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>>> Zoltan Pozsar: G7 Investors Should Worry About Gold-Backed Renminbi Eclipsing Dollars, Commodity Encumbrance


The Deep Dive

December 29, 2022


https://thedeepdive.ca/zoltan-pozsar-g7-investors-should-worry-about-gold-backed-renminbi-eclipsing-dollars-commodity-encumbrance/


Credit Suisse contributor Zoltan Pozsar has continued his ongoing series about Bretton Woods III where commodities will dictate the new world order. For his last dispatch of the year, he described how the world is now shifting to a multipolar order “being built not by G7 heads of state but by the ‘G7 of the East’ (the BRICS heads of state).”

BRICS stands for the group of five nations: Brazil, Russia, India, China, and South Africa. But Pozsar said that with the poised expansion via rumored applications for Saudi Arabia, Turkey, or Egypt, he took the liberty to round up the current “G5.”

The author focused on Chinese President Xi Jinping’s speech at the recent summit in the Arab states, which for Pozsar is very telling on how Beijing plans to outmaneuver the West in global economy.

“Fixed income investors should care – not just because the invoicing of oil in renminbi will hurt the dollar’s might, but also because commodity encumbrance means more inflation for the West,” Pozsar said.

In the next three to five years, China is ready to work with GCC [Gulf Cooperation Council] countries in the following priority areas: first, setting up a new paradigm of all-dimensional energy cooperation, where China will continue to import large quantities of crude oil on a long-term basis from GCC countries, and purchase more LNG. We will strengthen our cooperation in the upstream sector, engineering services, as well as [downstream] storage, transportation, and refinery. The Shanghai Petroleum and Natural Gas Exchange platform will be fully utilized for RMB settlement in oil and gas trade, […] and we could start currency swap cooperation and advance the m-CBDC Bridge project.

Pozsar quoted Xi’s speech

In dissecting Xi’s timeline of “three to five years,” Pozsar explained that in market terms, this means that five-year forward five-year inflation breakevens should discount a world in which oil and gas are invoiced not only in dollars but also in renminbi, and in which some oil and gas are not available at low prices (and in dollars) for the West because they have been encumbered by the East.

“My sense is that the market is starting to realize that the world is going from unipolar to multipolar politically, but the market has yet to make the leap that in the emerging multipolar world order, cross-currency bases will be smaller, commodity bases will be greater, and inflation rates in the West will be higher,” the author explained.

He added that inflation traders “should be paranoid, not complacent,” saying that “inflation breakevens do not seem to price any geopolitical risk.”

The dusk of petrodollar, the dawn of petroyuan

Striking a major comparison between Xi’s approach and then-president Franklin Roosevelt with King Abdul Aziz Ibn Saud, Pozsar highlighted that United States was at the time dealing “with a Middle East that had just started to develop.” The West was essentially securing oil flow from the Arab states in exchange for security through arms and revenue stability.

But now, US-Saudi Arabia relations are strained, America is now less reliant on oil from the Middle East owing to the shale revolution, and China ended up being the largest importer of oil.

“Back then, ‘liquidity and security’ were more important for an emerging region; today ‘equity and respect’ are more important for what has become an eminent region,” he described. China, he added, is now offering the latter through what Xi described as “a new paradigm of all-dimensional energy cooperation.”

The synergy put forth as a proposal by the Chinese leader “means not just taking oil for cash and arms but investing in the region in the ‘downstream sector’ and leveraging the regional know-how for cooperation in the ‘upstream sector’.”

“Put differently, ‘oil for development’ (plants and jobs) crowded out ‘oil for arms’ – the Belt and Road Initiative met Saudi Arabia’s Vision 2030 in a big win-win,” Pozsar concluded.

The icing on the proverbial cake? All these will be renminbi exclusive, starting with Xi’s promise that “the Shanghai Petroleum and Natural Gas Exchange platform will be fully utilized for RMB settlement in oil and gas trade.”

“China, already the largest buyer of oil and gas from GCC countries, will buy even more in the future, and wants to pay for all of it in renminbi over the next three to five years.” Pozsar also noted that the Chinese leader communicated this “not during the first day of his visit – when he met only the Saudi leadership – but during the second day of his visit – when he met the leadership of all the GCC countries.”

