China takes first steps towards oil in yuan

China is taking the first steps this year to settle the import of oil in yuan, according to reports Reuters based on various anonymous sources. At the beginning of this week, the oil contracts in yuan were launched and it is expected that large deals can also be concluded with oil-producing countries in the second half of this year. China would like to make agreements with Russia and Angola, among others, to pay for oil in its own currency.

The oil market is the most traded commodity in the world, with an annual trading volume of $14 trillion. Most of this is paid in dollars, but China, as the largest buyer, wants to change that slowly. To reduce their dependence on the dollar system, it is trying to persuade traders and oil-producing countries to pay for oil in yuan.

Oil in yuan

If China manages to strike deals with various suppliers of oil, it could give a strong boost to the yuan. Not only will the currency become more interesting for settling on other goods, but more central banks will also include the yuan as a permanent part of the currency reserves. It could give a significant boost to the internationalization of the Chinese currency, which until now has mainly taken place on paper.

According to Reuters, Unipec, the trading arm of Chinese refinery Sinopec, has already struck a deal with a supplier in the Middle East to settle oil in yuan. The new futures contracts that have been traded on the Shanghai stock exchange since this week were used for this purpose. China's ambition is to use these new oil contracts to put a new Asian reference price on the map, in addition to the US WTI and European Brent oil.

The global oil market is dominated by the U.S. dollar to this day, but more and more countries are looking for ways to reduce their dependence on the dollar. A successful example of this is Iran, which since the beginning of 2016 has only accepted euros as payment for oil.