Recent talks of China paying for Saudi Arabia’s oil in renminbi have bolstered expectations that China’s massive purchases from the Kingdom will facilitate oil trade between the two countries in the Chinese currency. In its latest report, S&P Global detailed the rapidly growing relationship between the two countries and the significant challenges they may face when conducting renminbi-based oil trade.
“As the renminbi is not broadly used in international trade and finance, there are relatively few outlets to spend these proceeds,” stated the report. Therefore, China’s accumulation of local currency inflow would incur substantial costs and raise currency risks. This local currency use between the two countries remains limited to the Saudi-China oil trade despite the Kingdom’s willingness to discuss more use of the currency.
China’s growing Middle East ties
China’s trade with the Middle East has more than tripled over the last 20 years, a key factor in the potential for broader use of the renminbi by Gulf states. In particular, Saudi Arabia is China’s largest trading partner in the Gulf.
Oil’s share of China’s imports from the Kingdom climbed from two-thirds a decade ago to 84 percent in 2023. Saudi Arabia’s trade surplus with China has also widened from $20 billion to $40 billion over the past three years from$5 billion to $10 billion in 2015-2016.
Vision 2030 strengthens China ties
In December 2020, President Xi Jinping’s visit to Saudi Arabia initiated the transformation of Saudi-China ties from one focused on oil to one that is comprehensive in nature. As the Kingdom’s Vision 2030 comes to life, Saudi Arabia sees an opportunity for greater collaboration with Beijing.
“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,” stated Charles Chang, Greater China Country Lead for Corporates at S&P Global Ratings.
These new ties will provide the Kingdom with more outlets for the use of the Chinese currency such as paying for Chinese engineering and construction services in Saudi Arabia or investing in Chinese firms across a widening range of sectors.
Leading Chinese firms have considerable experience in developing mega projects at the pace and scale that Saudi Arabia seeks. In addition, financial markets in Hong Kong and mainland China could facilitate Saudi ambitions to develop the Saudi stock exchange into one of the top exchanges in the world by sharing and collaborating on technology, know-how, and reforms.
Renminbi’s entry into global trade
The renminbi has made substantial progress since its global launch in July 2009, when the pilot scheme for renminbi cross-border settlement in Hong Kong expanded to corporates, which introduced the yuan as a currency for international trade.
Since then, China’s central bank has promoted the currency’s use mainly via two channels. First, through expanding trade and setting up bilateral clearing and settlement infrastructure for the trading of goods in the local currency. Second, through developing and deepening the offshore renminbi markets that enable international participants to access renminbi financial markets.
So far, China has made meaningful progress in the first channel. Its share of world trade has tripled over the last two decades, from 4 percent in 2002 to 13 percent last year.
Weak economic rationale means the yuan’s entry into oil markets may need to rely on non-economic factors such as strategic considerations. Escalating geopolitical events, shifting national interests, and growing non-U.S. trade, particularly with Asia, in recent years led some emerging economies to look to diversify their external relations.
Read: Aluminum and iron ore drive Bahrain’s $894.31 million export surge in July 2024
Saudi Arabia and China’s long-term alignment
Along with Vision 2030 projects and oil trade, the Saudi government may also need to ramp up spending for hosting the Asian Winter Games 2029, Expo 2030, and the FIFA World Cup 2034. These, among other projects, may involve increasing collaboration with Chinese parties, particularly if they develop a strong track record in the kingdom.
China Railway Construction’s track record in building the Lusail Stadium for the 2022 World Cup in Qatar, for example, likely facilitated its winning bid to build the Jeddah Stadium and surrounding sports villages.
For China, yuan-based oil trade could also support the country’s digital currency push, which culminated in the first purchase of crude oil in digital yuan in October 2023, followed in June 2024 by the Saudis joining mBridge, the central bank digital currency trial for trade settlements led by China and the Bank of International Settlements.
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