuan futures contract and other related moves will help address both these issues.
It will also strengthen the yuan and perhaps in anticipation of this the currency has been rising.
It is still too early to say whether traders will embrace the new futures contract.
While there is speculative interest, many potential buyers are watching these developments from the sidelines. It will be some years before the petro-yuan becomes a reality but if it does come - it will certainly have an impact.
The writer is CEO of Bangkok Bank, in China. The Nation is a member of The Straits Times media partner Asia News Network, an alliance of 23 news media entities.
