Author: cestmoi

Crude Oil Priced in RMB?   [Copy link] 中文

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Post time 2017-10-19 19:33:27 |Display all floors
. the current situation. RMB is strong enough to replace dollar?
life is colorful with you.

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Post time 2017-10-19 22:16:21 |Display all floors
sfphoto Post time: 2017-10-19 17:23
Trading in oil falls under the CURRENT account while buying shares of stock or property or bonds o ...
Consider a hypothetical case: a Chinese oil trader based in Shanghai buys oil from a foreign oil trader based in Singapore by borrowing USD from a Chinese bank such as ICBC who gets the USD from the PBoC. A foreign oil trader based in Singapore sells oil to the Chinese oil trader and gets paid in USD. The Chinese oil trader then imports the oil and sells it to oil refineries and gets paid in RMB.


But what if the Chinese oil trader, instead of immediately importing and reselling the purchased oil, let's it stand in reserve in a depot somewhere while waiting for oil price to go up? Wouldn't that be a capital investment, and as such restricted?

Similarly, if I have a desperate US buyer for property in Singapore, and I happen to know a Singaporean wanting to sell his apartment for cheap, and I want to profit from this by purchasing the property for myself and then immediatelly selling to the US guy, isn't that simple trade rather than capital investment? Buy low and sell high.

In both cases, shouldn't the post-trade actions define nature of the transfer, rather than the target industry? Obviously I don't work in this field.

Now let's see what happens if RMB is used instead of USD: the Chinese oil trader buys oil from the Shanghai commodity exchange priced in RMB. The Singapore oil trader sells oil to the Shanghai commodity exchange using his RMB accounts from a Singapore bank which handles the transfer of RMB to/from China.


Well you didn't just change the currency in your example, you changed the place where the trade happens. In first case with USD it was transaction between two traders, and then for RMB you changed to Shanghai commodity exchange.

Are foreign traders required to establish presence in China's FTZs before they could use RMB as trade currency? That alone would make it not competitive against USD.

Can you try the same scenario but maintain the original trader-to-trader transaction, and do it with RMB.

You'd have the Chinese oil trader purchasing oil from the Singapore based trader, and making the payment in RMB. The Singapore trader now holds RMB in his Singaporean bank account - or does he? Can he? What can he do with it? Let's say he wants to use this income to buy property in Singapore or USA.

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Post time 2017-10-20 19:10:15 |Display all floors
This post was edited by sfphoto at 2017-10-20 19:13
Jaaja Post time: 2017-10-19 22:16
But what if the Chinese oil trader, instead of immediately importing and reselling the purchased oil, let's it stand in reserve in a depot somewhere while waiting for oil price to go up? Wouldn't that be a capital investment, and as such restricted?

That's called "oil futures" which is a contract to buy/sell/trade oil at a future date at a certain price. The Chinese oil trader could buy/sell/trade such a contract in the Shanghai commodities market as a hedge against future oil price increases while his oil sits somewhere in an oil depot in China.

Similarly, if I have a desperate US buyer for property in Singapore, and I happen to know a Singaporean wanting to sell his apartment for cheap, and I want to profit from this by purchasing the property for myself and then immediatelly selling to the US guy, isn't that simple trade rather than capital investment? Buy low and sell high.

That's called real-estate speculation or "flipping" which is restricted by the Singaporean government. There's a hold period for foreigners who buy property in Singapore which would incur a penalty if the buyer sells during that period. Anyway, that transaction would qualify as "investment" which affects the CAPITAL account of Singapore which has nothing to do with the CAPITAL account of China.

Well you didn't just change the currency in your example, you changed the place where the trade happens. In first case with USD it was transaction between two traders, and then for RMB you changed to Shanghai commodity exchange.

Because that's the objective of China which is to establish Shanghai as an international financial center.

Are foreign traders required to establish presence in China's FTZs before they could use RMB as trade currency? That alone would make it not competitive against USD.

If they want to trade with China, then the Shanghai commodities market is the place to be. But no, they could still use the RMB anywhere foreign banks in foreign countries are willing to accept RMB.

Can you try the same scenario but maintain the original trader-to-trader transaction, and do it with RMB.
You'd have the Chinese oil trader purchasing oil from the Singapore based trader, and making the payment in RMB. The Singapore trader now holds RMB in his Singaporean bank account - or does he? Can he? What can he do with it? Let's say he wants to use this income to buy property in Singapore or USA.

If the Chinese oil trader buys oil from the Singapore oil trader in Singapore who gets paid in RMB, the Singaporean oil trader ends up with RMB in his bank account in Singapore. If he wants to buy property in Singapore, he exchanges his RMB with SGD. If he wants to buy property in the USA, he exchanges his RMB with USD. Those transactions are investment-related transactions which affects the CAPITAL account in Singapore not China.

