- Saudi Arabia and China signed a Rmb50 billion ($6.93bn) currency swap agreement in November
- China’s international swap agreements amounted to Rmb3.5tn from 2009–2020
- While Saudi Arabia’s currency remains pegged to the dollar, the country’s economic and political ties to China have deepened significantly over the past year
Amid deepening global geopolitical tensions, the recent currency swap agreement between Saudi Arabia and China is the latest in a series of initiatives that seek to put pressure on the dollar’s central role within international trade.
Last month, the People’s Bank of China (PBOC) and the Saudi Central Bank signed a three-year currency swap agreement worth Rmb50bn ($6.93bn) or SR26bn. According to a statement by the PBOC, the deal is designed to help the two countries strengthen their financial co-operation and boost the use of local currencies, while also promoting trade and investments.
Although the agreement is relatively modest in volume, considering that China is the biggest customer of Saudi Arabia’s energy resources, it is only the latest in a long list of similar agreements with other countries, which exceeded Rmb3.5tn ($554bn) between 2009–2020. Most recently, China cleared a $6.5bn swap line with Argentina in October to help the latter survive the sharp devaluation of the peso, as part of a broader swap agreement worth nearly $18bn between the two countries.
While the Saudi swap is relatively small, it symbolises the strengthening of China-Saudi ties, which have been developing for some time amid growing concerns about geopolitical tensions.
“I think this swap shows how close the two countries are getting, but also that they are looking to reduce their reliance on the Western financial system,” says Jason Tuvey, deputy chief emerging markets economist at Capital Economics.
“I think that both countries have seen the effects that sanctions have had on Russia and, therefore, they are looking to cut on their reliance on the US dollar so that they can reduce the likelihood of something like that happening to them while also building mutual dependency between each other.”
China’s push for dominance
Although the currency swap is primarily aimed at non-oil trade, it still reinforces China’s trading relationship with the world’s largest oil exporters. The world’s second-largest economy is also the top client of Saudi Arabia’s crude oil, of which it purchased more than 87 million tonnes in 2022 alone.
The agreement also gives China more leeway to price transactions of oil derivatives in yuan, a strategy it has been pursuing for several years. From the Saudi side, it helps the country in its efforts to diversify its economy and attract more investors to its ambitious Vision 2030 economic and social transformation programme.
At the same time, the agreement serves as a pilot project and a testing ground for the development of new non dollar-centric markets at a time when the Brics (Brazil, Russia, India, China and South Africa) group of economies — of which China is a key member — has extended an invitation to Saudi Arabia to join.
“I think this swap is one of several tools that China is using to increase their role in the global economy, or at least to signal their interest for that to happen,” says Rachel Ziemba, adjunct senior fellow at the Center for a New American Security.
“However, this is a country that already has very sizeable bilateral trade with Saudi Arabia, so I think it would be quite interesting to see whether this move will perhaps help increase the volume of demand for the riyal.”
Reducing reliance on the dollar as the currency of international trade — and thereby reducing US influence over the global financial system — is one of the key priorities for Brics and for China in particular, said Thomas Hill, senior program officer for north Africa at the US Institute of Peace, in a December note for the Atlantic Council.
“Any coordinated de-dollarisation effort, especially toward China’s renminbi, would diminish the ability of the United States to run large federal deficits and keep interest rates on accumulated debt relatively low,” he said.
The dollar remains the most commonly held currency in global foreign exchange reserves, but has seen its share fall from 71% to 59% between 2000 and 2022, according to International Monetary Fund data.
While Saudi Arabia’s currency remains pegged to the dollar, and uses the currency to price its crude oil exports, diversifying its economy would make the country less reliant on the currency.
According to Ms Ziemba, although China has benefited from its codependency with the US in the global monetary system, less reliance on the dollar may mean more independence in terms of monetary and economic policies for the Asian country.
“For China, greater use of the renminbi has strengthened some of the trade relationships that it already has, and it’s a way also to provide some credit to deficit buyers,” she says.
How long will the dollar stay strong?
A study from JPMorgan earlier this year highlights that the global transactional strength of the dollar remains undisputed, with its share of total international foreign exchange volumes standing at 88% for 2022.
“While it may be true that both countries might be interested in having a higher volume of transactions being done in local currencies, the Saudi riyal remains pegged to the dollar and the Chinese yuan also does to a lesser extent, so there are some inertia network effects that are still present, which make reducing their reliance on the dollar less attainable,” says Ms Ziemba.
“Less reliance on the dollar might mean a different sort of global volatility for Chinese capital markets, but I think that, ultimately, this is about building a new financial architecture that would allow China to set its own rules,” she continues.
On the other hand, China’s growing influence in the Middle East is sending alarming signals to Washington that a growing number of Arab states are looking to diversify their global partnerships. In addition to Saudi Arabia, Egypt and the UAE were also invited to join the Brics in August, with Algeria and Tunisia also applying (unsuccessfully) to join.
Saudi Arabia also agreed in March to become a “dialogue partner” in the Shanghai Cooperation Organisation, an international political and economic organisation founded in 2001 by China, which also includes Russia, India and Pakistan.
“Recently, we have seen Saudi Arabia lean more towards China and the Kingdom being the world’s biggest oil exporter, as well as the leader of the Muslim world, which means that it plays a very important role in the Middle East,” says Mr Tuvey at Capital Economics.
“I think that the US is starting to get somewhat concerned at the speed at which China has managed to pull Saudi Arabia into its orbit.”
