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The petroyuan

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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 “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. 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 “Honorable” of the Académie des Sciences de l’Institut de France. “

Economy

Guangdong special economic zones at China

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Guangdong Province in southern China is distinguished by the economic development. The sign been approached by “Made In Guangdong” is becoming so famous globally, besides the Guangdong industries and its unique culture.

  Guangdong represents one of the most important provinces of China for a number of political, economic, social and natural reasons. Indications of the success of the openness experiment pursued by China since the late seventies of the last century are evident in it.

Guangdong special economic zones have made great achievements. As the province with the largest economic output in China, south China’s Guangdong Province has achieved tremendous economic development in the past 40 years, thanks to the establishment of special economic zones.

 According to my information, the Guangdong region has established the “Zhuhai Doumen” intelligent manufacturing economic development zone recently, after the Guangdong Provincial Government officially approved the establishment of the “Zhuhai Doumen intelligent manufacturing economic development zone”, which will implement the existing provincial-level economic development zone policy.  It is the third regional economic development zone in “Zhuhai” after “Foshan Industrial Park and Liangang Industrial Zone”.

 Guangdong Province is an economic powerhouse in southern China, and the province will promote high-quality development this year by fostering new engines of growth and strengthening cooperation and communication in the regions of (Guangdong-Hong Kong-Macao Greater Bay) to deepen reform and opening up.

 Guangdong Province, a major part of China’s foreign trade and industrial hub, accounts for about one-tenth of China’s GDP and is the largest of all Chinese provinces.

 Guangdong Province pays close attention to the progress of China’s modernization and the overall picture of reform and opening-up and major national strategic planning. It firmly attaches importance to the reform and opening-up policy by strengthening cooperation between the province and the “Hong Kong and Macao” regions, aligning the development of Guangdong with the “Northern Metropolis” plan of Hong Kong and the economic diversification strategy of Macao, implementing the “Greater Bay Area Connection” project in a more in-depth way, and working with “Hong Kong and Macao” together to build a world-class bay area, injecting vigor and strong impetus into its modernization efforts”.

 It Is remarkable that most of the cities of Guangdong Province are crowded with visitors from all over the world, especially Arabs and Africans, who come to them for the purpose of trade and search for investment. The province is considered one of the regions characterized by the diversity of its industries, quality and attractive prices, as well as commercial activities in various fields.

 It Is also distinguished by the beauty and sophistication of its buildings, which embody the aesthetics of modern Chinese architecture, as well as the spread of green spaces and vibrant squares throughout the day. It is also distinguished in terms of weather, with its atmosphere that resembles the tropical atmosphere with heavy rain, and the various cities of Guangdong Province are also characterized by easy access to it from different parts of the world throughout the day, as well as ease of movement between its various cities, thanks to the presence of an infrastructure that makes most of the cities of the province at the forefront of attractive cities for investment globally.

  Due to the existence of the commercial ports, Guangdong has a long experience in terms of commercial exchanges regionally and globally.

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The Theatrics of the US Debt Ceiling: Fiscal Austerity or Political Brinkmanship?

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It amazes me sometimes how pointless some discussions are to begin with, yet the hype they garner is just outrageous compared to relatively pressing issues in the mainstream spotlight. I am no Democrat supporter or even a backer of Mr. Biden – as my columns would effectively relay. But I am also no fan of idiocy when I see it (also apparent in my writings). And the ongoing tensions lacing the US polity, unfortunately, qualify that criterion by a long shot. While the debate around the debt limit is neither novel nor unprecedented, the preachy statements posited in the US Congress to justify the GOP posturing are downright ridiculous. But even if we don ignorance and accept their premise as is, I fail to see any alternative path toward economic balance and prosperity – assuming that is actually the end goal of the Republican lawmakers.

Before even delving into the nitty-gritty of the debt ceiling saga, let’s get some ambiguities clear and out of the way. The debt limit is a statutory cap on the total amount of money the US federal government is authorized to borrow. Currently, that amount stands at $31.4 trillion – already reached about two weeks ago. However, breaching that limit is well-nigh avertable: All the US Congress needs to do is raise that limit higher, and the chaos would disappear overnight. No risking the smooth functioning of the money markets, no pressure on the Treasury and the Federal Reserve, and no uncertainty while the world grapples with demons on geopolitical and economic fronts. But what about fiscal responsibility? Since 2001, the United States has consistently rolled around with budget deficits year after year and filled the gap with excessive borrowing to meet its financial obligations. In that period, the US has accreted about $20 trillion in national debt; debt held by the public as a percentage of Gross Domestic Product (GDP) has roughly tripled from 32% to 94%. Even for an economy as omnipotent as the United States, that’s prohibitive. But we need a thorough comparison to realize the underlying trends – both on the macroeconomic and political scale.