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Post time 2017-10-20 21:29:31 |Display all floors
sfphoto Post time: 2017-10-20 19:10
That's called "oil futures" which is a contract to buy/sell/trade oil at a future date at a certai ...
et's it stand in reserve in a depot somewhere while waiting for oil price to go up


But what if the trader does not yet know when to sell, or even what price he is hoping to get. He just wants to hold on to the oil as capital, same way someone may invest in gold or property. I don't believe that oil future or commodities market belong to this picture.

his oil sits somewhere in an oil depot in China.


Also I didn't say that the depot would be in China, it could be anywhere in the world.

real-estate speculation or "flipping" which is restricted by the Singaporean government. There's a hold period for foreigners who buy property in Singapore which would incur a penalty if the buyer sells during that period.


Many countries have a certain period during which the profits from resale of property is taxed heavier, but what if (somewhere, not necessarily Singapore) such penalty would still make the overrall trade profitable.

Anyway, that transaction would qualify as "investment" which affects the CAPITAL account of Singapore which has nothing to do with the CAPITAL account of China.


There are two transactions in this example, one where I purchase the property with RMB, and another where I sell the same property with USD. The first transaction, according to your own statement earlier, WOULD affect capital account of China - since every transaction has two parties. First it's China-Singapore, and then Singapore-USA.

My point is, that if there wouldn' be a "hold period", or it could be ignore, is it (I know it is, my question is actually why it is) still considered capital investment?

But no, they could still use the RMB anywhere foreign banks in foreign countries are willing to accept RMB.


So if some way or another a trader (Chinese or foreign, doesn't matter) ends up with RMB in his foreign bank account, can he use it for capital investment or any other way there, that a foreign bank or some other entity is willing to accept RMB for?

Isn't this a perfect way to circumvent China's foreign investment controls - you just acquire the RMB abroad through regular trade rather than investment, and then you are good to go purchasing property, movie companies, or weapons, as long as the seller is willing to accept RMB?

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Post time 2017-10-22 19:25:53 |Display all floors
sfphoto Post time: 2017-10-17 00:27
If I am not mistaken, Central Banks use the Bank of International Settlements (BIS) based in Basel ...

You have a lot of book-knowledge. Any real-life, operational experience?
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Post time 2017-10-23 06:39:02 |Display all floors
cestmoi Post time: 2017-10-22 19:25
You have a lot of book-knowledge. Any real-life, operational experience?

I make my living in international trade so I am quite familiar with how the international financial system works.

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Post time 2017-10-23 07:04:24 |Display all floors
This post was edited by sfphoto at 2017-10-23 07:16
Jaaja Post time: 2017-10-20 21:29
But what if the trader does not yet know when to sell, or even what price he is hoping to get. H ...

I think you're missing the picture.

China only controls its CAPITAL account not those of foreign countries. Any foreign bank that can accept RMB as payments is free to offer RMB accounts, loans, etc. What those foreign banks do with those RMB is outside of the control of China.

Using the example above, the Chinese oil importer pays the Singapore oil trader in RMB which gets deposited in a Singaporean bank which offers to pay interest on his RMB accounts. The Singaporean bank then loans out the RMB to a Singapore electronics importer who buys electronics goods from a Chinese electronics manufacturer by settling the trade in RMB. All three foreign parties benefit: the Singapore oil trader, the Singapore bank and the Singaporean electronics importer while the Chinese oil importer, Chinese bank and Chinese electronics manufacturer deals only with RMB even though the whole RMB transaction was done offshore. If the whole transaction took place in the Shanghai FTZ, then that would qualify as an onshore RMB transaction.

Now, what happens to the RMB deposited in the Singaporean bank? If the Singapore oil trader wants to use the RMB to buy property in Singapore, he goes to his bank and exchanges his RMB to SGD because Singapore only uses SGD. If the Singapore oil trader wants to use his RMB to buy property in the US, he goes to his bank and exchange his RMB to USD because the USA only uses USD. All these transaction qualify as property investments which affects the CAPITAL account of Singapore (or USA) but not China.

Remember that the Singapore oil trader made his RMB by selling oil to the Chinese oil importer who pays him in RMB which gets deposited in his Singapore bank account. That RMB transaction qualify as trade-related which affects the CURRENT account of both China and Singapore because the RMB has to be wired from the Chinese bank to the Singapore bank.

Once the RMB trade transaction from China to Singapore is completed, China has ABSOLUTELY no control over what the Singapore oil trader does with his RMBs. He can leave them in the Singapore bank, exchange them for SGD to buy property in Singapore or exchange them for USD to buy property in the USA.

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