New Delhi: China launched its first ever yuan-denominated oil futures contract in Shanghai on Monday, marking the first time foreign investors will have access to Chinese commodity futures as the world`s top crude importer seeks greater influence over global prices.

Shanghai crude oil futures opened up more than 6 percent with almost 20 million barrels of the most-active September contract changing hands in the first 25 minutes as China debuted its oil benchmark.

The launch of China’s yuan-denominated oil futures marked the culmination of a decade-long push by the Shanghai Futures Exchange (ShFE) aimed at giving the world’s largest energy consumer more power in pricing crude sold to Asia.

The current global standards are London-trade Brent futures, and West Texas Intermediate (WTI), which is traded in New York.

They mainly trade higher-quality light sweet crude oil, while the yuan contracts on the Shanghai International Energy Exchange involve mainly medium-sour crude.

It also is the latest in a series of steps by China to raise the world profile of the yuan.

The most-active September contract opened at 440.4 yuan per barrel from a reference point of 416 yuan, and jumped to as high as 447.1 yuan in the first few minutes.

At 9:24 a.m. (0224 GMT) prices were up 3.29 percent at 430 yuan, with 19,122 lots, equal to 19.1 million barrels of oil, traded. </s> China’s yuan-denominated crude-oil futures surged on their long-awaited debut Monday, indicating positive initial sentiment toward the new market, which Beijing hopes will eventually give the country an oil benchmark to rival those in the U.S. and Europe.

The most actively traded futures contract due for delivery in September closed up 3.3% at 429.9 yuan ($68.07) per barrel on the Shanghai International Energy Exchange, after opening up more than 6% from a starting reference point of 416 yuan per barrel. Over 42,000 lots, or more than 21 million barrels, of oil valued at 18.3 billion yuan ($2.9 billion) were traded on Monday, according to data from Wind Information Co.

Beijing has been planning to launch its own oil market for several years, with the aim of providing an oil price that will be more closely aligned to local supply and demand conditions. China is the world’s biggest importer of oil after the U.S., and its fourth-largest producer. The new oil futures traded in Shanghai are open to foreign investors, the first time China has allowed them to trade in its domestic commodities markets in this way.

See: China faces hurdles as it vies with U.S. in oil-futures market

On Monday, Brent crude-oil futures UK:LCOK8 — the global benchmark based in London — were trading at $70.46 per barrel, while West Texas Intermediate futures US:CLK8 , the U.S. version, were trading at $65.68 per barrel.

Despite buoyant initial demand for the Shanghai oil contract, some analysts say the number of restrictions on trading and fears of regulatory intervention in the market could over time limit domestic interest in the market.

Meanwhile, Chinese commodities markets’ reputation for high volatility, and the fact that the contracts are denominated in yuan, not dollars, could damp international investors’ appetite for the futures.

“Trading has been relatively active and smooth so far,” said Gui Chenxi, an analyst at brokerage Citic Futures Co. “It’s a positive step forward, though investors will tread with caution at first as regulators see overall market stability as a desirable goal.”

Gui said it would likely take time for overseas investors to become familiar with the new oil futures, which have been designed in line with existing Chinese contracts. More than 150 Chinese institutions and 19 foreign firms have so far received approval to offer brokerage services to crude-oil futures traders, according to the Shanghai International Energy Exchange.

One issue for overseas investors is how easy it will be for them to take money out of China, given the country’s still relatively strict capital controls.

“As the most influential among all commodities, the crude futures could attract lots of interest from global investors. The question is how can overseas capital flow into China given Beijing hasn’t allowed for full convertibility of its currency,” said Fan Qingtian, a trader at Wuhan-based Changjiang Futures Co. </s> [SEOUL] China launched its first ever crude-futures contract as the world's biggest oil buyer seeks to wield greater power over pricing and challenge benchmarks in the US and Europe.

The long-awaited yuan-denominated futures on the Shanghai International Energy Exchange traded at 440.20 yuan a barrel (S$91.74) at 9.01am local time. The contracts, which are open to foreign investors, end years of delays and setbacks since China's first attempt to list the securities in 1993.

The two major dollar-based oil benchmarks, Brent in London and West Texas Intermediate in New York, traded near US$70.95 a barrel and US$66.42 a barrel, respectively. </s> China, the world’s largest oil importer, is launching a yuan-denominated crude futures contract with the potential to become a benchmark for global oil transactions. But it must overcome many challenges to earn a place alongside the internationally recognized U.S. dollar-denominated contracts.