The US last enjoyed a fiscal surplus during the presidency of a Republican. Mr. George W. Bush. But you rarely witness a vociferous detour around that nook of history by any GOP members. It is perhaps because he squandered that surplus on tax cuts for the wealthy. Or on the invasion of Iraq. While one led to more inequity in an already lopsided social demography, the latter ushered those resources to decimate a foreign land on bogus pretenses. Another manifestation of the ‘Trickle-Down economic principle (apparently notorious for the Conservative fractions on both sides of the Atlantic) was during the Trump tenure. Mr. Donald Trump ran through another profligate tax-cutting regime to do good for the US economy. But ironically, the debt ceiling got raised three times during his own term, sans the drama we witness whenever the Republican Party holds either of the chambers of the US Congress but not the presidency. At this point, some people won’t need any more evidence to gauge the true intentions of the right-wing bloc baying for fiscal austerity. But let us sieve through the Democratic rule for a non-partisan outlook.

During the past two decades, only two episodes stand out apropos of record debt as a function of the US economy: the Great Recession 2007-09 and the Covid-19 pandemic. While I admit Mr. Biden’s nearly $2 trillion worth of American Rescue Plan helped (in large part) fuel the current inflation, it also helped avoid a devastating recession and jumpstart a speedy recovery. It kept businesses running, people employed, and spending buoyed. Notwithstanding that the unemployment rate in America is still at a multi-decade low, the economy could very well trip into another recession as the Fed moves aggressively to blunt the pain of price increases. But insofar as projections go, it appears that the American economy would brush past a prolonged recession and manage a relatively softer landing. According to recent estimates, annualized inflation has slowed consistently for the past six months, dipping to 6.5% from a summer peak of 9%. While the Republicans tried effortlessly to channel their narrative around the economy, their embarrassing rout during the Midterm elections was a testament to the facetious nature of their claims. 

Then there was the infamous standoff in 2011. We all know how the markets got rattled; borrowing costs spiked; and why the S&P downgraded the credit rating of US debt, even though we didn’t actually breach the limit. But we rarely ask: Why did the Obama administration end up with a debt of such mammoth magnitude? The answer is obvious. The Great Recession dried up tax receipts as the economy plunged into turmoil; the social safety net programs swelled, especially as spending on unemployment benefits soared. In 2008, the federal budget deficit stood at $458.6 billion, which staggered to $1.4 trillion in the subsequent year. Despite that, it took roughly eight years for unemployment to return to normality. Had the government raised taxes or cut spending drastically, the US would have witnessed something like Great Britain.

In the aftermath of the financial crisis, while America sustained spending to bolster the economy via borrowing, the Tory-led British government embarked on an austerity drive: Annual expenditure, as a percentage of GDP, was cut from 46% to 36%; spending on health infrastructure dragged down by half over the last decade. In hindsight, the difference is remarkable. While American wages have just stagnated over the course of the past 15 years, real wages in Britain have declined over the same period. While the US still contends with a rousing China for global economic superiority, Britain got recently supplanted by India (its former colony) as the fifth-largest economy in the world. The story couldn’t be any more lucid. 

Ultimately, the GOP political mumble of “adding guardrails” and “fiscal reforms” to bend the debt curve might be politically splendid, but to an economic mind, it is frankly garbage! And I have no doubt that regardless of cogent reasoning, the hardline Republicans would hold the government paralyzed – as was evident when they scrapped concessions from Mr. McCarthy in barter for his post as the House speaker. Nonetheless, the bottom line is that regardless of your disposition – Democrat or Republican, pro-spending or pro-austerity – the debt ceiling is, as aptly verbalized by Senator Ron Wyden, “not about adding new spending,” but “it’s about paying debts that the government [already] owes – debts that were incurred under presidents of both parties.”

