In a major boost to the de-dollarization campaign, the two central banks of People’s Republic of China and Kingdom of Saudi Arabia have signed a three-year local swap agreement. The development comes as China hosts the foreign ministers from the Arab and Muslim majority countries on their two-day visit to Beijing to discuss the prospects of peace in Gaza. Therefore, the swap agreement between the two largest consumer and exporter of the oil should be seen in the broader context of increasing Chinese presence in the Middle East.
The agreement, worth 50 billion yuan ($6.93 billion) or 26 billion Saudi riyal (SAR) is mutually extendable after the expiry of its validity of three years. It was signed between the People’s Bank of China and Saudi Central Bank or SAMA. In a statement released by the People’s Bank of China on Monday, the bank mentioned that the agreement will strengthen the financial cooperation and promote trade and investment in local currencies between the two countries. Saudi Central Bank’s (SAMA) official statement read that the agreement reflects “the strengthening collaboration between the two central banks.”
Further, indicating Saudi’s willingness to partner with China at international forums like IMF and World Bank, the Governor of SAMA said in an interview, “By adopting a collaborative and constructive approach in these (international) forums, the two central banks can work together to address shared challenges and promote joint initiatives.”
De-dollarization: China’s looking to replace dollar with yuan.
China currently boasts of nearly 30 currency swap agreements, which is the largest in the world. According to the observers, the latest swap agreement is yet another move by China to internationalize its currency yuan. One of the advantages of the agreement for China is the massive value of oil trade which is currently conducted in US dollar.
The total value of Saudi’s oil exports to China in 2022 was $65 billion, which is the largest oil trade by value. Saudi, however, currently settles its oil trade in dollars only because of the petrodollar system that was established in 1970s. However, the two countries are looking to diversify their trade kitty, with China expected to play a major role in Saudi’s efforts to diversify its oil-dependent economy.
In addition to that, the Belt and Road Initiative (BRI) of China provides it a lever to settle its loans and investments in yuan. In a recently concluded BRI Summit in Beijing, China signed several loan agreements with the countries of Global South that were denominated in yuan. Further, USA-led sanctions on Russia following the Ukraine war have also given a major push to the de-dollarization. For instance, India, who has Russia as its major oil supplier, had to find a way to circumvent the sanctions which prevented countries from trading with Russia in dollars. At regional forums as well we see the conversation around the need for trade in countries’ local currencies. The prime example of that is BRICS. However, let’s be realistic. Dollar is not going anywhere for the next few decades.
China’s increasing presence in the Middle East.
China’s flagship geopolitical and geo-economic initiative, BRI is a vital tool in its race to the top. In recent times, the BRI’s focus has shifted to the Middle Eastern and North African region because of their proximity to the major sea routes for trade and their strategic place in the world map. In the year 2021, the largest recipient of BRI funds was Iraq (nearly $11 billion).
China is expected to play an important role in Saudi’s Vision 2030 to develop infrastructure and end its reliance on oil. The two countries are, therefore, looking to diversify the trade basket. China’s efforts are also reflected in its public diplomacy. In September this year, the two countries signed a memorandum for knowledge exchange on modern transport systems, which is Vision’s crucial component.
China’s efforts are reflected in its thrust for public diplomacy in the region, a role that the traditional patriarch USA used to play. China brokered a mediation and establishment of formal diplomatic relations between the archrivals Saudi and Iran in 2023. We also saw how Iran, after the breakdown of nuclear talks with USA, revoked the contract with India for the development of Chabahar port, and gave it to a Chinese firm. USA’s Israel, or more broadly, Middle East policy is anti-Iran, which has led to close relations between China and Iran.
One of the reasons why China has become a dominant foreign player in the Middle East is the waning US influence in the region. USA’s foreign policy is currently more focused on the Indo-Pacific for greater space and influence in Asia, against China. One more reason why the Middle Eastern countries have thrown their lot in Chinese basket is USA’s stance on the Israel’s aggression in Gaza. With USA currently aligning with the Israel’s ‘war on terror’ in Gaza,