China is taking its first steps towards paying for imported crude oil in yuan instead of the U.S. dollar, three people with knowledge of the matter told Reuters, a key development in Beijing’s efforts to establish its currency internationally.
Shifting just part of global oil trade into the yuan is potentially huge. Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s gross domestic product last year.
A pilot program for yuan payment could be launched as early as the second half of this year, two of the people said.
Regulators have informally asked a handful of financial institutions to prepare for pricing China’s crude imports in the yuan, said the three sources at some of the financial firms.
“Being the biggest buyer of oil, it’s only natural for China to push for the usage of yuan for payment settlement. This will also improve the yuan liquidity in the global market,” said one of the people briefed on the matter by Chinese authorities.
China is the world’s second-largest oil consumer and in 2017 overtook the United States as the biggest importer of crude oil. Its demand is a key determinant of global oil prices.
Under the plan being discussed, Beijing could start with purchases from Russia and Angola, one of the people said. Both, like China, are keen to break the dollar’s global dominance.
Russia and Angola are two of the top suppliers of crude oil to China, along with Saudi Arabia.
The move would mark a major step in reviving usage of the currency of the world’s second-largest economy for offshore payments after several years of on-again, off-again measures.
If successful, it could also trigger shifting other product payments to the yuan, including metals and mining raw materials.
All three sources, who spoke to Reuters on the condition that they not be named, said the plans were at early stages. Officials at some of China’s state oil companies said they had not heard of such plans.
The plans coincide with this week’s launch of the first Chinese crude oil futures in Shanghai, which many expect to become a third global price benchmark alongside Brent and West Texas Intermediate crude.
Shanghai’s new crude contract is traded in yuan.
Besides the potential of giving China more power over global oil prices, “this will help the Chinese government in its efforts to internationalize renminbi (yuan),” said Sushant Gupta, research director at energy consultancy Wood Mackenzie.
Unipec, trading arm of Asia’s largest refiner Sinopec, has already inked a first deal to import Middle East crude priced against the newly-launched Shanghai crude futures contract.
U.S. bank Goldman Sachs said in a note to clients this week that the success of Shanghai’s crude futures was “indirectly promoting the use of the Chinese currency.”
People’s Bank of China, the country’s central bank, did not respond to a Reuters request for comment on the plan. The Ministry of Commerce also declined to comment.