Connect with us

Economy

The petroyuan

Giancarlo Elia Valori

Published

on

Many oil futures denominated in yuan were launched on the Shanghai market at the end of March 2018 and quickly traded for 62,500 contracts – hence for a notional value of 27 billion yuan, equivalent to 4 billion US dollars.

The financial process of the new petroyuan, however, had already begun as early as 2016.

Hence there was obviously the danger of an internal financial bubble in China, but linked to the crude oil price –  yet the Chinese government had decided that the fluctuation allowed for those contracts had to be only 5%, with a maximum 10% fluctuation only for the first day of trading.

Furthermore considering the average level of oil transactions in China, we can see that oil and gas imports could back financial operations totalling over 200 billion yuan.

According to industry analysts, the level of Chinese oil  imports is expected to increase by approximately 2.1 million barrels per day from 2017 until 2023, which implies that the Chinese market will change the future level of oil barrel prices – be they denominated in dollars or in another currency.

Hence, from now on, China will explicitly challenge the “petrodollar” to create its petroyuan – with an initial foreseeable investment by the Chinese government, which will take place on the sale of a 5% shareholding of Saudi Aramco.

Nevertheless the prospect of an IPO on the Saudi “jewel in the crown” – which was also at the core of Prince Mohammed bin Salman’s Vision 2030, all focused on the Kingdom’s economic diversification – has been postponed to at least 2019.

The Saudi Royal Family is not at all homogeneous, both politically and for its different financial interests.

This is demonstrated by the attack – obscure, but thwarted with some difficulty -on Riyadh’s royal palace, launched by some armed units on April 21 last.

Should the sale of a 5% shareholding of Saudi Aramco finally take place, however, it would be the biggest IPO ever.

The magnitude of the deal is huge: according to the latest Saudi estimates, the company is worth 2 trillion US dollars – hence a 5% shareholding is at least equal to 100 billion dollars.

Moreover, China is doing anything to make Saudi Arabia accept payments in yuan –  the first step to replace the old petrodollar.

If Saudi Arabia did not accept at least a large share of Chinese payments in yuan, it could be “blackmailed” and witness a decrease in an essential share of its oil exports. Not to mention the fact that – also with reference to Saudi Aramco-as the saying goes, sovereign funds and Chinese state-owned companies have “deeper pockets” than many prospective Western buyers.

Moreover President Trump is doing anything to make the IPO on Saudi Aramco end up in US hands. However, it cannot be taken for granted that he will succeed. In spite of everything, Mohammed bin Salman is not the heir of the old Saudi bilateralism vis-à-vis the United States.

Nonetheless, in his visit to China last March, Prince Mohammed bin Salman already signed contracts with his  Chinese counterparts to the tune of 65 billion US dollars –  and they are only petrochemical and energy transactions.

Furthermore this major Saudi oil company is considering the possibility of issuing yuan-denominated bonds, at least to cover part of the trade between the two countries.

Moreover, the US imports of Saudi oil have been steadily declining for some time, which makes the US role in the future post-oil diversification of the Saudi economy – the real big deal of the coming years – more difficult.

Over the next few months, however, the Chinese financiers are preparing to launch on the market a yuan-denominated oil future convertible into gold.

According to Chinese sources, it will be open to foreign investment funds and to the various oil companies.

Hence if the use of the dollar is gradually avoided, it will be possible -also for Russia and Iran, for example – to circumvent the sanctions imposed by the USA, the EU and the UN and fully re-enter -precisely through the yuan – the global oil and financial markets.

Moreover, the “petroyuan operation” is rapidly expanding to Africa.

Just recently, we heard about the definition of a three-year currency swap between China and Nigeria worth over 2.5 billion yuan.

As is well-known, the currency swap is a special derivative contract with which two parties exchange interest and sometimes principal in one currency for the same in another currency. Interest payments are exchanged at fixed dates through the life of the contract.

Hence 2.5 billion yuan are exchanged with 720 billion Naira.

Obviously, also in this case, there is no need for either of the two contracting parties to buy US currency for trading and exchanges, while Nigeria is currently China’s largest trading partner in Africa and China is the largest foreign investor in Nigeria.

All this happens in Nigeria, with African exports to China  mainly consisting of oil and raw materials, exactly what is needed to keep China’s rate of development (and the yuan exchange rate) high.

