There’s one key piece of the “petroyuan” story which has gotten lost in the frenzied hype. While many get fixated, and make others fixate, on how RMB-for-oil was going to, or maybe even still will, destroy the dollar there’s been important, legitimate functions for Shanghai’s International Exchange which don’t involve, and never really did, replacing the reserve currency.

It’s all about dollar burden, lightening the monetary load in a reserve system that doesn’t supply enough of it (nor redistribute efficiently). The Chinese simply wants to cut into its dollar short, the overall level of everyday and long-range dollar financing it requires just to be in the world economy. Getting some of the nations who provide China its oil to accept RMB is one means toward that end.

If they do, then China won’t need as many dollars to pay them for crude. While it does nothing to replace the global (euro)dollar standard, this is a patchwork solution to a chronic problem. They all are (including the equally overhyped bilateral currency agreements).

But therein lies the problem. In order to get more oil suppliers to accept RMB for payment in lieu of dollars the more the Chinese have to turnaround their currency. Or at least make their currency’s turnaround more credible. They’d have to work against the decaying dollar system’s hardened direction; up for dollar, down for CNY.

Why?

Right from the start, China’s currency isn’t fully convertible in the most comprehensive sense, which means that once you have RMB in your hands you don’t actually have RMB in your hands. The Chinese government is notoriously inviting for those who want to move cash or product in, but equally if not more stringent for anyone even thinking about taking cash out.

RMB is therefore of limited use, a fact of monetary life China isn’t going to change anytime soon (they certainly haven’t yet). Which, if you understand the nature of global reserve currencies, would definitively rule out RMB as one even if the PBOC’s involuntarily ultra-tight grip on supply hadn’t already done so a long time before.

Second, the dollar’s exchange value is, they say, unstable. And while that’s true, unstable in the post-GFC1 fashion actually has benefited greatly those who stick with it. Why would oil producers want RMB when they can continue demanding dollars and then gain further as the dollar “unexpectedly” grinds ever higher? It makes their future purchases of cheap Chinese goods that much cheaper, any future investments that much more investable.

There’s been all sorts of periodic hype over the dollar’s “inevitable” crash, but typically coming from those who don’t stand to lose in the way the world’s petroleum exporters might while listening to them. To put it simply: why in the world would they want RMB?

You might therefore begin to understand why CNY countermeasures may have gone underground this time (Euro$ #4) around. Last time, Euro$ #3, the Chinese tried it the textbook way – and it made things even worse (like pretty much everything in the Economics textbook).



It’s a tug-of-war between the dollar – which wants to push CNY lower – the fact that CNY is hanging in there despite how quite obviously dollars aren’t flowing into the places they would flow if CNY was organically hanging in there, and Chinese officials trying to hide and obscure these sets of contradictions (including what’s already being suggested about ongoing dollar scarcity and the most likely future direction of CNY as given to us by little more than RRR).

If there was any credibility to the falling dollar, the Chinese wouldn’t have needed, nor keep needing, to try so hard. They’re telling the world through this petroyuan story that in a very important way it’s (still) not going their way!

In terms of eurodollars and currency, it’s all very reminiscent of what happened in 2017.

As is what I wrote about not that long ago; the rumors of high-level political intrigue which just recently have been confirmed. In a major move, Xi really is going after the major powerbase of his rivals. Not just going after, but already begun.

A senior ally of Chinese leader Xi Jinping called for a Mao-style purge of China’s domestic-security apparatus last month, saying it was time to “turn the blade inwards and scrape the poison off the bone.”

The cleansing commenced swiftly.

Within the first week after the call to action, Communist Party enforcers had launched investigations.

How do all these things tie together? Petroyuan’s real purpose; the artificial steadying of CNY and the means by which it is being hidden; the 2017 comparisons, including the increasingly strongarm tactics of China’s putative dictator?

What was supposed to have happened from 2017 forward was dollar down, maybe even a crash, as the world got better; way better; too much better to the point of inflationary risks.

Instead, the dollar went up which you would have anticipated had you looked at all these same things in this way back then. None of these factors being repeated in 2020 indicate a confident regime believing in the close or even ultimate successes of what are really ad hoc, unplanned, and uncoordinated responses to a problem which has been, is now, and will continue to be, out of their hands.

Like 2017, in 2020 you don’t perceive even the outlines of some grand unified strategy; quite the contrary, very clear signs of awkward, inept flailing.

Or, what I wrote last August:

I fail to see an enlightened group of long-range thinkers expertly and patiently executing the perfect plan combining all the best and right pieces in all the best and right ways. In my view, this is all evidence (on the central bank’s balance sheet!) of increasingly desperate bungling officials throwing whatever they can at the wall and just hoping something sticks; buying them just enough time that through nothing more than sheer random good luck it all just goes away.

This latter view would seem to fit with the idea of Emperor Xi, who has to be less than thrilled about what’s going on and what top officials are telling [him] they can actually accomplish. Realizing the lack of any good options and what that truly means, he is taking proactive steps to maintain himself, and the Communist government, in the growing expectation there’s not much chance he or his court can realistically do anything about it.

Utterly trapped like the rest of the world in the eurodollar’s vise, what’s happening in China is simple: they’ve been throwing crap at the wall for years hoping something, anything sticks. Dollar scarcity is like lubrication on that wall practically guaranteeing nothing will. Their idiots really are no better than ours. 

And Xi, who realizes at least the consequences if not likely the true causes, continues to prepare for them. He’s now upped his game in that regard, even more than he already had, which, like 2017, is a warning about the reality in China, the reality in dollars (scarcity), and how that’s not something only the Chinese should be worried about.