“GCC oil flowing East + renminbi invoicing = the dawn of the petroyuan,” he summed up.

Renminbi perks: projects, gold, CBDC

There will be numerous opportunities for GCC countries to decumulate the renminbi earned from selling oil and gas to China. Referring to Xi’s remarks, these could range from “the sale of clean energy infrastructure, big data and cloud computing centers, 5G and 6G projects, and cooperation in smart manufacturing and space exploration.”

“Cooperation in the upstream sector” could potentially also include “the joint exploration of oil in the South China Sea.”

Pozsar also noted that the People’s Bank of China (PBoC) reported an increase in its gold reserves for the first time in more than three years.

“Why do China’s gold purchases matter in the context of renminbi settlement? Because at the 2018 BRICS Summit, China launched a renminbi-denominated oil futures contract on the Shanghai International Energy Exchange, and since 2016 and 2017, the renminbi has been convertible to gold on the Shanghai and Hong Kong Gold Exchanges, respectively,” Pozsar explained.

He added: “Money is as money does, and convertibility to gold beats convertibility to dollars.”

READ: Zoltan Pozsar: Gold At $3,600 Is Not Improbable If US Refill Reserves With Russian Oil

Xi also referred specifically to the m-CBDC Bridge project in his speech. The central bank digital currency project, “enables real-time, peer-to-peer, cross-border, and foreign exchange transactions,” and is being undertaken by the central banks of China, Thailand, Hong Kong, and United Arab Emirates. This would conduct exchanges “without involving the US dollar or the network of Western correspondent banks that the U.S. dollar system runs on.”

“In a very Uncle Sam-like fashion, China wants more of the GCC’s oil, wants to pay for it with renminbi, and wants the GCC to accept e-renminbi on the m-CBDC Bridge platform, so don’t hesitate – join the mBridge fast train,” said Pozsar.

To make things sweeter for the GCC, Xi also highlighted starting “currency swap cooperation,” facilitating an easier way for the countries to buy the stuff it needs with China extending loans in renminbi. This can be repaid via the swap lines when China buys oil for renminbi.

“Do take a step back and consider… that since the beginning of this year, 2022, Russia has been selling oil to China for renminbi, and to India for UAE dirhams; India and the UAE are working on settling oil and gas trades in dirhams by 2023; and China is asking the GCC to ‘fully’ utilize Shanghai’s exchanges to settle all oil and gas sales to China in renminbi by 2025,” Pozsar wrote. “That’s dusk for the petrodollar… and dawn for the petroyuan.”

China and the OPEC+

The ascension of petroyuan is not something that is just about to start, it has already been set in motion. Among the OPEC+ countries, Russia and Venezuela are already accepting payments for oil in renminbi at steep discounts.

China also inked the Comprehensive Strategic Partnership with Iran – “a 25-year ‘deal’ under which China committed to invest $400 billion into Iran’s economy in exchange for a steady supply of Iranian oil at a steep discount.” It stipulates $280 billion toward developing downstream petrochemical sectors (refining and plastics) and $120 billion toward Iran’s transportation and manufacturing infrastructure in exchange for energy exports at a minimum guaranteed discount of 12% to the six-month rolling mean price.

The China-Iran agreement has the same spirit to what Xi’s speech is saying at the summit with GCC: “investments in downstream petrochemical projects, manufacturing, and infrastructure… [in exchange for] renminbi settlement.”

“Russia, Iran, and Venezuela account for about 40 percent of the world’s proven oil reserves… the GCC countries account for 40 percent of proven oil reserves as well (with Saudi Arabia accounting for half)… and are being courted by China to accept renminbi for their oil in exchange for transformative investments,” Pozsar summed up.

“To underscore, the U.S. has sanctioned half of OPEC with 40 percent of the world’s oil reserves and lost them to China, while China is courting the other half of OPEC with an offer that’s hard to refuse,” he added.