The internationalization of the Chinese currency, however,  is mainly stimulated by the following factors: the expansion of the cashless economy, which favours large Chinese and global operators such as AliBaba (Alipay) or WeChatPay; the Belt and Road Initiative, which pushes China’s   investment and combines it with other monetary areas; the very fast globalization of Chinese banks and their adoption of the SWIFT gpi system; finally the development of the Interbank Paying System between China and the countries with which it trades the most.

Nonetheless there are some factors which still need to be studied carefully.

Meanwhile, Hong Kong is still the largest clearing center for the transactions denominated in yuan-renmimbi – with 76% of all transactions that currently pass through the island still under the Chinese special administration.

Still today the renmimbi account only for 1.61% of all international settlements, while 22 Chinese banks are  SWIFT-connected.

Many, but not enough.

Moreover, as much as 97.8% of the yuan trading is still as against the US dollar, while the exchange between the yuan and the other currencies other than the US dollar is worth very little in terms of quantities of cash and liquidity traded.

Still today 80.47% of payments whose last beneficiary resides in China is denominated in dollars.

As to the international renmimbi reserves, it all began when, in September 2016, the International Monetary Fund announced that, for the first time, the Special Drawing Rights (SDR) would include the renmimbi.

In June 2017, the European Central Bank converted the value of 500 million euro into dollars (557 million US dollars)  and then into renmimbi – equivalent to 0.7% of the total portfolio of ECB’s currencies, while in January 2018 the German Central Bank decided to include the renmimbi among its reserves.

Nowadays only 16% of China’s international trade is traded in the Chinese currency.

The real problem for the dollar is still the euro.

In fact, the transactions in US dollarsfell from 43.89% of total transactions in 2015 to 39.85% in 2017 while, in the same period, those denominated in euro rose from 29.39% to 35.66%.

However, as Vilfredo Pareto said, currencies are “solidified politics”.

In fact, China wants to use the renmimbi-yuan also in the Pakistani port of Gwadar and in its Free Economic Zone, which is the first maritime station of the Belt and Road initiative.

Furthermore the payments in yuan between China and the USA, which is still China’s largest trading partner – account for 5% only, while Japan – the second largest country by volume of transactions with China – already operates 25% of its transactions with the yuan-renmimbi.

Only South Korea – another primary commercial point of reference for China – does use the Chinese currency for a very significant 86% of bilateral transactions.

Certainly the oil market remains essential for the creation of petroyuan or, in any case, for the globalization of the Chinese currency.

Since 2017 China has overtaken the USA as the world’s largest oil and gas importer.

Furthermore, as early as 2009, the Chinese authorities have criticized the use of the US currency alone as a basis for international trade.

In fact, the Chinese political leadership would like to define a monetary benchmark among the main currencies and later build the progressive de-dollarization of trade on it.

Obviously the expansion in the use of the Chinese currency in global transactions, which peaked in 2015, corresponded to the phase when the yuan was undervalued and gradually and slowly appreciated as against the US dollar.

After the two devaluations of the yuan-renmimbi in the summer of 2015, the profitability of replacing the US dollar with the Chinese currency has clearly diminished.

Moreover, since the possession of the yuan is still subject to restrictions and checks, the globalization of the Chinese currency cannot fail to pass through the full liberalization of China’s currency and financial markets.

A project often mentioned  by President Xi Jinping and implemented by the Central Bank, especially with maximum transparency on transactions and the end of the capital “shares”, in addition to the quick acceptance of a price-based financial system.

Moreover, all the currencies with which China trades in the oil markets are still pegged to the US dollar and, for the Chinese authorities, this is  another difficulty to replace the US currency.

On the domestic side, the yuan has a big problem: it is a matter of investing Chinese savings, which are currently equal to 43% of GDP.

If we consider a similar investment rate, the Chinese economy is no longer sustainable.

Therefore, either all investment abroad is liberalized – but, for China, this would mean the loss of control over domestic savings – or the yuan becomes a new international currency, thus using it for long-term loans in the Belt and Road Initiative and for creating a market of yuan-denominated  oil futures.

Hence, unlike petrodollars, the petroyuan is not a US internal way to use the Arab capital stemming from the energy market, but a large internal reserve of capital to meet the needs of an expanding economy and support China’s fresh capital domestic requirements.

For Swiss banks, however, the flow of renmimbi-denominated contracts will radically change the energy financial market, but in the long run, thus obliging many global investors to invest many resources only in the Chinese financial market.

It is worth reiterating, however, that the Chinese currency has not fully been liberalized yet – nor, we imagine,  will it be quickly liberalized in the future.

