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China's RMB oil futures exchange—the 'story of the year'!

February 3, 2018
Bob Savage
Track Research
‍The Shanghai International Energy Exchange:blowing up more than oil

There's a lot to follow in China. And, I had missed reports about the opening of the Shanghai International Energy Exchange or INE, likely this quarter. But, during my interview with Bob Savage, the well-respected analyst of global markets and CEO of TRACK, he told me the INE could be the 'story of the year.' That's a big - and interesting - claim about something that seems like one more ho-hum Chinese entity. Bob explained that the INE will create the an RMB-denominated oil futures contract. The first such contract in a petrodollar world, where China is largest crude oil importer. If RMB oil contracts - even just for trade with China - catch on, then the whole global oil trading regime will change. And, given the massive size of the global oil trade, a shift from dollars to RMBs will both erode the dollar as a reserve currency, and push the RMB closer its goal of becoming a full reserve currency.

1. China's new RMB oil futures exchange - the 'story of the year'!

Watch for the opening of The Shanghai International Energy Exchange - acronym: INE - this quarter. 

'Story of the year' and 'game changer' are what Bob Savage, CEO of TRACK and member of our soon-to-be launched China Analyst Network, calls the INE. And, the impact goes way beyond oil to bolstering the RMB's challenge to the dollar.

About the INE. The INE will offer the first oil futures contract denominated in RMB, instead of U.S. dollars.

  • Chinese buyers will lock in oil prices and pay in RMB, instead of U.S. dollars.
  • Oil producers will be able to sell oil to China - the largest oil importer - in RMB, instead of dollars.
  • And, the INE will establish a third oil price benchmark (after the WTI and Brent) in RMB, instead of U.S. dollars.
  • (note: the 'RMB, instead of U.S. dollars' - that's crux of what follows.)

The INE sounds a little ho-hum until Bob explains its impact on the relationship of commodities and currency: 

  • The last time the world saw a reserve currency change was during World War Two when the dollar formally replaced the British pound as the universal medium of global exchange in the 1944 Bretton Woods Agreement.
  • But the de facto change began 'after World War One, when more and more contracts started to be denominated in dollars instead of pounds. And, that played a part in the dollar's replacing the pound as the world's reserve currency.' 
  • 'The question to ask is: Will the U.S. begin to see an erosion of its reserve currency status when more and more contracts start to be denominated in RMB?' 

'Already, the open interest of the commodity contracts listed in Shanghai in Renminbi far outstrips anything in the rest of the world's commodities futures in commodities combined.' 

  • 'What we're beginning to recognize is what has de facto already been the truth: that China's import of a huge proportion of the world's commodities changes the way currencies work.'

'As more trade becomes denominated in Renminbi and more futures contracts become denominated in Renminbi, then the Renminbi becomes a more viable alternative to the dollar, and prices begin to revolve around whether the Renminbi, not the dollar, is holding its value or not.'

Enter the INE. 'The denomination of oil futures contracts in Renminbi exemplifies the role of commodities in the geopolitical fears about the dollar weakness and about the role of China in that weakness.'

  • This is why the opening of the INE could 'exacerbate the dollar weakness story because it's an example of the dollar continuing down the path of eroding its reserve status.'

After the INE opens, watch:

  • 'How much volume it does and how quickly it expands.'
  • 'How many other countries start denominating oil contracts with China in Renminbi. The Saudis have said they might. The Iranians already do. The Russians already do. But, if OPEC, as a whole, starts to denominate both in dollars and Renminbi, it's a game-changer.'

 

'For all these reasons, the opening of the Shanghai International Energy Exchange, the INE, could be the biggest story of the year.'

  • 'The impact might not happen dramatically or immediately, but over time, over maybe the next five years, the opening of the INE could be seen as crossing the Rubicon.'                                                                                                                                                                                                                      

2. U.S. inflation in an RMB world

Image
‍That twisty thing is the RMB after it replaces the dollar

Bob Savage, CEO of TRACK, riffed on U.S. inflation if we one day lived in an RMB world.

If the RMB moves toward replacing the dollar, then 'the locus of attention about inflation, particularly global inflation, will change from 'what is the policy of the Fed?' to 'what is the policy of the People's Bank of China?' - and, to what is the value of the Renminbi rather than what is the value of the dollar.'

  • 'It really moves U.S. inflation from being under Fed control. 
  • Instead, 'you have to keep an eye on Chinese demand for commodities. That will set the rates for a lot of commodities that we're dependent upon.'
  • 'And, if Chinese demand sets the rates, the currency relationship with China will likewise matter to the U.S. in a much more dramatic way.'

'If China sets the commodities rates, U.S. inflation from imports will be more dramatic.