READ: China Makes Historic Economic Partnership With Saudi Arabia

The remaining 20% of proven oil reserves are located in North and West Africa, as well as Indonesia. North Africa is currently dominated by Russia, West Africa by China, and Indonesia has its own agenda with battery metals, according to Pozsar.

Commodity encumbrance

In a nutshell, that is how China is softly imposing the use of yuan in the oil markets, in so-called “three to five years.”

“China will not only pay for more oil in renminbi (crowding out the U.S. dollar), but new investments in downstream petrochemical industries in Iran, Saudi Arabia, and the GCC more broadly mean that in the future, much more value-added will be captured locally at the expense of industries in the West,” Pozsar said.

This has played well for China in other non-oil exporting countries. Called “debt trap diplomacy,” many nations are forced into allegiance or giving preference to mainland China in the geopolitical landscape after being unable to repay borrowed investments from Beijing to finance their respective countries’ development projects.

Forbes reported that 97 countries throughout the world are in debt to China, using World Bank data. Countries that owe China a lot of money are largely in Africa, although they can also be found in Central Asia, Southeast Asia, and the Pacific. Pakistan owes Beijing the most money: $77.3 billion, Angola $36.3 billion, Ethiopia $7.9 billion, Kenya $7.4 billion, and Sri Lanka $6.8 billion.

But, it has a different effect to what China is essentially offering the richer GCC nations: “emancipation,” as Pozsar puts it.

“Think of this as a ‘farm-to-table’ model: I used to sell my chicken and vegetables to you, and you sold soup for a markup in your five-star restaurant, but from now on, I’ll make the soup myself and you’ll get to import it in a can – my oil, my jobs, your spend, ‘our commodity, your problem’,” Pozsar explained.

Pozsar cites the first “casualty” of the commodity encumbrance tactic is the decision of the world’s largest chemicals group, BASF, to downsize “permanently” in Europe after it opened the first part of its new €10bn plastics engineering facility in China.

And like anything else, if it can be pledged to be encumbered, it can be rehypothecated.

Pozsar describes how rehypothecation will add value to the budding system: “heavily discounted oil and locally produced chemicals invoiced in renminbi mean encumbrance by the East, and the marginal re-export of oil and chemicals also for renminbi to the West means commodity rehypothecation for a profit.”

This has already started to manifest. For instance, China has suddenly become a big exporter of Russian LNG to Europe and India has become a big exporter of Russian oil and refined products such as diesel to Europe.

BRICS coin

But China is not the only party playing the commodity encumbrance game. On June 22, 2022, at the BRICS Business Forum, Russian President Vladimir Putin noted that “the creation of an international reserve currency based on a basket of currencies of our countries is being worked on.”

The project is poised to challenge the International Monetary Fund’s Special Drawing Rights (SDR)–an international reserve asset created in 1969 to supplement its member countries’ official reserves. In 2016, renminbi joined the US dollar, euro, yen, and British pound in the SDR basket.

On July 29, 2022, the Executive Board decided on the amounts (number of units) of each currency in the SDR valuation basket. These amounts will be effective for a period of five years, starting from August 1, 2022

Source: IMF

Pozsar cited the Minister-in-charge of Integration and Macroeconomics of the Eurasian Economic Commission, Sergei Glazyev, who’s also in charge of developing BRICS’s “international reserve currency”, in determining how the new asset would be measured.

“Should [a nation] reserve a portion of [its] natural resources for the backing of the new economic system, [its] respective weight in the currency basket of the new monetary unit would increase accordingly, providing that nation with larger currency reserves and credit capacity,” Pozsar quoted Glazyev. “In addition, bilateral swap lines with trading partner countries would provide them with adequate financing for co-investments and trade financing.”

The project is similar in spirit to Xi’s proposal to the GCC countries (and its debt trap diplomacy): currency swap and downstream development for renminbi settlement.

“The BRICS and other interested nations need to talk about setting up their own independent global financial system – whether it would be based on the Chinese currency or they will agree on something different. They need to debate this,” said Sergey Storchak, chief banker of Russian bank VEB.RF, in an interview at the BRICS summit.

