Strengthening ties between Saudi Arabia and China could enable oil trading between the two nations in the renminbi, according to S&P Global Ratings.
Yuan-based oil trade between Riyadh and Beijing faces “significant challenges” and may take decades to grow to a “meaningful scale”, but the deepening bilateral ties and aligning long-term interests may boost this process, the ratings agency said in a report on Wednesday.
“Aside from the booming oil trade that continues to anchor their core relationship, long-term plans such as Saudi Arabia's Vision 2030 are driving new institutional, financial and cultural linkages between the two countries,” said Charles Chang, Greater China country lead for corporates at S&P.
“These new linkages will provide the Saudis more outlets for the renminbi's use, such as paying for Chinese engineering and construction services in the kingdom or investing in Chinese firms across a widening range of sectors."
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The potential for more renminbi-based oil trade hinges on exporters' willingness to accept the Chinese currency for payment and that depends on their ability to use the resulting proceeds, the report said.
However, since the yuan is not widely used in international trade and finance, there are relatively fewer spending opportunities, the agency added.
Saudi Arabia is China's largest trading partner in the Gulf. The kingdom's trade surplus with China has widened from the lows of $5 billion to $10 billion in 2015-2016 to $20 billion to $40 billion in the past three years, the report said.
Crude oil accounted for about 84 per cent of China’s imports from Saudi Arabia in 2023, up from about 67 per cent a decade ago, S&P said.
The yuan is now the fourth most-transacted currency, having overtaken the Japanese yen last year, according to data from Swift.
Its rise represents a shift in the global financial landscape towards a more multipolar system, challenging the historical dominance of western currencies and financial markets.
The Chinese currency’s share as a global trade settlement currency has continued to grow despite China’s weakening exports to western countries.
Attempts to increase the yuan's global use were undone by a sharp depreciation in late 2015. However, by early 2022, escalating geopolitical risks caused a resurgence in its role in global trade.
“These episodes underscore the pull forces of trade and the push forces of geopolitical risks that continue to characterise the renminbi’s use,” S&P said.
“Both these forces are at play in the use of the currency in Saudi-China trade.”
Riyadh has been focused on maintaining a balance between its relationship with its primary security ally, the US, and its relationships with China and Russia, its key energy partner within Opec.
Last year, China and Saudi Arabia signed a local currency swap agreement worth $7 billion as part of efforts to boost trade using their currencies and reduce reliance on the dollar.
More recently, Saudi Arabia became a participant in the mBridge project, a collaborative effort to develop a new system for cross-border payments using central bank digital currencies.
It was launched in 2021 between the central banks of China, Hong Kong, Thailand and the UAE.
“Escalating geopolitical events, shifting national interests and growing non-US trade, particularly with Asia, in recent years led some emerging economies to look to diversify their external relations,” S&P said.
Dollar dominance
Gulf exporters’ currencies are pegged to the US dollar, including those of Saudi Arabia, the UAE, Iraq and Oman.
If the dollar appreciates against the yuan, as it has been doing for the past year, selling oil in the Chinese currency will cut their incomes in domestic-currency terms, the agency said.
“Moreover, Beijing has yet to lay out a road map for resolving these issues and for liberalising the country’s currency and capital account,” S&P said.
“This leaves a high degree of uncertainty on the ability to manage future petroyuan-related risks.”
About 88 per cent of all foreign currency transactions have the dollar on one side, while half of all international trade is conducted in dollars.
Although the dollar remains the most dominant currency in the foreign exchange reserves of the world's central banks, its share in these reserves has decreased from more than 70 per cent in 2000 to about 55 per cent in the last quarter of 2023, after accounting for exchange-rate and interest-rate adjustments, International Monetary Fund data shows.
Growing partnership
Saudi Arabia’s Vision 2030 programme, which aims to reduce the country’s dependence on oil exports and diversify its economy, along with its plans to host major events, may lead to increased collaboration with Chinese entities, the report said.
The kingdom will host the Asian Winter Games 2029, Expo 2030 and the Fifa World Cup 2034.
“For China, yuan-based oil trade and the resulting Saudi need to spend future yuan proceeds would provide self-sustaining logic for Saudi Arabia’s participation in China’s Belt and Road Initiative,” S&P said.
The Belt and Road Initiative, a mega project launched in 2013, aims to connect several countries in Asia, Europe and Africa through a network of infrastructure and trade-related projects.
