China’s authorities announced plans this week to work towards the pricing of commodities in the local currency, the yuan. Specifically, the South China Morning Post reports:
The country is studying the “market rules and mechanisms of pricing commodities in yuan [to] satisfy demand from domestic and overseas investors,” Pan Hongsheng, deputy secretary general of the People’s Bank of China’s monetary policy committee, was quoted as saying by the official China Securities Journal.
Pan’s comments, made on Monday at an international oil and gas conference in Hangzhou, capital of eastern China’s Zhejiang province, came as China is about to launch a yuan-denominated crude oil futures contract in Shanghai that has been almost seven years in the planning.
The news attracted relatively little attention, with more of the world’s focus currently directed towards the downgrade of the country’s debt rating. Make no mistake, however: it’s significant (and one day, could prove to have been very significant). China is the world’s leading trading nation, and is the world’s top importer of commodities. As a result, if the contract proves to be the first of many more, it would start to give China “a greater say in the pricing of crude traded in Asia.” (Though what this means is somewhat misunderstood).
Yet there’s even more at stake: global commodities are largely priced in US dollars, a fact that helps to support global demand for the currency since it is needed for international purchases. But by pricing iron and crude in RMB, China could not only dramatically increase demand for the RMB for settling transactions, especially given the country’s relatively current account, but the move would also provide the impetus towards and financial incentive for creating a diverse ecosystem to support commodity trading—from simple futures products to more complex financial swaps.
As I’ve noted before, of course, ramping up capital market liberalization requires upgrades to not only China’s markets, but also to the regulatory infrastructure supporting them. But the mere act of pricing should not be underestimated, and may indeed portend greater changes soon to come.