Oil, RMB and the petrodollar’s demise

The goal of making the RMB a global commodities currency is not a job for those looking for quick successes. But recent moves from Russia and the Middle East have laid further bricks on the road to glory for China.

  • By Paolo Danese
  • 12 Sep 2017
Email a colleague
Request a PDF

Most of China’s RMB internationalisation efforts have so far been divided between its near neighbours in Asia and the developed economies of Europe and the Americas. But the recent announcement that Saudi Arabia and the Emirate of Sharjah may be looking to begin funding in renminbi, by issuing directly in China’s onshore Panda bond market, appears to be a signal that Beijing may be moving on to a new phase of its strategy.

This is, of course, a clear result of the Belt and Road Initiative (BRI). Unlike the RMB internationalisation strategy of the previous five years, the BRI is clearly targeting stronger ties with developing economies in Central Asia, the Middle East and Africa. The news out of Riyadh and Sharjah indicate that China is making headways in that direction.

It is hard to overstate the significance of the geopolitical shift this would mark. China's success in luring Middle Eastern sovereigns to its bond market could bring about nothing less than the end of the petrodollar. 

Of course, a symbolic, politically-driven Panda bond issue by a Middle Eastern name would not in itself mean much. But that funding channel could open the door to China finally convincing key oil exporters to accept renminbi in payments instead of dollars.

That would be the game changer.

China being a key customer for Saudi Arabia easily explains why the possibility is even vaguely on the horizon. But there is some cause for scepticism. 

Previous experiments have not fared particularly well. A 2014 contract between China and Russia saw the two countries agree that the former would pay for gas imports in RMB. But with commodity prices collapsing globally shortly after and the RMB losing nearly 7% of its value against the dollar in 2016, the decision became nearly disastrous for the Russians.

Whether or not the agreement still stands is unclear, but the unhappy turn in what was marked as a landmark development in the Sino-Russian relationship serves as a clear cautionary tale.

One analyst made an interesting link between such developments, RMB gold contracts and the potential to break the dollar’s dominance in the oil market. With the Hong Kong and Dubai exchanges now offering renminbi-denominated gold contracts, there is now an obvious investment choice for oil exporters accumulating RMB.

“This means that having accepted payment for oil or gas in RMB, the seller, be it Russia or Saudi (or anyone else for that matter) does not have to worry about having excess RMB, they can simply trade it back into gold,” wrote Mark Tinker, head of equities at AXA IM Framlington Equities Asia. “At no point does the dollar or the US banking system become involved.”

A world where oil and gold are traded primarily in renminbi is certainly a distant one. Perhaps it will never come to pass on the scale China hopes for. But step by step, the long-standing global order in the commodity markets appears to be coming to an end. 

  • By Paolo Danese
  • 12 Sep 2017

Panda Bonds Top Arrangers

Rank Arranger Share % by Volume
1 Bank of China (BOC) 23.56
2 Industrial and Commercial Bank of China (ICBC) 16.09
3 China Merchants Securities Co 11.38
4 Agricultural Bank of China (ABC) 6.90
5 HSBC 5.75

Bookrunners of Asia-Pac (ex-Japan) ECM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 CITIC Securities 10,473.46 57 7.30%
2 Goldman Sachs 10,466.14 46 7.30%
3 UBS 8,351.15 61 5.82%
4 Morgan Stanley 8,168.31 54 5.69%
5 China International Capital Corp Ltd 7,763.29 49 5.41%

Bookrunners of Asia Pacific (ex-Japan) G3 DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 26,241.68 231 8.40%
2 Citi 20,661.93 146 6.61%
3 JPMorgan 15,433.82 108 4.94%
4 Standard Chartered Bank 14,190.58 144 4.54%
5 Morgan Stanley 11,315.38 77 3.62%

Asian polls & awards

  • Now open! GlobalCapital Asia Capital Market Awards 2019

    GlobalCapital Asia is pleased to invite pitches for our annual capital markets and investment banking awards, which reward the most impressive transactions and investment banks of 2019.

  • GlobalCapital reveals SRI Award nominations

    GlobalCapital has published the nominations for its Sustainable and Responsible Capital Markets Awards. The winners will be announced on September 17, at our Awards Ceremony in Amsterdam.

  • GlobalCapital SRI Awards: poll extended

    In response to requests from market participants, GlobalCapital has extended the closing date of its poll to determine the 2019 winners of its Sustainable and Responsible Capital Markets Awards. Market participants can now vote until July 26.

  • GlobalCapital opens 2019 poll for SRI Awards

    GlobalCapital has launched its poll to determine the 2019 winners of its Sustainable and Responsible Capital Markets Awards. Market participants are invited to participate.

  • GlobalCapital launches Sustainable Financing and Investing Survey

    GlobalCapital is conducting a global research survey on the fast-changing markets for sustainable financing and investing. It will combine the views of issuers and investors to give a nuanced picture of how this trend is changing capital markets for both groups.