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The Prolongation of BRICS: Impact on International World Order and Global Economy

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BRIC, coined by an economist Jim O’Neil in 2001 as an acronym for the four countries like Brazil, Russia, India and China. South Africa joined in 2010 and this organization turned into BRICS. The prime goal of BRICS was to the formation of the diplomatic and economic assistance framework, and the challenges to western influence in the global economic order. The Western cordially welcomed BRICS with the earnestness. The BRICS, five major emerging economies, together represent about 26% of the world’s geographic area, inhabitant of 2.88 Billion people which is about 42% of the world’s population and accounted for a quarter of the global GDP. The enlargement of BRICS was talked on June, 2022 at the groups summit which took place in Beijing. The 2023 summit will take place in South Africa. 

Russian Foreign Minister, Sergey Lavrov stated that Algeria, Argentina and Iran have already applied for joining in BRICS. In contrast, Saudi Arabia, Turkey , Egypt have declared their intense interest for becoming the member of BRICS and they are already engaged in the membership process. Now the question is what outcomes or impacts may be happened in the International world order and global economy in order to the expanding of BRICS?

Russia is the second largest producer of crude oil among OPEC+ members. Russia is a self-contained of its oil production. Because of Russia-Ukraine War, America and its European allies imposed sanctions on Russia and some European countries minimized their dependency on Russian oil. China imports its oil from Saudi Arabia, Russia, Iraq, Oman, Brazil and Kuwait. China increases at 21% its imports crude oil from Russia in 2022. The  member of OPEC+ decided to reduced their oil production by 2Million barrels per day two month before and it will continue in the end of 2023. The U.S.A and other western countries aggravated. 

Saudi Arabia is one of the world’s largest crude oil exporters, 11% of the world’s petroleum liquid production and has 15% of the world’s oil reserves. Recently it has declared that it will take initiatives to boost its oil production from 10 to 13 Million barrels per day. Egypt is a prominent petroleum producer and exporter. Egypt exports cotton and textiles, raw materials, chemical products and petroleum products. Egypt is a dialogue partner to the Shanghai Cooperation Organization. Iran is the world’s largest hydrocarbon Reserves in the world. Western world impose sanctions again and again. Iran is also the member of OPEC+ and Shanghai Cooperation Organization. Algeria, 10th largest natural gas reserver and 6th largest gas exporter. It is also a member of OPEC+. Turkey exports motor vehicles and their parts, gold and petroleum oil. It is the world’s 7th exporters of cotton. Argentina is a major exporter of wheat and corn. 

If Saudi Arabia, Egypt, Iran, Argentina, Turkey become the member of BRICS, it will enormous impact on the World order and global economy. 

1. The sphere of influence of the oil producer countries will be strengthen. The structure of oil market in the global economy will be changed. 

2. Lula da Silva, President of Brazil suggested to make a common currency for the BRICS countries. If it takes place, a more stable currency will be created. 

3. As China, Russia, Iran have a rivalry with the U.S.A, they will make more alliances to combat the U.S.A influence in the world. 

4. As the U.S dollar is the world’s dominant currency in the global financial and monetary system, and it is the Centre of U.S.A global leadership, the monopolistic influence of Dollar will be undermined. If BRICS countries will reach an agreement to continue their trade through a common currency, De-dollarization will be accelerated. 

5. As Turkey, Algeria, Iran, Egypt, Saudi Arabia and others have already shown their interest to join BRICS, it will accelerate to boost BRICS global influence. Russia, China will lead collectively in the world order. 

6. Most of the countries reserve crisis will be resolved. 

7. Saudi Arabia, Russia, Brazil will be able to export their oil collectively to China, India, Egypt and Turkey. China is Saudi Arabia’s biggest trading partner with more than $50 Billion. 

8. The investment of China and Russia in African continent will be extended. China is the largest trading partner of South Africa. South Africa is more advanced than any other countries of Africa because of its natural wealth and location. 

9. De-Dollarization will deteriorate the U.S.A capability to alter the behavior its opponents. If BRICS continuously expand, China will easily promote its agenda and grand strategy in the world. 

10. According to World Bank, BRICS grew at an average of 6.26 percent in 2021. On the contrary, G7 grew at 5.15%. If BRICS continues to attract other countries to join, it will emerge as a powerful force of the global leadership. The GDP is hoped to double to 50% of global GDP by 2030.

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