Wide participation among global economies are expected once this project materializes as Saudi Arabia, Turkey, and Iran have all started their application to the BRICS. In addition, the Shanghai Cooperation Organization (SCO) granted dialogue partner status to Saudi Arabia and Qatar (which has half of GCC oil reserves) and began procedures to admit Iran as a member at the last summit in Samarkand.

“The China-GCC Summit is one thing, and China’s strategic partnership with Iran is another, but both Saudi Arabia and Iran applying to pillar institutions of the multipolar world order – BRICS+ and the SCO – at the same exact time, plus the idea of ‘BRICS coin’ as a commodity-weighted neutral reserve asset that encourages members to pledge their commodities to the BRICS ’cause’, should have G7 bond investors concerned, because these trends may keep inflation from slowing and interest rates from falling for the rest of this decade,” Pozsar concluded.

The new paradigm

“The ‘new paradigm’, as I see it, comes with a theme of ’emancipation’,” Pozsar explained. “Both sanctioned and non-sanctioned members of OPEC, with Chinese capital, are going to adopt the ‘farm-to-table’ model in which they will not just sell oil but will also refine more of it and process more of it into high value-added petrochemical products.”

He noted that all growth in global oil production came from US shale and other non-conventional sources such as Canadian tar sands. Saudi Arabia has already restricted boosting output by only one million barrels per day by 2025 while America’s biggest shale oil operator Pioneer Natural Resources recently said accelerating drilling would send investors fleeing and leave the sector “back at the bottom” of the stock market.

“It appears to me that unless the U.S. nationalizes shale oil fields and starts to drill for oil itself to boost production, over the next three to five years, we’re looking at an inelastic supply of oil and gas,” Pozsar noted.

This scenario opens the global oil market and makes it vulnerable for China to come in with its “emancipation” proposal.

READ: Joe Biden Prepares to Frantically Sell Oil From Reserves After Snubbed by OPEC

These supply constraints will lead, as Pozsar puts it, to a position where the “new paradigm” will likely be at the expense of refiners and petrochemical firms in the West, and also growth in the West–“much less domestic production and more inflation as steadily price-inflating alternatives are imported from the East.”

The author drew connection in that when one looks at the yield curve and think about the five-year section and then the forward five-year section, Xi may have accomplished his “next three- to five-year” goal of paying for China’s oil and gas imports exclusively in renminbi and may have advanced commodity encumbrance by developing downstream petrochemical industries in the Middle East “region” of Belt and Road and also the rollout of “BRICS coin” by the time the forward five-year section starts.

“I don’t think five-year forward five-year rates are pricing the future correctly: breakevens appear to be blind to geopolitical risks and the likelihood of the above,” said Pozsar. “Recognize two things: first, that inflation has been driven by non-linear shocks (a pandemic; stimulus; supply chain issues involving laptops, chips, and cars; post-pandemic labor shortages; and then the war in Ukraine), and second, that inflation forecasts treat geopolitics in the rearview mirror.”

Pozsar also said that central banks should think about inflation with geopolitics, resource nationalism, and “BRICS coin” in mind as the next set of non-linear shocks “that will keep inflation above target, forcing central banks to hike interest rates above 5%.”

In April, China will host the fourth Belt and Road Forum after it was postponed in 2021 due to the COVID-19 pandemic.

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>>> Qatar seals 27-year LNG deal with China as competition heats up


Reuters

Nov 21, 2022

By Andrew Mills and Maha El Dahan



https://www.reuters.com/business/energy/qatarenergy-signs-27-year-lng-deal-with-chinas-sinopec-2022-11-21/


Talks with other Chinese, European buyers ongoing -Kaabi

Says buyers may take up to a 5% stake in expansion

Says deal signals importance of secure long-term supply


DOHA, Nov 21 (Reuters) - QatarEnergy has signed a 27-year deal to supply China's Sinopec with liquefied natural gas in the longest such LNG agreement to date as volatility drives buyers to seek long-term supplies.

Since Russia's invasion of Ukraine in February, competition for LNG has become intense, with Europe in particular needing vast amounts to help replace Russian pipeline gas that used to make up almost 40% of the continent's imports.

