After Dr. Michael Salmony explored the evolution of money from traditional banknotes to digital CBDC, Richard takes the baton in our CBDC series, shedding light on fascinating insights into China’s digital yuan.
China just sent chills down the spine of the US Fed Governors when PetroChina International Corp Ltd bought 1 million barrels of crude in digital yuan (e-CNY) in mid-October 2023. In doing so, PetroChina completed the first-ever international crude oil trade settled in e-CNY at the Shanghai Petroleum and Natural Gas Exchange (SHPGX).
This is big news but let me be clear from the start that it falls short of a cross-border transfer of e-CNY between China and a foreign buyer. Don’t worry; that’s coming soon. The People’s Bank of China recently announced that it would use the digital yuan for oil and gas purchases with Hong Kong.
For an actual assault on the petrodollar, look no further than the UAE’s agreement to cooperate on digital yuan and the new strategic relationship between the Bank of China and the UAE’s largest bank, First Abu Dhabi Bank (FAB). This relationship is telegraphing the inevitable.
Oil for digital yuan
The SHPGX is China’s national energy trading platform, and its contracts are settled exclusively in Chinese yuan. The SHPGX intends to have its oil contracts in yuan become international standards, just like the New York Mercantile Exchange’s WTI ‘light sweet crude’ and the Intercontinental Exchange’s ‘Brent contracts’.
That an undisclosed foreign seller opted to sell in yuan is news; that it went even further and used digital yuan is a jaw-dropper! The petrodollar is not under immediate threat, but ignoring the signal that energy products will trade in yuan and digital yuan in the future would seem an error of epic proportion.
In this first transaction, the digital yuan, or e-CNY, was used to pay roughly USD 90 million in oil. Try that with WeChat Pay or Alipay! PetroChina paid the exchange in digital yuan, likely settling with the seller’s bank accounts in China in digital yuan, where it converted to ‘normal’ yuan. The primary benefit of using e-CNY on the SHPGX is that oil contracts can settle immediately. That’s a breakthrough in a market where agreeing on a contract price can be followed by a wait for payment.
What this transaction wasn’t is a direct cross-border transfer between China and another oil-producing nation. Fed governors can sleep more easily as that would be even bigger. Still, this transaction is important because it clearly shows how China intends to use the e-CNY to settle major commodities purchases; true cross-border trades come next. If you thought that e-CNY was used only for buying coffee, as a replacement for WeChat or Alipay, it’s time to reframe your expectations.
By selling oil on the SHPGX, foreign oil suppliers are slowly breaking the US dollar’s monopoly on energy purchases. Detractors would be correct in saying that this single purchase is a mere drop in the ocean compared to the dollar’s use in the global oil trade. That is true, but like a slow leak, these drops add up, and in October, SHPGX also did a significant LNG trade with a French company, its second for the year.
Does it matter if a CBDC is wholesale or retail?
News of high-value trades like this is also important because it demonstrates digital yuan use in transactions considered ‘wholesale’ in nature. The PBOC considers the e-CNY a universal payment system that spans wholesale, usually between financial institutions, and retail payments. This is innovative and different from neighbouring India’s CBDC or the EU’s, where separate retail and wholesale CBDCs are the norm.
The PBOC’s head of the Digital Currency Research Institute Mu Changchun, recently spoke candidly about payment size and the lack of division between wholesale and retail payments:
China, BRICS, and oil.
So far, the SHPGX offers contracts in LNG and oil, and neither contract has seen much action. However, China’s mantra of ‘Build it, and they will come’ will likely pay off.
China surpassed the US as the world’s largest crude oil importer in 2017, with Saudi Arabia its largest supplier. Note that Saudi Arabia and the United Arab Emirates will join China to become members of BRICS in December, which has an often-stated strategic goal of de-dollarizing.
UAE, mBridge, and oil
Almost as big as the e-CNY oil trade is that the United Arab Emirates and its largest bank, First Abu Dhabi Bank (FAB), signed cooperation agreements with China on the digital yuan.
The UAE is no stranger to the digital yuan or CBDC. It is a founding member of the mBridge CBDC transfer system in Hong Kong that will go online in mid-2024. As a leading financial centre, the UAE loves CBDC and has publicly stated that UAE corporates are happy to receive it in trade.
The UAE is a founding partner in the mBridge CBDC transfer system located in Hong Kong. mBridge is scheduled to come online in 2024, and as a fellow BRICS nation, one has to wonder when, not if, it will start trading with China in digital yuan. Source Regulation Asia
The UAE is also a key finance centre for China in the Middle East, with 60% of Chinese trade in the Middle East and North Africa passing through the nation.
The fact that the UAE will someday process digital yuan payments for energy and other trade that use mBridge and not SWIFT shouldn’t surprise anyone. The UAE will enter BRICS with Saudi Arabia this January, and it is anyone’s guess how long it will take for small trades in digital yuan to take place, which will eventually start the oil trade flowing.
Death of the dollar?
Since I published Cashless in 2021, I have consistently said that China will use the digital yuan for large-scale trade between nations. Some, stuck in the notion that digital yuan is only used to buy coffee, did not believe this would be possible or would not be impactful if it occurred. China is thinking big with its digital yuan, and this oil purchase on the SHPGX proves it and gives us a glimpse of bigger things to come.
With the entry of UAE and Saudi Arabia into BRICS nations and the UAE’s participation in the mBridge CBDC transfer system, it’s just a matter of time before digital yuan trade in the region becomes normalised.
When the first cross-border digital yuan oil trade occurs, it is anyone’s bet, but at this point, few should doubt that they will. My bet is that next year, we’ll be seeing the first trades.
Meanwhile, pundits look at the digital yuan and claim it is failing. This is despite a weekly flow of firsts for the digital yuan: smart contracts for loans of USD 20 million, WeChat launching smart contracts with personal loans, NFC-enabled SIM cards, e-CNY industrial parks, supply chain finance smart contracts from banks, connection to Hong Kong’s Fast payment system, an e-CNY bond issuance, a pilot zone promoting e-CNY in ASEAN nations and the list goes on. With a string of firsts like this and the declaration in June that e-CNY volume had reached around USD 250 billion, it’s hard to conceive that a fair-minded observer would claim that the e-CNY is a failure.
All of these are significant accomplishments, but what makes the digital yuan a true game changer is that it is an alternative to sending money over SWIFT. This feat is highly valued by BRICS nations eagerly searching for US dollar alternatives. It’s just a matter of time before the digital yuan circulates widely among them for trade in goods and oil with China.
The news that SHPGX settled a contract in digital yuan is significant. Still, the future announcement that it purchased oil or gas directly from Saudi Arabia or the UAE will be positively explosive. It won’t be ‘death of the dollar’ but it will signal a new ‘multipolar’ currency world has begun.
Do you think anyone in Washington is watching, or that e-CNY is just for buying coffee?