Tim Seymour, managing partner of Seymour Asset Management, notes that because the contract covers a product handled in the Shanghai Free Trade Zone, this will be the first time non-Chinese can trade in Chinese commodity markets. The trade zone, launched in 2013, is open to foreigners and lets goods and capital flow freely without import duties.

This “will begin to create a 24-hour market for trading oil, especially where some of the largest buyers of oil are located,” Seymour says.

The crude-oil futures began changing hands on March 26 on China’s Shanghai International Energy Exchange. They will be traded in the Chinese currency, in a market that’s ruled by the greenback-denominated West Texas Intermediate, the U.S. benchmark CLK8, -0.43% , and Brent crude LCOK8, -0.20% , its global equivalent.

“China is the largest net buyer of oil and [other petroleum] products,” says Seymour, and is intent on securing enough energy for its needs.

In 2017, China imported 8.4 million barrels of oil a day, versus 7.9 million for the U.S., according to the Energy Information Administration. China wants its importance as the top importer “reflected in its stature in the world,” says Matt Badiali, senior analyst at Banyan Hill.

“What better way to do that than to supplant the U.S. dollar with the yuan?” asks Badiali.

He believes that oil futures traded in China will “become a global benchmark, based on the crude basket that will be offered, and the power of China’s economy.” They will “directly challenge WTI and Brent.”

This year, WTI oil futures have climbed around 9%, while Brent has tacked on more than 5%.

Seven grades of crude will be accepted for delivery under the Chinese futures contract, including Basrah Light, a Middle Eastern high-sulfur “sour” oil. China is the biggest buyer of Basrah Light, with 618,000 barrels a day delivered in 2017, with the second and third purchasers being India and the U.S., according to Matt Smith, director of commodity research at ClipperData.

“The competition with the U.S. for Basrah Light is most likely the most interesting aspect of this new futures contract,” notes Smith.

Check out: Who gets hurt in a trade war? Mostly not China

The contract has “been in the works for over half a decade, and although it may be off to a modest start, the ultimate goal is to create a yuan-denominated global crude benchmark,” he continues. “Given this underlying ambition, we should not be dismissive of it growing in prominence to be a leading benchmark over the coming decade.”

Banyan Hill’s Badiali says the fact that these contracts are “signed up to be delivered in yuan is important. … That means China has a major inroad into oil deals in the Middle East.” It also marks a bid to “strengthen the yuan in the eyes of the world,” he maintains.

But being traded in yuan also puts the futures at a big disadvantage: They will have limited liquidity.

The vast majority of traders “have little incentive to trade the contract, given the contract specifications, most importantly the [yuan] currency, as [the U.S. dollar] is the global standard for oil trading,” says Michael Corley, president of Mercatus Energy Advisors.

“It will be quite a challenge for the contract to even become a regional benchmark, let alone a global benchmark,” he adds. The main interest will come from Chinese refiners, he observes, but “it simply isn’t an attractive contract to most global market participants.”

Trading in West Texas Intermediate on the New York Mercantile Exchange averages roughly 1.4 million contracts a day, while daily volume is just shy of one million for Brent on the ICE Futures Europe exchange, he says. He doesn’t expect the Chinese contract to soon steal much, if any, volume from either, as “they are simply too well-established, globally acceptable benchmarks.”

Still, Corley adds, given that China is one of the world’s largest oil consumers, if the contract succeeds, that would “indeed provide China with more pricing power, much to the dismay of their primary suppliers, the Middle East producers.”

This report also appears at Barrons.com. </s> Futures in Shanghai are about $3/barrel higher than WTI crude

China launched its first ever crude-futures contract as the world’s biggest oil buyer seeks to wield greater power over pricing and challenge benchmarks in the U.S. and Europe.

The long-awaited yuan-denominated futures on the Shanghai International Energy Exchange traded at 440.20 yuan a barrel ($69.70) at 9:01 a.m. local time. The contracts, which are open to foreign investors, end years of delays and setbacks since China’s first attempt to list the securities in 1993. The two major dollar-based oil benchmarks, Brent in London and West Texas Intermediate in New York, traded near $70.95 a barrel and $66.42 a barrel, respectively.

— With assistance by Sarah Chen, and Heesu Lee </s> It’s taken a quarter of a century, but China’s finally getting its own oil futures.

At 9 a.m. local time on Monday, crude contracts will begin trading on the Shanghai International Energy Exchange. The world’s biggest oil buyer is offering yuan-denominated futures that foreigners can buy and sell -- a first in Chinese commodities. Among the most intriguing questions is whether the traditional benchmarks of Brent crude in London and West Texas Intermediate in New York will face a serious challenger. Here are some of the other key questions.