European companies looking to buy LNG needed to look at how Asian buyers were approaching their own negotiations and were willing to lock into long-term deals, QatarEnergy chief Saad al-Kaabi told Reuters, shortly before signing the Sinopec deal.

"Today is an important milestone for the first sales and purchase agreement (SPA) for North Field East project, it is 4 million tonnes for 27 years to Sinopec of China," Kaabi said.

"It signifies long-term deals are here and important for both seller and buyer," he said in an interview in Doha, adding that the deal was the LNG sector's largest single sales and purchase agreement on record.

The North Field is part of the world's biggest gas field that Qatar shares with Iran, which calls its share South Pars.

QatarEnergy earlier this year signed five deals for North Field East (NFE), the first and larger of the two-phase North Field expansion plan, which includes six LNG trains that will ramp up Qatar's liquefaction capacity to 126 million tonnes per year by 2027 from 77 million.

It later signed contracts with three partners for North Field South (NFS), the second phase of the expansion.

Monday's deal, confirmed by Sinopec (600028.SS), is the first supply deal to be announced for NFE.

"This takes our relationship to new heights as we have an SPA that will last into the 2050s," Kaabi said.

"It sends a message that a lot of Asian buyers are actually approaching us to have a long term deal because they see the volumes of gas that are coming in the future are less and less."

LONG-TERM SUPPLY

Kaabi said negotiations with other buyers in China and Europe that want to have security of supply were ongoing.

Qatar is already the world's top LNG exporter and its North Field expansion project will boost that position and help guarantee long-term supplies of gas to Europe as the continent seeks alternatives to Russian flows.

"The recent volatility has driven buyers to understand the importance of having long-term supply that is fixed and that's reasonably priced for the long term"," Kaabi said.

"There aren't many projects that are taking final investment decision and the next two big chunks of LNG capacity that are coming into the market is Golden Pass LNG that we partnered with ExxonMobil in Texas and the next big chunk if you will is North Field East and North Field South."

Kaabi also said there was more realisation globally that gas should be an essential part of any energy transition.

"The wind doesn't blow all the time and the sun doesn't shine all the time," he said, adding that Qatari LNG is "a solution that has the least carbon intensity".

The pricing of the Sinopec deal will be similar to others in the past that were linked to crude oil.

"The way we're pricing our deals with Asia is crude linked. We've done it this way in the past and that's the mechanism we're using going forward."

The deal was signed on an ex-ship basis, meaning QatarEnergy will provide the shipping and delivery of the LNG.

Kaabi added negotiations for an equity stake in the Gulf country's expansion project were ongoing with several entities.

The supply contract is a key component for an integrated partnership in the NFE, Sinopec said in a statement, indicating it could be involved in stake negotiations.

QatarEnergy has maintained a 75% stake overall in the expansion and could give up to a 5% stake from its holding to some buyers, Kaabi said.

"Important buyers that want to commit for the long term on a substantial volume want to see part of the benefits of the upstream business... so I think it's an important win if you will and it makes the partnership even more solid."

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Bigworld, Looks like that Pozsar article is only available to Zero Hedge subscribers, but I found this other excellent article (see pervious post). It sure sounds like the future belongs to China and the expanding BRICS, and the US/West is in very deep trouble.

So how do the US/West elites turn this around? It appears that only a desperation strategy can possibly stop the coming juggernaut. Time to release a race-specific bioweapon targeting Asians? That always seemed like a potential future 'solution', and it might still be the plan, with Covid as just the warmup. Who knows, but it seems likely the US/West finance ghouls will have to do something drastic, done out of increasing desperation.

In the past, having a war would be the solution. The classic strategy ('Tertius Gaudens') was for #1 to ally with #3 against #2, and thus weaken both #2 and #3. That was the basis for the Kissinger/Nixon strategy back in the early 1970s, when the US opened relations with China. Later, Brzezinski reportedly had the long term strategy of pitting Russia against China over control of the vast oil/gas resources of Siberia. So #2 (Russia at the time) and #3 (China) would destroy each other, and the US/West would sail on for another century of unopposed global hegemony.

But what is the current strategy, I wonder?


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