  • 'Up until now, import inflation in the U.S. has been muted because we are blessed with lots of commodities of our own. And, the pricing of those commodities on a world market has never really been part of the story because everything that we buy and sell has been denominated in dollars.'
  • 'But, if we start pricing those commodities in RMB terms, then that exchange rate becomes terribly important to the Fed.'
Bob Savage

Bob Savage

Chief Executive Officer
Track Research
  • Chief Executive Officer, Editor-in-Chief and Head of Research of Track.com
  • Joined FX Concepts as COO and Chief Strategist when Track.com was acquired by FX Concepts in 2012.
Track Research

Track Research

Trackresearch.com is the global marketplace for research ideas. It is a place where qualified contributors can share their stock, commodity and macro ideas with a unique group of institutional investors, high net worth individuals and other thoughtful market participants.

We are an independent platform for investment research and market ideas. Our content is submitted by highly qualified professionals with proven track records and a developed understanding of what is required to produce thoughtful research. We offer our contributors a unique distribution channel to a growing base of institutional money managers in search of top-quality, real-time research, as well as the general public. We provide filtering, messaging and alerting tools so that our readers can access what they want as soon as it is available to them.

Our management team has over seventy years of experience in financial services at top tier firms.

THE TRACK FREE TRIAL

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With the TRACK FREE TRIAL you can try out our prestigious PREMIUM SUBSCRIPTION for 2 weeks and our BASIC SUBSCRIPTION for 1 week. Once the 3 week trial period is over, you will have limited access to TRACK for an unlimited time at the FREE REGISTRATION level.

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Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book

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Track Research

U.S.-China trade dispute: Will China Weaponize the RMB and U.S. Treasury bonds?

Bob Savage
Bob Savage
4/10/18
U.S.-China trade dispute: Will China Weaponize the RMB and U.S. Treasury bonds?

U.S.-China trade war: collateral damage

Consider the soy bean. 'China is threatened retaliatory tariffs on U.S. soybeans. The U.S. is one of the largest producers of soybeans. If China's not going to buy them, we're going to have an excess capacity.'

  • 'So, last week, we saw a soybean selloff.'

'But there was a complete dislocation in whole soybean supply chains. Downstream products, like soybean oil, didn't move at all in the same way.'

How Trump's tariffs impact China's trade/currency relations with Japan & Korea

How Trump's tariffs impact China's trade/currency relations with Japan & Korea

'The currency markets are embroiled in trying to figure out whether the Trump tariffs on steel and aluminum are good or bad for the U.S. economy and the U.S. stock market.'

China's RMB oil futures exchange—the 'story of the year'!

China's RMB oil futures exchange—the 'story of the year'!

There's a lot to follow in China. And, I had missed reports about the opening of the Shanghai International Energy Exchange or INE, likely this quarter. But, during my interview with Bob Savage, the well-respected analyst of global markets and CEO of TRACK, he told me the INE could be the 'story of the year.' That's a big - and interesting - claim about something that seems like one more ho-hum Chinese entity. Bob explained that the INE will create the an RMB-denominated oil futures contract. The first such contract in a petrodollar world, where China is largest crude oil importer. If RMB oil contracts - even just for trade with China - catch on, then the whole global oil trading regime will change. And, given the massive size of the global oil trade, a shift from dollars to RMBs will both erode the dollar as a reserve currency, and push the RMB closer its goal of becoming a full reserve currency.

China's trade surplus up, RMB weaker

China's trade surplus up,  RMB weaker

'The RMB did not like the trade data at all, and it weakened immediately - over 1% today.' 'Overnight, the world has moved a little bit away from its U.S.-centric obsession about equity volatility in the United States and around the world to what's going on in China,' says Bob Savage, CEO of TRACK and member of the soon-to-be-launched China Analyst Network.

Bob Savage

Bob Savage

Chief Executive Officer
Track Research
  • Chief Executive Officer, Editor-in-Chief and Head of Research of Track.com
  • Joined FX Concepts as COO and Chief Strategist when Track.com was acquired by FX Concepts in 2012.
Track Research

Track Research

Trackresearch.com is the global marketplace for research ideas. It is a place where qualified contributors can share their stock, commodity and macro ideas with a unique group of institutional investors, high net worth individuals and other thoughtful market participants.

We are an independent platform for investment research and market ideas. Our content is submitted by highly qualified professionals with proven track records and a developed understanding of what is required to produce thoughtful research. We offer our contributors a unique distribution channel to a growing base of institutional money managers in search of top-quality, real-time research, as well as the general public. We provide filtering, messaging and alerting tools so that our readers can access what they want as soon as it is available to them.

Our management team has over seventy years of experience in financial services at top tier firms.

THE TRACK FREE TRIAL

THREE SUBSCRIPTIONS LEVELS,ONE TO SUIT YOUR NEEDS

With the TRACK FREE TRIAL you can try out our prestigious PREMIUM SUBSCRIPTION for 2 weeks and our BASIC SUBSCRIPTION for 1 week. Once the 3 week trial period is over, you will have limited access to TRACK for an unlimited time at the FREE REGISTRATION level.

SIGN UP TO START YOUR FREE TRIAL

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book
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