1. Why is this important for China?

Futures trading would wrest some control over pricing from the main international benchmarks, which are based on dollars. Denominating oil contracts in yuan would promote the use of China’s currency in global trade, one of the country’s key long-term goals. And China would benefit from having a benchmark that reflects the grades of oil that are mostly consumed by local refineries and differ from those underpinning Western contracts.

The push for oil futures gained impetus in 2017 when China surpassed the U.S. as the world’s biggest crude importer. The Asian nation’s purchases reached a record high in January.

Lower crude prices have played a part as to why not earlier. Chinese oil futures were proposed in 2012 following spikes above $100 a barrel, but prices in 2017 have averaged little more than $50. There’s also concern over volatility. China introduced domestic crude futures in 1993, only to stop a year later because of volatility. In recent years, it repeatedly delayed its new contract amid turmoil in equities and financial markets. Such destabilizing moves have often prompted China’s government to intervene in markets in one way or another.

Futures contracts fix prices today for delivery at a later date. Consumers use them to protect against higher prices down the line; speculators use them to bet on where prices are headed. In 2017, oil futures contracts in New York and London outstripped physical trading by a factor of 23. Crude oil is among the most actively traded commodities, with two key benchmarks: West Texas Intermediate, or WTI, which trades on the New York Mercantile Exchange, and Brent crude, which trades on ICE Futures Europe in London.

Trading hours will be 9 a.m.-11:30 a.m. and 1:30 p.m.-3 p.m. local time and, at night, 9 p.m.-2:30 a.m. The daily trading band has been set at 5 percent on either side, and 10 percent on its debut day, while margin requirements are at 7 percent. Seven grades will be deliverable, including Dubai crude, Basrah Light and China’s Shengli. The contracts will have 36 delivery months with the first 12 months as rolling contracts. The daily cost to store crude for delivery into the Shanghai exchange is set at 0.2 yuan a barrel, or at least twice the rate elsewhere, in a move seen as deterring excessive price swings.

Nickel was the last major commodity to be listed there in 2015; within six weeks, trading in Shanghai surpassed benchmark futures on the London Metal Exchange, or LME. In China, speculators play a far greater role, boosting trading volumes but making markets susceptible to volatility. In early 2016, the then-head of the LME said it was possible some Chinese traders did not even know what they were trading as investors piled into everything from steel reinforcement bars to iron ore. Steep price rises relented when China intervened with tighter trading rules, higher fees and shorter trading hours.

That remains to be seen. Overseas oil producers and traders would need to swallow not just China’s penchant for occasional market interventions but also its capital controls. Restrictions on moving money in and out of the country have been tightened in the past two years after a shock devaluation of the yuan in 2015 prompted a surge in money leaving the mainland. Similar hurdles have kept foreign investors as bit players in China’s giant stock and bond markets. As of March 21, a total of 19 overseas brokers have registered with the Shanghai exchange for dealing the oil futures contract.

8. Could the yuan challenge the dollar’s dominance in oil?

Not any time soon, since paying for oil in dollars is an entrenched practice, according to some analysts. Shady Shaher, head of macro strategy at Dubai-based lender Emirates NBD PJSC, says it makes sense in the long run to look at transactions in yuan because China is a key market, but it will take years. Bloomberg Gadfly columnist David Fickling argues that China doesn’t have “nearly the influence in the oil market needed to carry out such a coup.” On the other hand, paying in yuan for oil could become part of President Xi Jinping’s “One Belt, One Road” initiative to develop ties across Eurasia, including the Middle East. Chinese participation in Saudi Aramco’s planned initial public offering could help sway Saudi opinion toward accepting yuan, which is used in only about 2 percent of global payments.
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— With assistance by Dan Murtaugh, Serene Cheong, and Sarah Chen </s> China's first ever crude-futures contract has been launched, as the country seeks to have a greater say over pricing and challenge benchmarks in Europe and the U.S., Bloomberg reported Monday.

According to the report, the yuan-denominated futures traded at $68.47 per barrel for September settlement by 11:30 a.m. local time Monday.

Moreover, the Chinese contract traded about $4 a barrel higher than West Texas Intermediate (WTI), the report said.

Last year, China became the world's biggest buyer of foreign oil, surpassing the U.S. Yuan-denominated contracts are expected to boost the use of yuan in international trade in the long run. </s> But analysts said the long-delayed Shanghai-traded futures are unlikely to challenge the primacy of New York and London-based futures any time soon due to Chinese capital controls and the entrenched position of the dollar-denominated contracts. 



