If China is about to start setting the global price of oil, why isn't it setting the price of metals?
After all, the country accounts for about half of worldwide demand for most base metals, compared with just 13 percent or so for crude. The reality is that scale doesn't matter. As Gadfly argued in October, the European Union has long been the world's largest oil-importing trading bloc, but we don't trade West Texas Intermediate in euros.
That's not putting off Chinese securities regulators, who hope to list yuan-denominated crude futures in Shanghai on March 26. But those who think such moves could help the yuan replace the U.S. dollar as the global reserve currency are muddled.
To see why, look at aluminum. It's the most widely used of the six main base metals and the most extensively held on both the Shanghai Futures Exchange and the London Metal Exchange.
The U.K. -- whose single aluminum smelter was sold to turnaround specialists Liberty House Group in 2016 -- doesn't seem an obvious place to trade the metal. Yet volumes show that between a third and half of Shanghai aluminum futures typically change hands between midnight and 3 a.m. Asian time, when local traders are asleep.
By contrast, just 10 percent to 20 percent of LME contracts are traded during the LME's "Asian hours" before 7 a.m. U.K. time. That suggests that it's London that sets Shanghai prices, not vice versa.
The reasons aren't hard to discern. Traders on the LME have access to a global network of warehouses and can settle transactions in dollars, while taking advantage of all the hedging and arbitrage instruments available in European and North American capital markets. Those on the Shanghai exchange are limited to the domestic market and a currency that's used in just 4 percent or so of worldwide foreign-exchange transactions. On top of that, they pay a 17 percent sales tax, which keeps Chinese copper prices at a persistent premium to those in London and New York.
Local futures will no doubt be useful for Chinese traders, but in global markets they are most likely to be only a gut-check for investors buying and selling more liquid, dollar-denominated contracts during Asian hours. In many ways, that's a missed opportunity: The world could do with better benchmarks for the Persian Gulf and Chinese domestic grades that are mainly consumed in Asia.
China has a chicken-and-egg problem. It's not so much that the yuan needs its own oil benchmark to become a global reserve currency: The more important issue is that a yuan-denominated contract will never lead the oil market so long as Beijing drives foreign traders away by keeping its capital account closed. Few international investors are going to commit to a contract that leaves them dependent on the heavily controlled, illiquid offshore renminbi to settle trades.
It's often hot pride rather than cold reasoning that dictates ideas about how currencies should behave. President Donald Trump's mercantilist instincts would favor a weak currency along the lines of that pursued by Japanese Prime Minister Shinzo Abe, but last month he instead backed a "stronger and stronger" greenback.
China's dreams of turning the yuan into a global reserve currency are little different. Superficially, such a shift would suggest an increase in Beijing's authority over the global economy, but it will never happen so long as the government insists on controlling its currency. Letting go, rather than taking power, is the only route to growth.