China urges yuan settlement for oil

China should use its own currency to pay for oil imports from the Middle East, Central Asia and Russia to boost the yuan’s global role and challenge the dollar’s dominance, a top Chinese commercial bank executive said in comments published on Monday.

“If the yuan can be recognized by these oil producing countries and become one of the major oil pricing and settlement currencies along with rouble and others, it can greatly enhance the yuan’s status,” Cao Tong, senior vice president at CITIC Bank (601988.SS)(0998.HK), said in comments published in Financial News, a newspaper run by China’s central bank.

“It will be the second battleground for the yuan to go global,” Cao said, noting that trade within Southeast Asia is the first.

Cao’s view, while not necessarily representing Beijing’s official stance, is indicative of China’s desire to unseat the greenback as the pre-eminent currency in the global monetary system.

China has boosted the use of the yuan by launching international trade settlement schemes, creating a yuan-denominated bond market in Hong Kong and allowing Hong Kong banks to take yuan deposits.

But on the other hand, Beijing has been very cautious in making the yuan a fully convertible currency, largely keeping its domestic markets closed to overseas investors, except through tightly controlled quota schemes.

China has inked bilateral currency swap deals with United Arab Emirates, Kazakstan and Uzbekistan, giving these countries a credit line to obtain yuan from China.

These moves are widely seen as part of Beijing’s efforts to secure a stable supply of energy. China and Russia also allow trading of yuan and rouble in domestic foreign exchange markets, but that is a just a small part of the potential market.

According to China’s central bank, the onshore trading turnover between the yuan and rouble in China were only 200 million yuan ($31.75 million)in the whole year of 2011, a tiny figure compared to the 35.5 trillion yuan worth yuan/dollar turnover. ($1 = 6.2991 Chinese yuan)

Reuters