 Futures contracts allow investors to hedge exposure to physical prices, and offering them in yuan could allow energy-hungry China -- which last year surpassed the United States as the world's largest crude importer -- to exercise more control over prices of the type of oil it consumes most. 



 It also is the latest in a series of steps by China to raise the world profile of the yuan. 



 The new contracts are "rooted in China's ambition to increase its bargaining power to price energy supplies amidst an increasing reliance on oil imports," energy industry information provider ICIS said in a research note.

"If the demand for (yuan contracts) came at the expense of the US dollar, there is always a chance, however slim, that the Chinese yuan could displace the US dollar as the main petro-currency." 



 But analysts said Chinese capital controls will likely discourage hefty foreign engagement, as will wariness of the often wild gyrations in China's still relatively immature financial markets. </s> Amid the ongoing trade war between the U.S. and China, it seems that Beijing may be getting the short end of the stick already.

On Sunday, the People’s Bank of China said it was cutting the reserve requirement ratio for most banks by 100 basis points, which will result in an injection of 750 billion yuan ($109.2 billion) in cash into China’s banking system. The move is intended to provide easier lending and more liquidity in China's economy as the impact of U.S. sanctions start to hit manufacturing and the overall economy.

Several analysts are claiming that the ratio move shows China is getting nervous about a protracted trade war with the U.S. However, if China is getting the jitters, the official tone coming out of Beijing is more stiff lipped defiance. The government claims in a 71-page paper that it’s not afraid of a trade war and that its economy is “heavily resilient.”

Fraser Howie, an independent analyst and China watcher told CNBC on Monday that "China is probably facing its worst period since the global financial crisis.” “All news is against it,” he said. "They certainly want to play down any talks of panic or near panic ... but they're clear it's not business as usual in China.”

Bloomberg News said in a report that the Bank of China move was understandable as a short-term response to a more challenging growth environment, but it risks being another attempt to crank up an old economic- model whose effectiveness has declined and whose unfavorable side effects could increase. The bank move also could be a preemptive step to avoid massive outflows of investor money from its financial system if the trade war continues.

On the energy front, China has already blinked, maybe even twice or thrice (if that is a word).
• First, it conceded in August by removing U.S. oil imports from a list of possible duties. Two months earlier, China - perhaps trying to either intimate U.S. oil producers (who have been largely supportive of Trump’s policies thus far) who would in turn pressure President Trump, or either by pressuring Trump directly, indicated it would levy a 25 percent duty on U.S. oil imports.
• Second, since China is the largest buyer of American crude, Beijing likely discarded one of its strongest bargaining chips in the trade war so far. Some reports claim that U.S. oil imports to China are worth $8 billion all by themselves, so erasing oil from the tariff list reduced the value of sanctioned goods by roughly one-third.
• As far as Beijing’s LNG tariff threats are concerned, the reduction from an earlier 25 percent duty to 10 percent could also be considered another blink on China's part. Beijing, though it does have a host of other gas and LNG suppliers, at the end of the day still needs American LNG as the country continues to pivot away from dirtier burning coal needed for power production in favor of cleaning burning natural gas. By 2020, per government mandate, gas is earmarked to make up at least 10 percent of China’s energy mix, with further earmarks by 2030.

Moreover, Beijing's 10 percent duty on U.S.-sourced LNG will merely see that cost passed onto China's state-run oil majors, while also increasing revenue for LNG sellers, including American LNG exporters.

Tariffs will also increase the price of LNG in Asia as producers and traders in the region will likely increase LNG on the spot market (which China needs to fill gaps in winter supply) to prices just under U.S. LNG prices with the tariff cost added in. Complicating the matter further, the 10 percent LNG retaliatory tariff comes just before winter when LNG demand is set to increase, and customers are already vulnerable to price hikes for the cleaner burning fuel.

Energy consultancy Wood Mackenzie estimates that China will need to buy about 8 million tons of LNG on the spot market, where commodities are purchased for immediate delivery or shipment in the near future CNBC, citing analysts, claims that Chinese LNG buyers will also try to swap as many LNG cargoes as possible to avoid the 10 percent tariff, but if they can’t swap cargoes they will be stuck paying the 10 percent duty.

As other LNG producers take advantage of China’s 10 percent tariff increase and hike LNG prices, the markup could add another $4 million to $5 million on LNG cargoes for Chinese buyers, Wood Mackenzie added. </s> ...and our world will never be the same!

