China has indicated it is set to launch a crude oil futures contract in yuan, which could be a significant step towards the de-dollarization of the global economy. It is a sign of China’s growing confidence – and the U.S.’s declining influence, writes Friedbert Pflüger, Director of the European Centre for Energy and Resource Security (EUCERS). According to Pflüger, President Trump’s “America First” policy is having the opposite effect: it is putting China ahead – especially in energy.
While President Trump touted his recent visit to Beijing as a success, saying the warm and lavish reception he received from Chinese President Xi Jinping was “absolutely terrific”, his continued path towards protectionism and withdrawal from the global stage looks likely to backfire. This is particularly evident when it comes to energy.
Yes, both leaders did sound an upbeat and collaborative tone on many bilateral and regional issues. And yes, U.S. and Chinese companies did sign a number of commercial documents worth some $250 billion (on paper), which could be perceived as a strong signal of increased trade between the world’s two largest economies. This included state-owned China Energy Investment Corp’s plans to invest over $80 billion in shale gas development and chemical manufacturing projects in West Virginia over the next two decades – a state where Trump, by the way, won by a landslide in the presidential elections. The size of the proposed investment is larger than the state’s 2016 GDP of about $73 billion.
Once launched, the “petro-yuan” will be the first significant step towards de-dollarization and set to become the most significant Asia-based crude oil benchmark, given that China is the world’s biggest oil importer
Thus, the China trip will surely score Donald Trump points amongst his voter base and media outlets like Breitbart and Fox News. They will hype the deals as evidence of Trump staying true to his mantra of putting “America First” and “Making America Great Again” by re-attracting business to the U.S.
Filling the vacuum
However, what they won’t mention is the deeper issue at hand. Namely, what Beijing is doing independently of the U.S., which is nothing less than filling the vacuum Washington is leaving by withdrawing from its global engagements and pushing protectionist policies: withdrawal from the Paris Agreement, refusing to explicitly support Article 5 of NATO, scrapping of trade partnership TTIP, placing punitive tariffs on imports from Canada, and so on. This provides China with a golden opportunity to increase its influence, and it seems Beijing is dead set on taking it.
Three key developments illustrate just how quickly China is stepping in to fill the US vacuum.
Challenge to dollar hegemony
For decades, the dollar’s status as world reserve currency bestowed the US unparalleled economic power. Oil, the world’s most traded commodity, is priced in relation to Brent or West Texas Intermediate futures, both denominated in dollars. This means that the US can count on high global demand for its currency, which it then trades for tangible goods and services while also being able to use it as an economic weapon to impose sanctions on countries like Russia and Iran.
Perhaps to preemptively avoid being a target itself, China is set to launch (perhaps even before Christmas) a crude oil futures contract of its own priced in yuan and convertible into gold. Once launched, the “petro-yuan” will be the first significant step towards de-dollarization and set to become the most significant Asia-based crude oil benchmark, given that China is the world’s biggest oil importer.
Included in the initiative is the creation of a global electricity “Supergrid” to fight climate change, where Xi Jinping is also taking over the reins from the US
But the implications go even further. The petro-yuan may likely spur new currency wars and accelerate diversification away from the dollar, while repatriating billions of dollars back to the US due to reduced global demand. This would have dire financial consequences.
One Belt, One Road
While the US is working to contain and isolate countries like Iran, China is looking for ways to bring them into a trade system spanning three continents. China’s One Belt, One Road (OBOR) initiative, a sort of Marshall Plan of the 21st century, seeks to connect the world’s second-largest economy with Southeast Asia, Eurasia, the Middle East, Europe and Africa via a network of oil and gas pipelines, airports, ports, fiber-optic networks, highways, and railways.
This OBOR covers about two-thirds of the world’s population, about one-third of the world’s GDP, and about a quarter of global trade. It requires an estimated annual investment of $1.7 trillion. Where it gets even more interesting is that China is prioritizing its own funding institutions – the Asian Infrastructure Investment Bank, the New Development Bank, and the Silk Road Fund – over traditional Western financial institutions like the IMF and the World Bank. Included in the initiative is the creation of a global electricity “Supergrid” to fight climate change, where Xi Jinping is also taking over the reins from the US.
Following Trump’s withdrawal from the Paris Climate Accord, Chinese President Xi Jinping declared his own country to be a climate change leader. At the opening of the Communist Party congress, Xi said China has taken a “driving seat in international cooperation to respond to climate change.”
Trump won the 2016 elections not least due to his credentials as a businessman. At the same time, it seems that he also brought with him the short-termism that is prevalent in business today. Yes, his protectionist policies and trade deals may provide a relatively brief economic boost but they pale in comparison to the raw economic impact of Beijing’s projects, not to speak of what it stands to gain strategically.
Indeed, while many have predicted that China’s economic rise would eventually usher in a new multipolar era, few expected it to happen at such a blistering pace, and indirectly facilitated by the US no less!
Prof. Dr. Friedbert Pflüger is Director of the European Centre for Energy and Resource Security (EUCERS) at King‘s College London and former German Deputy Minister of Defence.