Trump Drives Iran into the Arms of China's Golden Petro-Yuan

The United States unilaterally withdrew from the Iran JPCOA on May 10. One of the unintended consequences of that action may be Iran repricing its oil in Chinese Yuan.

The once sleeping Chinese dragon will grow stronger as Trump pushes Tehran toward a closer embrace with Beijing.

When Donald Trump made the decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA), he also promised re-imposition of tough sanctions against the country. With the exception of Israel, no major ally of the United States has chosen to align itself with Trump in this decision. Other major players on the world stage have also put the world on notice that the U.S. decision will have no effect on their plans to continue ties with Iran on several levels.

Continuing those ties could turn out to have some far more serious repercussions – economically -- than the U.S. might have imagined.

One of the focus areas for those consequences regards Iran’s trade with China. Since China launched its “Belt and Road” initiative to link together Europe, the Middle East, Asia, and Southeast Asia together with China, China has been finding multiple ways to enhance its connections with key trading partners like Iran. Iran’s capital, Tehran, also appears to be a major strategic shipping ‘node’ for China, providing a means of connecting with mainland Europe. That is why over the last 15 months China has completed construction two separate 8,000 kilometers + long freight train routes with Iran. In February 2017 the first of these connected eastern China to Iran, and on May 10, the day Trump pulled out of the JPCOA agreement, China launched a rail shipment of over a thousand tons of sunflower seeds from Inner Mongolia to Tehran. That shipment was over a new train line which had not been in existence before.

A second involves Iran’s oil business. China uses more oil than any other country in the world. It also is the single largest customer for Iranian oil. It further buys a full one-fourth (25%) of all Iranian oil exports. That 25% supply corresponds to 8% of China’s total oil purchases from outside the country.

With China already reaching out to Iran as a trading partner, a logical move for the countries would be for China to show its support by increasing the percentage of oil it buys from Iran. China might agree to that and ask for something else in return. That something else would be for Iran to agree to price that oil in Yuan rather than Iran’s current pricing instrument of choice, the U.S. dollar.

This is far from idle speculation. China launched its first Yuan-based oil futures market on the Shanghai International Energy Exchange (SIEE) at the end of March. As Trump’s expected decision to pull out of the Iran nuclear weapons deal grew near last week, on May 9 the traded daily volume on that market reached a high of 250,000 lots bought and sold. That is 12 percent of global trading, versus only 8 percent when the Petro-Yuan market opened.

Shanghai futures themselves also rose to a record high of $75.40 per barrel, calculated in U.S. dollars for comparison purposes but of course priced in Yuan.

So the markets are already moving in anticipation of perhaps more than just Iran making the move to reprice in Yuan versus dollars. For Iran alone, Stephen Innes, head of trading for Asia/Pacific at futures brokerage OANDA in Singapore, told the Reuters news service that, “It makes sense for Iran to begin selling oil under contracts denominated in Yuan rather than dollars.”

It is also a move that costs Iran virtually nothing, while still harming U.S. interests in the process. Besides making it easier for China to buy -- since there is no currency exchange conversion fee, it continues to whittle away at once automatic U.S. dominance in world buying markets.

As Trump’s attempt to enforce its “America First” doctrine as applied to the Iran deal across Europe and Asia, more than just Iran may begin to turn away from the U.S. Europe is already aligning strongly against what Trump did on May 10, and other countries in Asia are also evaluating their options. Although it is still mostly speculation at this point, with Trump coming across as a lone wolf with little consideration for even the U.S.’s closest allies on this matter, there are already indications that more than just Iran repricing its oil in Yuan may be at stake. China and to a lesser extent Russia are finding others reaching out to them as potential allies in at least the economic arena.

With that could come others who, like Pakistan, have announced that although they are not pricing import contracts wholly in Yuan, they will no longer accept any imports priced in dollars from crossing into their country. Moves like that, along with the potential repricing of oil shipped out of Iran, could have a major long-term global impact on U.S. competitiveness and power.