The North American Free Trade Agreement (NAFTA) is dead. Mexico and Canada have folded. A new agreement, the United States-Mexico-Canada Agreement (USMCA), will replace it. While the new agreement maintains the integrity of the North American market, it dramatically changes the rules and tilts the playing field in favor of the United States. In particular, changes in provisions regarding the percentage of North American content required in vehicles imported under the agreement, a mandate for huge increases in minimum wages in Mexico and support for labor unions in Mexico mean that an already resurging American manufacturing base is set to expand even more rapidly.

All eyes now shift to the ongoing trade war between the United States and China, the world's two largest economies. Here the news is even better. We have already won.

Growth in China's manufacturing sector stalled this September, with export orders falling faster than they have in two years. The Caixin/ Markit Manufacturing Purchasing Managers' Index (PMI) for September fell more than expected to 50.0 from 50.6 in August. The index measures the rate of expansion or contraction in an economy, and the neutral 50-mark divides expansion from contraction. What was once the world's fastest growing economy, destined to overtake the United States at any moment, is now poised, not simply to cool off, but to begin to shrink in size. New export orders from Chinese firms, the all-important indicator of what the future portends, are now shrinking across the board.

China's currency is in free fall. China's foreign exchange reserves fell more than expected in September 2018 to a 14-month low as the yuan weakened against the dollar.

China's stock market is crashing. It has lost $2 trillion in value already this year. China, which overtook Japan as the second largest stock market in the world only a few years ago, has now officially fallen behind Japan. The losses show no signs of abating.

Chinese investments in the US plummeted 92 per cent in the first nine months of 2018 from their peak two years ago. In New York, where Chinese money was once driving real estate prices through the roof, the Chinese are now selling and going home. In the second quarter of 2018 Chinese investors sold $1.29 billion worth of US commercial real estate. During the same time period, Chinese investors bought only $126.2 million of property, according to data firm Real Capital Analytics. This marked the first time that these investors were net sellers since 2008.

Meanwhile, back home, China is on pace for a record year in corporate-bond defaults. Chinese companies have reneged on about $2.5 billion of public bond payments so far this year. As the economy downshifts and the threat of US tariffs hangs over everything, Chinese companies increasingly simply cannot pay their debt.

Meanwhile a spokesman for the Chinese Supreme People's Court is warning of an impending flood of Chinese bankruptcies and telling the Chinese judiciary to prepare in advance.

Against this backdrop China-based manufacturers, many of whom were already in the process of moving out, have intensified the speed with which they are leaving.

"Companies aren't as eager to have production in China," says Nathan Resnick, CEO of startup company Sourcify. "We run production runs in India, Bangladesh, Vietnam, Philippines and Mexico right now. Labor costs are actually more affordable outside of China, so for products like apparel where there is a lot of cut-and-sew labor, most companies are moving out of China anyway," he says. "I've been going back and forth to China for years, and it is getting more expensive. With all these tariffs coming, why not run some of your production runs elsewhere? Companies are saying that the scare of these tariffs has decreased the incentives to manufacture in China."

Discussing the trend, William Ma Wing-kai, managing director of Kerry Logistics Network, a Hong Kong-listed firm owned by Malaysia's billionaire Kuok family, stated,

In retrospect none of this should come as a surprise. The result of this confrontation was preordained. The United States is far and away the world's largest market for consumer goods. China, which lives or dies based on exports cannot lose access to the American market and even begin to replace those sales elsewhere. There are on the other hand an almost endless number of other locations other than China, including the United States, to which manufacturers can move their factories and shift production. China was already seeing the beginnings of this shift before the trade war began. The confrontation with the United States simply intensified the trend.

What comes next will reshape the global economy and the world's geopolitical landscape. China will ultimately cave and sign a deal. Its economy will not collapse. It will, however, never again see growth on the scale it has seen for the last thirty years. Within a year or two, in fact, we are likely to see a red-hot American economy surge past China in its rate of growth. China, which once thought fit to challenge the United States for global supremacy will remain a second-tier power.

Chinese influence around the world, heavily dependent on the availability of funds to invest, will decline precipitously. Chinese plans for massive defense spending will be still born. Outposts in the South China Sea once taken as harbingers of relentless expansion will instead stand as high-water marks for a nation facing the harsh reality of economic contraction.

The ultimate reckoning will come inside China however. Ever since China opened its economy to the world it has had an implicit bargain with its citizens. They would accept continued authoritarian rule by the Communist Party in exchange for a rising standard of living and greater economic opportunity. The Communist Party is about to be forced to admit that it can no longer keep its end of that bargain. What the people do next remains to be seen.
China launches an oil futures market, with contracts denominated in yuan, in a bid to compete with oil benchmarks from the United States and Europe.