Saudi Arabia may partly fund itself with help from China, a senior Saudi official said in a statement Thursday, August 24. The oil-rich country is considering getting help via Chinese yuan funds, thus increasing the possibility of the two global powers forging closer financial ties. This bold idea came in light of Saudi’s recent budget deficit, as the country has already started borrowing billions of dollars abroad in the last year. However, is the past, such loans were in U.S. dollars exclusively.
Russia accepts yuan for their oil trade with China, possibly affecting Saudi’s share which has dropped from 25% in 2008 to its present at below 15%.
Seeking and obtaining funds in Chinese yuan means Riyadh, the Saudi capital, will have more financial flexibility. In turn, it also boosts China on the world stage. China is undoubtedly Saudi oil’s biggest market, but the move from the dollar allows the two nations to deal directly with each other, effectively cracking the hegemony of the U.S. dollar. In addition, the Chinese yuan (also known as the renminbi) will continue its path in potentially becoming a top international currency.
During a Saudi-Chinese conference held in Jeddah, Vice Minister of Economy and Planning Mohammed al-Tuwaijri announced that this action is taken so that the country’s funding sources may diversify. “We will do that through access to investors or bodies of liquidity in the markets. China is by far one of the top markets,” he explained. “We will also access other technical markets in terms of unique funding opportunities, private placements, panda bonds and others.”
He mentioned that Saudi Arabia is “very willing to consider” using Chinese funding and products, and mentioned many divisions have “shown interest” including the Industrial and Commercial Bank of China.
Panda bonds, or Chinese yuan-denominated bonds from non-Chinese issuers but sold within the People’s Republic of China, are a possibility as well. An Liyan, chief executive of ICBC International, one of the biggest Chinese banks, announced in the conference that her bank is willing to sponsor panda bonds to Saudi Arabia.
Breaking the Petrodollar Lock Open
Petrodollars, or money earned from oil sales, help Saudi Arabia standardize worldwide oil prices in U.S. dollars. When the U.S. and Saudi Arabia struck a deal in the 1970s, it allowed the U.S. dollar to claim an elevated status as the global reserve currency. With Saudi Arabia potentially doing a 50-50 deal with China, it may seal the fate of the petrodollar, switching the world currency from U.S. dollars to Chinese yuan or a group of floating currencies. This a bold move that will cause impacts not just in the three countries involved, but also the rest of the world.
In a statement, Tuwaijri said that Riyadh wants to raise money abroad for many reasons outside of simply covering its budget deficit. He stated that this action will finance major investment projects, leading to a better and expanded economy which will then also create more jobs. “Ideally, we would be funding through project finance and bond markets and other means,” he explained.
In an interview with Reuters, Saudi Energy Minister Khalid al-Falih said that the Saudi-China 50-50 investment, worth a total of $20 billion, will contribute to various sectors including energy, infrastructure, mining, and materials. However, Falih did not elaborate any further.
The commitment both countries are willing to perform seems promising, as it may also create a number of jobs, among other positive changes. However, some analysts are viewing China’s latest financial assault as primarily a threat to the petrodollar.
As the Chinese government takes action in making the yuan international, they still currently trade in gold or U.S. dollars, albeit reluctantly. With China as the world’s largest importer of oil, it may come as a slight shock that Saudi Arabia is only it’s top second source – in first place is Russia and third is Angola, and other backup sources such as Oman, Iran, and Iraq.
China prefers using its native currency over U.S. dollars. Incidentally, Russia accepts yuan for their oil trade with China, possibly affecting Saudi’s share which has dropped from 25% in 2008 to its present at below 15%. Under these circumstances it is understandable why Saudi Arabia is open to trading and borrowing in yuan. “It is preliminary at this stage but the commitment from the top is there,” said Falih. This is a major move that may create a bold impact not just for the parties directly concerned, but potentially worldwide, sooner than we may realize.