Author: cestmoi

Crude Oil Priced in RMB?   [Copy link] 中文

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Post time 2017-10-15 12:24:01 |Display all floors
This post was edited by tedbrent at 2017-10-15 13:59

  I think you truly hate Western nations, sfphoto. Otherwise, you wouldn't roast America  while extolling China all the time. I'd argue that even most Chinese conservatives wouldn't have the cojones to tell people that China has already surpassed America in terms of global leadership and innovation.

  I'm not putting you down, man. I just think that you seem to be another shamer here. You said it's infra dig for foreigners living in China to repine at China's social problems since China is the host. I think you may have a point. But you simply can't hold yourself back from slating America or even distorting some facts.

  I think your own blinkered views  and resentment against America have colored your  perception of global affairs. Correct me I'm wrong, you seem to try to suggest that China is a perfect model for other developing nations here.

  But you sure other nations would love to build a social system in which everything can be monetized including love and sex. You sure they would prefer to let interest groups prey on them and chivvy them to be labourers instead of thinkers?  

  I just take exception to that.

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Post time 2017-10-15 12:27:02 |Display all floors
Jaaja Post time: 2017-10-15 10:33
While I agree about your argument about petrodollar regime, it would make little sense to trade  ...

I was replying to your earlier post about the geopolitical risk of trading oil in RMB which has nothing to do with the reserve status of the USD conferred by Central Banks all over the world. The former has to do with the medium of exchange in commodity markets while the latter has to with foreign currency exchange. Those two issues affect the global financial system but they're orthogonal to each other. For example, oil is traded in USD not in EURO or Yen but the USD, EURO and Yen are all treated as reserve currencies. Trading of oil in RMB as implied by this futures contract priced in RMB won't supplant the Petrodollar regime which is inextricably tied to the geopolitics of the Middle East. All this does is to create a Petroyuan regime which doesn't necessarily transform the RMB into a reserve currency. The Bretton Woods system is what turned the USD into the international reserve currency not the Petrodollar regime.

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Post time 2017-10-15 13:44:41 |Display all floors
sfphoto Post time: 2017-10-15 12:27
I was replying to your earlier post about the geopolitical risk of trading oil in RMB which has no ...

geopolitical risk of trading oil in RMB which has nothing to do with the reserve status of the USD


Well I disagree - I think geopolitical risk (among other risks, and regulations of People's Bank of China) is why RMB cannot join USD, Euro or Yen as global reserve currency, and therefore it also cannot be used to trade global commodities. If RMB could be treated as reserve currency equally to USD, then it would affect USD's status as reserve currency. So in my opinion those two things are interlinked.

As long as RMB is considered less safe currency than other currencies (for reasons I mentioned in my earlier post), it would make little sense to use it to trade oil or any other global commodity, when you can as well trade directly in one of those safer currencies.

The reasons why anyone would trade a global commodity in a currency that is not a global reserve currency are often the very same why that currency is not a reserve currency - they'd do it to look for short term gains from exchange rates, and other kind of speculation, which is what the central banks governing those currencies want to prevent by implementing controls that make them unsuitable to be used as reserve currencies.

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Post time 2017-10-15 14:13:41 |Display all floors
This post was edited by sfphoto at 2017-10-15 14:14
Jaaja Post time: 2017-10-15 13:44
Well I disagree - I think geopolitical risk (among other risks, and regulations of People's Ban ...

I beg to disagree.

The US dollar became the international reserve currency after the Central Banks of the Allied Nations decided to adopt it as part of the Bretton Woods Agreement with fixed exchange rates between currencies based on the price of gold. This was the gold standard which Nixon abandoned in 1971 in favor of floating exchange rates between currencies. Norhing to do with geopolitics but everything to do with geoeconomics.

The Petrodollar regime on the other hand is driven by the geopolitics of the Middle East which is a highly unstable war-torn region. The fact that the USD is used for the trading of oil as part of the Petrodollar regime is orthogonal to the adoption of the USD as part of the Bretton Woods Agreement. Case in point: neither the EURO nor the Yen is used in the trading of oil and yet they have become reserve currencies. It's up to the Central Banks to decide which reserve currency to use but their choice of reserve currency has nothing to do with the choice of the trade and settlement currency.

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Post time 2017-10-15 15:46:02 |Display all floors
sfphoto Post time: 2017-10-15 14:13
I beg to disagree.

The US dollar became the international reserve currency after the Central Banks ...
It's up to the Central Banks to decide which reserve currency to use but their choice of reserve currency has nothing to do with the choice of the trade and settlement currency.


That's not what I'm saying either. I'm saying that the choice of trade and settlement currency for the traders has a lot to do with the currency being a reserve currency.

I get that you use your bretton woodses and nixons to justify your arguments, but for me this is just common sense and logic.

Imagine you are a banker. A guy comes to you saying he wants a loan of 1 billion USD to invest in oil business. The loan time will be 20 years. Given that everything else checks ok, would you rather loan the money, if he's going to trade the oil directly with the USD that your bank gives him, or if he exchanges the USD from your bank first to RMB and then uses RMB to settle his deal?

If a trader would demand to settle his deals in RMB, he will have less access to capital, because banks (central and otherwise) do not trust RMB as much as they do USD - for long term investments. Short term investments perhaps, but that is speculative area which PBOC does not like to see RMB used for.

RMB cannot become a global settlement currency unless its quality in global eyes is first upgraded to reserve currency status.

It is irrelevant to me why USD has got its status - my points are about RMB, and how (if) it can take similar status.

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Post time 2017-10-15 19:58:44 |Display all floors
sfphoto Post time: 2017-10-15 14:13
I beg to disagree.

The US dollar became the international reserve currency after the Central Banks ...

A simplistic reason why RMB is not a reserve currency already, is that there isn't considerable amount of RMB outside China - compared to USD for example.

And to attain the status, there needs to be such amounts of RMB abroad, that PBOC or the Chinese government may not feel in control of their own currency anymore.

Same way as USD is a fiat currency instead of linked to gold now, RMB could become a fiat currency not linked to whims of Chinese government - and that is too much for the government to accept.

Because of that I don't think that this situation will change anytime soon, and therefore RMB will not become a global reserve currency soon either.

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Post time 2017-10-16 06:11:49 |Display all floors
This post was edited by sfphoto at 2017-10-16 06:14

I see where you are coming from. You're conflating the international FINANCIAL system with the international TRADING system. In the example cited above, the oil businessman needs USD to trade in oil because the oil markets agreed on the USD as the trade and settlement currency. So that oil trader borrows USD from the bank and uses the USD loans to buy oil. He then turns around and sells those oil to China. He decides to accept payment in RMB. But he needs to pay back his USD loans so he takes the RMB and sells them for USD in the currency markets.

What I am trying to say is that the commodity and currency markets are disjoint and thus orthogonal to each other with the sole exception of the Petrodollar regime which conjoined the USD currency market with the oil commodity market. The effect of the Petrodollar regime is to link the value of the USD to the price of oil, which has an inverse relationship with the greenback. That's why the Central Banks of the world started keeping EUROs as an alternative reserve currency to the USD because the Iraq War destabilized the Middle East which increased the price of oil while devaluing the USD. That decision had nothing to do with using EURO as the trade and settlement currency for oil. Those Central Banks were selling USD and buying EUROs as a financial hedge against further devaluation of the USD.

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