Author: cestmoi

Crude Oil Priced in RMB?   [Copy link] 中文

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Post time 2017-10-18 22:14:27 |Display all floors
sfphoto Post time: 2017-10-17 00:56
You're right about China's control of the CAPITAL account but not the CURRENT account. So that affe ...

My original reply seems to have gotten stuck in filter, I try again.

right about China's control of the CAPITAL account but not the CURRENT account. So that affects the movement of CAPITAL in/out of China but not the transfer of MONIES in/out of China for trade/settlement purposes.


Let's take some example regulations.

Indviduals are limited to convert and transfer abroad equivalent of 50 000 USD annually. From what I know of developments in 2017, they are also required to sign guarantees that the money is not used to purchase property or insurance products abroad. Chinese enterprises are restricted to invest RMB abroad into number of fields, including but not limited to real estate, sports and film industries.

Would you say that those restrictions are about controlling capital account, or the current account?

In my opinion such purchases (by indviduals) are prime examples of trade and settlement, and if RMB is not freely convertible and usable abroad for such purposes, then clearrly RMB is not competitive as trade and settlement currency compared to USD.

Relevant to topic of this thread, some sources also mention "those that do not comply with environmental standards" as restricted industr for RMB investments - of course "standards" is a loose definition, but anything to do with oil is rarely good for the environment.

I wouldn't be surprised, if sometime in future China restricts RMB from being used in oil trade, in effort to direct it for more sustainable industries - commendable as such.

In this kind of situation, how could RMB become a competitive and trustable currency for trade and settlement, specifically in industry such as oil?

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Post time 2017-10-18 23:34:23 |Display all floors
SEARU Post time: 2017-10-12 21:02
The title should be "Oil priced in RMB"!

Now I see that you have changed the title!
Childish pure  mindset can simplify your life which let you live in a light way! Without man-made troubles you will work in high efficiency!

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Post time 2017-10-19 05:15:16 |Display all floors
This post was edited by sfphoto at 2017-10-19 11:48
Jaaja Post time: 2017-10-18 22:14
My original reply seems to have gotten stuck in filter, I try again.
Indviduals are limited to convert and transfer abroad equivalent of 50 000 USD annually. From what I know of developments in 2017, they are also required to sign guarantees that the money is not used to purchase property or insurance products abroad. Chinese enterprises are restricted to invest RMB abroad into number of fields, including but not limited to real estate, sports and film industries.

Individuals or corporations transferring monies in/out of China for investments in property, buying insurance, etc. qualifies as CAPITAL inflows/outflows which is restricted by Chinese authorities.


Would you say that those restrictions are about controlling capital account, or the current account?

China imposes currency controls on the CAPITAL (investments) account but not on the CURRENT (trading) account.


In my opinion such purchases (by indviduals) are prime examples of trade and settlement, and if RMB is not freely convertible and usable abroad for such purposes, then clearrly RMB is not competitive as trade and settlement currency compared to USD.

You're talking apples and oranges again. Such purchases (by individuals or corporations) are prime examples of investment-related currency transfers which affects the CAPITAL account. They are not trade-related currency transfers which affects the CURRENT account. Your examples just prove that currency transfers can't be used for real-estate speculation by either individuals or corporations which is irrelevant to currency transfers used for trade/settlement purposes.

China does not control currency transfers related to international trade which is why the RMB is already being used by private banks as the currency for trade/settlement purposes. Whether Central Banks want to use the RMB as their reserve currency depends on the size and scope of China's foreign trade in the globalized economy.

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Post time 2017-10-19 13:35:36 |Display all floors
sfphoto Post time: 2017-10-19 05:15
Individuals or corporations transferring monies in/out of China for investments in property, buyin ...
Individuals or corporations transferring monies in/out of China for investments in property, buying insurance, etc. qualifies as CAPITAL inflows/outflows which is restricted by Chinese authorities.


I stand corrected on nature of those transfers with regard to capital and current accounts.

I still fail to see, how RMB could ever become competitive trade currency (in particular with oil) wih the closed capital account. Who or what determines whether buying a million USD worth of oil (either the real thing in a tanker or future production) is considered capital investment or trade? I see no difference between such purchase and buying of property, for example.

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Post time 2017-10-19 17:07:44 |Display all floors
Supporting Oil prized in RMB

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Post time 2017-10-19 17:23:46 |Display all floors
This post was edited by sfphoto at 2017-10-19 17:37
Jaaja Post time: 2017-10-19 13:35
I stand corrected on nature of those transfers with regard to capital and current accounts.
I still fail to see, how RMB could ever become competitive trade currency (in particular with oil) wih the closed capital account. Who or what determines whether buying a million USD worth of oil (either the real thing in a tanker or future production) is considered capital investment or trade? I see no difference between such purchase and buying of property, for example.

Trading in oil falls under the CURRENT account while buying shares of stock or property or bonds or insurance falls under the CAPITAL account.

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.

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.

The USD disappears completely from the hypothetical transaction above. The RMB need not sit outside of China as the Singapore bank could establish a subsidiary operating inside the Shanghai FTZ which would allow foreign persons such as the Singapore trader to open RMB accounts in foreign-owned banks such as the Singapore bank.

The reason why China imposes currency controls on the CAPITAL account is to prevent financial speculators from using the RMB as speculative capital. And indeed, currency speculators have been trying for years to manipulate the USD/RMB exchange rate but to no avail because the PBoC regularly intervenes to maintain a 2% trading band. Similarly, China imposes restrictions on financial investments through the QFII (Qualified Foreign Institutional Investor) program as well as the QDII (Qualified Domestic Institutional Investor) program.

I don't see any reason why the RMB can't be used as the trading/settlement currency for the oil trade unless the Singapore trader wants to use his RMB to buy Chinese property/stocks/bonds which are restricted transactions. The PBoC need not get involved at all if the RMB transaction takes place inside the Shanghai FTZ.

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Post time 2017-10-19 17:48:55 |Display all floors
Be careful of committing to high buying price today when there is prospect of it falling to Usd10/barrel in 6-8 years time. Unless it is for strategic reasons.

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