In essence, China wants to govern its development and it does not at all want to favour the US single pole.

Hence either a small monetary globalization, like the current one, or the large and progressive replacement of the dollar with the renmimbi – but this presupposes the liberalization of the entire financial market denominated in the Chinese currency.

Moreover – but this would be fine for the Chinese government -foreign and domestic investors’ full access to the Chinese capital market should be granted.

It already happened in 2017 but, nowadays, it becomes vital for the geopolitical and financial choices made by President Xi Jinping’s China.

Hence, it is likely that in the future China would play the game that Kissinger invented after the Yom Kippur War, i.e. the game of the dollar surplus in the Arab world that is reinvested in the US market.

Obviously, this has kept the US interest rate unreasonably low with an unreasonably high US trade surplus.

A monetary manipulation made using one’s own strategic and military leverage.

Hence, with petrodollars, the USA has invented the monetary perpetual motion.

Therefore, if most of the Chinese oil market is denominated in yuan-renmimbi, a strong international demand for Chinese goods and services will be created or there will be a huge amount of capital to invest in the Chinese financial markets.

This will obviously change the role and significance of China’s engagement in the world.

With significant effects for the dollar market, which could be regionalized, thus highlighting the asymmetries which currently petrodollars hide: the US super-trade surplus and the simultaneous very low interest rate.

What about the Euro? The single European currency has no real market and it shall be radically changed or become a unit of account among new infra-European currencies.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs "La Centrale Finanziaria Generale Spa", he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group and member of the Ayan-Holding Board. In 1992 he was appointed Officier de la Légion d'Honneur de la République Francaise, with this motivation: "A man who can see across borders to understand the world” and in 2002 he received the title of "Honorable" of the Académie des Sciences de l'Institut de France

Continue Reading
Comments

Economy

Social Mobility and Stronger Private Sector Role are Keys to Growth in the Arab World

MD Staff

Published

on

In spite of unprecedented improvements in technological readiness, the Arab World continues to struggle to innovate and create broad-based opportunities for its youth. Government-led investment alone will not suffice to channel the energies of society toward more private sector initiative, better education and ultimately more productive jobs and increased social mobility. The Arab World Competitiveness Report 2018 published by the World Economic Forum and the World Bank Group outlines recommendations for the Arab countries to prepare for a new economic context.

The gap between the competitiveness of the Gulf Cooperation Council (GCC) and of the other economies of the region, especially the ones affected by conflict and violence, has further increased over the last decade. However, similarities exist as the drop in oil prices of the past few years has forced even the most affluent countries in the region to question their existing social and economic models. Across the entire region, education is currently not rewarded with better opportunities to the point where the more educated the Arab youth is, the more likely they are to remain unemployed. Financial resources, while available through banks, are rarely distributed out of a small circle of large and established companies; and a complex legal system limits access to resources locked in place and distorts private initiative.

At the same time, a number of countries in the region are trying out new solutions to previously existing barriers to competitiveness.

  • In ten years, Morocco has nearly halved its average import tariff from 18.9 to 10.5 percent, facilitated trade and investment and benefited from sustained growth.
  • The United Arab Emirates has increased equity investment in technology firms from 100 million to 1.7 billion USD in just two years.
  • Bahrain is piloting a new flexi-permit for foreign workers to go beyond the usual sponsorship system that has segmented and created inefficiencies in the labour market of most GCC countries.
  • Saudi Arabia has committed to significant changes to its economy and society as part of its Vision 2030 reform plan, and Algeria has tripled internet access among its population in just five years.

“We hope that the 2018 Arab World Competitiveness Report will stimulate discussions resulting in government reforms that could unlock the entrepreneurial potential of the region and its youth,” said Philippe Le Houérou, IFC’s CEO. “We must accelerate progress toward an innovation-driven economic model that creates productive jobs and widespread opportunities.”

“The world is adapting to unprecedented technological changes, shifts in income distribution and the need for more sustainable pathways to economic growth, “added Mirek Dusek, Deputy Head of Geopolitical and Regional Affairs at the World Economic Forum. “Diversification and entrepreneurship are important in generating opportunities for the Arab youth and preparing their countries for the Fourth Industrial Revolution.”

With a few exceptions, such as Jordan, Tunisia and Lebanon, most Arab countries have much less diversified economies than countries in other regions with a similar level of income. For all of them, the way toward less oil-dependent economies is through robust macroeconomic policies that facilitate investment and trade, promotion of exports, improvements in education and initiatives to increase innovation and technological adoption among firms.

