Posted on Nov 27, 2020 at 1:06 p.m.
In the currency market, the dollar is king. In the world of commodities, where almost everything is traded for greenbacks, this is even truer. But the domination of the American currency is gradually starting to be called into question.
The latest offensive came from China, which launched the first international yuan-denominated copper futures contracts last week. Listed on the Shanghai International Energy Exchange (INE), these instruments aim to facilitate the access of foreign investors to the Chinese red metal market. Futures traded on the Shanghai Futures Exchange are reserved for domestic investors and are subject to taxes and customs duties.
The stated objective is to strengthen China’s “market power” over the main raw materials and therefore copper. “ Market power is not about influencing prices one way or another, recalls Yves Jégourel, professor at the University of Bordeaux and co-director of CyclOpe, but to serve as a reference price in the commercial negotiations of physical actors “. A role currently played by the London Metal Exchange.
Futures markets are not just used to hedge against price fluctuations. Manufacturers also use them to determine the price of the metal they are going to buy. In order for the mechanics to be well oiled, the prices of commercial contracts and paper contracts must therefore be as correlated as possible. Creating financial instruments open to the international market makes it possible to “ solicit speculation Necessary, explains the academic.
A complex alchemy
Will the world convert to Chinese copper prices? “ The chemistry of futures is complex. All the major players must take part, the financier, the industrialist, the trader … », Lists Sylvain Berthelet, analyst manager of raw materials at SMA Gestion. Without forgetting individuals! ” VSunlike developed countries, commodity futures markets in China are dominated by retail investors », Underlines an article of the JP Morgan Center for Commodities.
In any event, international players have already expressed their interest. During the first day, the British broker Sucden Financial and the Singaporean Envy Global Trading took part in the exchanges with the Chinese Jiangxi Copper, China Minmetals, Wanbao Mining and Bank of China International at their side. Swiss trader Trafigura was also on hand, Reuters said.
Internationalize the yuan
The second goal is to internationalize the yuan. “ This requires deep financial markets », Explains Yves Jégourel. China is not at its first attempt: it has already launched futures contracts in yuan on oil, iron, rubber, terephthalic acid (used as a raw material in the polyester industry) , and low sulfur fuel oil.
China’s determination in these markets can also be explained by their importance for its economy: the former Middle Kingdom alone swallows up half of the world’s raw materials. “ China is a huge commodity market, you need infrastructure, but also futures contracts, explains Benoît Hélin of SMA Gestion.
At the same time, the Chinese giant distances itself from Washington and the dollar, which allows it “ to exist in its area and outside its relationship with the United States. The political message is clear », Analyzes the manager.