Entrepreneurship and broad-based private sector initiative must be a key ingredient to any diversification recipe.

The Arab Competitiveness Report 2018 also features country profiles, available here: Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, United Arab Emirates.

Continue Reading

Economy

The impact of labour market trainings on unemployment process in the global labour economy

Gunel Abdullayeva

Published

on

Since the 1990s, the persistence of high unemployment has been followed by two downturns, which affected an economic life over the world across the nation-states. The overt consequences cost unpleasantly social and economic outcomes for the states as well as societies. Henceforth, activation turn has observed once more shifting passive employment policies within the active policy actions of countries upon labour market at the beginning of a new millennium. It was supposed that the activation of jobless people through keeping employees occupied, job-search assistance, job creation and work experience programs, training and invest in up skilling, is an open way to fight against high unemployment and secure economic growth as well. Hereby, the idea of an active labour market policy (ALMP) became again pivotal tool in the domestic policy agendas of states in order to engage in new challenges of labour markets. Since the 1950s,it is an apparent fact that in Europe and the Nordic countries that the effectiveness of ALMPs engenders diminution in a structural and long-term unemployment and leads to increase net income together with the employment ratio of targeted groups in national economies.

With the XXI century’s new technological vicissitudes and industrialization, the active employment policies have been designed to support people with monetary (income) and non-monetary (education) incentives in order to reduce inequality, keep the balance of social inclusion, and stimulate market beyond to decrease unemployment. Consequently, labour market training grew into to become an important measure of ALMP strategies in the background of “welfare to workfare policy approach” to create better-skilled workforce as well as to surge adequate match between skilled manpower and needs of progressive demand in labour markets.

In fact, the scholarly studies state significant impacts of training and vocational programs in the activation of the workforce. For example, the 1950-1960s – Post War Era characterized with the rapid economic growth and labour supply shortage in the European industry. And as a solution, national employment policies started to focus on labour trainings. So that Sweden with its successful retraining system has been the pioneer of ALMP idea in the history. On the other hand, Germany with 1969`s Employment Promotion Act considered training as a principal component of active employment policies to upskill workforce in terms of new industrial needs by market demand.

The UN 2009 reports that education is considered one of the main indicators of poverty reduction: education and human resource investments contribute to an economic development of nation-states and societies. Higher educated people or up-skilled workforce boost up productivity and react the positively to technological changes. Some scholars and interlocutors claim that in long-term perspectives ALMPs should have to aim to develop an education and training system that enhances the productivity and employability of a labour force. Because of the fact that the skilled manpower is one of the cornerstones of the higher employment, developed economy, higher net income and well-being of the whole society.

Many types of research have been carried out to identify the prominence of labour market training, however, the Katz`s study (1993) shows the significant point of job market training as turning “unskilled labour” into “skilled labour”. Perceptibly, the unemployment problem is more common among less skilled individuals and new entrants to the market. Shifting in demand against unskilled labour force causes an unemployment among those people. In contrast to unskilled force reservation wage and labour demand is high for skilled manpower in the market. Here, the training policy helps turn out unskilled to a skilled workforce and to increase total employment in order to decrease unskilled unemployment. Research argues that training policy extends the skilled labour force and close the gap between the unskilled and skilled workers. Caruana and Theuma (2012) refer to Katz (1993) argue that in order to push jobless people towards work, some trainings improve the qualification of those workers who are already in the market. Hence, Katz (1993) emphasizes the importance of labour market training in reducing the unemployment rate of unskilled labour by transferring more workers to the skilled labour pool. They also underline the significant role of a training policy in improving the skills of employees and increasing, the supply of skilled manpower in the economy. The following figure “Development of Unskilled Labour Force” visualizes Katz`s statement andshows how training measure affects the job market in both ways. The points where demand curves intersect supply curves, which are given wages for skilled and unskilled labour respectively. As the author explains, the wages represent the remuneration of foregone opportunity costs that, logically, is higher for skilled labour than for unskilled one. Since labour demand for the skilled labour is stronger than that of unskilled labour, thus, the demand curve for the former one is more elastic. As the figure illustrates, after the implementation of training, part of unskilled labour is moving up to the skilled.

At the same time, scholar states that wage setting regulation, training, and education systems affect differently net income and employment perspectives. Consequently, education and labour training policies create an equal distribution of skills and able to reduce supply and demand shifting on wages and employment. Another study by Calmfors et al., (2001) argue that training programs increase the reservation wage of attendees. However, salary growth and employment perspectives are possible by time after long run participation in the program.

To sum up, the training policy is considered as a main supply-side policy tool of activation to tackle unemployment. Scholars argue that training programs are useful to prevent the long run unemployment and to keep unemployed active in the market via participation. However, ex-post evaluation of training programs is controversial. Country case studies show that training programs are more effective in the background of vocational education reforms and collaboration with demand-side active labour market policies.

Reference list:

  • , Forslund A., &Hemstrom M., (2001), Does Active Labour Market Policy Work? Lessons from Swedish experiences, Swedish Economy Policy Review, 85, 61-124
  • Caruana C. &Theuma M., (2012), The next leap – From Labour Market Programmes to Active Labour Market Policy.
  • Katz, F.L., (1993), Active Labor Market Policies to Expand Employment and Opportunity.
  • United Nations, (2009), Rethinking Poverty: Report on the World Social Situation 2010, Retrieved from http://www.un.org/esa/socdev/rwss/docs/2010/fullreport.pdf
Continue Reading

Economy

Paid and well-designed internships work

Shane Niall O’Higgins

Published

on

“Before, they would ask for your diploma and maybe your grades. Now, when you are entering the labour market, you are asked for multiple internships and work experience here and there so I feel the pressure to intern so as to be better prepared for the labour market.”

That was what secondary school student, Georgia, told me while I was carrying out some focus group research last year for an ILO survey on youth aspirations.

Her frustration and worry are typical these days of many young people entering the labour market. They face the daunting task of finding a decent job and then keeping it when they do.

Unemployment and the proportion of young people not in employment, education or training are high, and new and emerging forms of ‘non-standard’ employment such as temporary, part-time and gig work are rapidly expanding.

These types of ‘non-standard’ jobs now dominate young people’s early labour market experiences, along with internships, which are becoming ever more common – not only in high income countries where they originated but also in low and middle income countries.

The idea is that internships help break that Catch 22 that many young jobseekers face – not having enough experience to get a job and not being able to get the experience needed because of not having a job.

But, just how effective are internships as a means of promoting the long term job prospects of young people like Georgia?

The fact is, there hasn’t been much solid research. Above-all, very little at all is known about the impact of so-called ‘open-market’ internships which are not undertaken as part of either an educational course or as part of an active labour market programme. In many – if not most- countries, these remain under-studied and under-regulated

This is the question that my colleague Luis Pinedo and I set out to answer in a new ILO working paper,  “Interns and outcomes: Just how effective are internships as a bridge to stable employment?”, which reviews existing studies and analyses primary data using surveys of interns undertaken by the European Commission and the Fair Internship Initiative (FII), an intern advocacy coalition.

We came to three main conclusions:

Not all internships improve career prospects

The impact of internships on the longer term integration of youth into work appears to be modest. Internships are, on average, less effective than either student jobs or apprenticeships as a means to bridge the gap between education and regular employment.

Paying interns pays off

It is clear, however, that paid internships offer better job prospects for youth in the long run than unpaid ones and that paid interns are more likely to find a job than those who were not remunerated. This may be because the payment itself may be linked to other positive features of a well-designed internship programme. These include the presence of a mentor; similar working conditions as regular employees; access to health insurance, and internships that are long enough for the young person to acquire and improve their skills. In addition, formal certification of the completed internship and/or undertaking the internship in a big firm both influence employment prospects and can also have a positive long-term impact.  However, the likelihood of finding a job does not increase in relation to the amount paid to the intern.

More and better research is needed

As yet, far too few studies have been carried out and those that do exist rarely make a serious attempt at identifying the causal links between internship programme features and post-internship labour market outcomes. Moreover, analyses of open market internships are even rarer. The task is clearly made more complicated by the fact that there is no agreement about what precisely is an internship. However, the lack of analysis is particularly worrisome not least because it is precisely open market internships which are least covered by existing forms of regulation. This paper, along with its two companion papers listed below mark a first step by the ILO to rectifying this information gap.

See the two other working papers that are part of the series:

Employment working paper no. 240: The regulation of internships: A comparative study Andrew Stewart, Rosemary Owens, Anne Hewitt and Irene Nikoloudakis

Employment working paper no. 242: Does work-based learning facilitate transitions to decent work? Laura Brewer and Paul Comyn

ILO

Continue Reading

Latest

Trending

Copyright © 2018 Modern Diplomacy