Why would Saudi Arabia not give up the dollar for the sake of the Chinese yuan?

In the last few days, sources have indicated that the Kingdom of Saudi Arabia may switch to using the Chinese yuan instead of the US dollar, in its deals with Beijing, based on a number of facts imposed on the Kingdom ” “may be due to the need to strengthen its relationships with buyers of its oil.

The most prominent of these data is the nature of Saudi Arabia’s oil exports, which puts China first among the kingdom’s importers.

According to the Organization for Economic Co-operation and Development, the Kingdom’s first major export destinations are China with $ 45.8 billion, India with $ 25.1 billion, Japan with $ 24.5 billion, and South Korea with $ 19.5 billion, followed by the United States. State $ 12.2 billion.

With Saudi Arabia being the world’s largest oil exporter with a value of $ 145 billion, China is the largest buyer with $ 204 billion, according to figures provided by “eurasiareview” which dates back to 2019.

The Wall Street Journal said in an article published earlier this month that the Saudi authorities were in talks with Beijing to price some of its oil sales to it in yuan, “a move that would dominate the US dollar over the “Global oil market will decrease” and represents another shift for the largest crude oil in the world is an export to Asia, “according to the newspaper.

The majority of global oil sales (about 80%) are made in dollars.

The Saudis have been trading oil exclusively in dollars since 1974, following an agreement reached by the authorities with the administration of former US President Richard Nixon, which included security guarantees for the kingdom.

China offered yuan-denominated oil contracts in 2018 as part of its effort to make its currency tradable around the world, but that did not affect the dollar’s dominance of the oil market.

For China, the use of the dollar has become an obstacle to its economy, especially after the US sanctions against Iran over its nuclear program and on Russia in response to its invasion of Ukraine.

The use of dollars has become a brake on Beijing

The Wall Street Journal says in this regard that Beijing has intensified its courtship with the Kingdom of Saudi Arabia in recent years to persuade it to deal with it in yuan, as China has helped Saudi Arabia pursue its own ballistic missions. missiles, and it was consulted on a nuclear program, and began investing in Crown Projects Al-Ahed, Prince Mohammed bin Salman, represented the “NEOM” project, the future city.

Meanwhile, Saudi relations with the United States have deteriorated, specifically as a result of the human rights file, according to the same newspaper.

Saudi economic expert Nouf Al-Ghamdi believes that China has been trying for some time to get rid of the dominance of the US dollar in international trade transactions, within the framework of the “BRICS” union, which includes Brazil, Russia include. India, China and South Africa.

In an interview with Al-Hurra, Al-Ghamdi revealed that these countries have decided to support the levels of international trade between them through the use of their national currencies.

Al-Ghamdi also says that although most countries in the world compete to bring in foreign currencies, not necessarily to use their national currencies as a means of payment, “there are countries that seek to strengthen their economic position through their national to strengthen currency “in international markets, with reference to China.

Should Saudi Arabia use the yuan?

The report answers this question in the negative, referring to Saudi foreign exchange reserves, which amounted to $ 472.8 billion in 2020, despite the decline in exports and demand for oil due to the Corona epidemic.

Those reserves can comfortably cover Riyadh’s foreign debt, giving it a level of stability that makes it not consider replacing the dollar, compared to other countries of the Organization of Petroleum Exporting Countries (OPEC) that are under major trade and financial tekorte ly.

The expert adds that the yuan can not reach any position in the trading market.

In this regard, she says that although Beijing could conclude bilateral agreements with some countries to import oil and gas into yuan instead of the dollar, “so far the Chinese yuan has had no real impact on the reserve currency as it weight currently, according to the International Monetary Fund, reaches only 2.5 percent of the volume of reserve currencies, of which the dollar accounts for 55 percent, followed by the euro 19 percent.

On the other hand, she returns and says that “it is difficult to predict the effects associated with economic fluctuations and geopolitical changes that occur from time to time, but it seems that the recent developments due to the Russian-Ukrainian crisis on the one hand, and the fluctuations of the US economy on the other, could cause unprecedented changes in terms of reserve currencies.In the world.

What will Saudi Arabia benefit from using the yuan?

China needs its oil imports more than Saudi Arabia needs China’s domestic currency, so there is no real evidence that exports to China will decline if Saudi Arabia continues to use the US dollar, according to the same report.

Given that the yuan’s use in global transactions is very limited, and given the figures compiled by the Association for Global Interbank Financial Telecommunication, Bloomberg notes that “the yuan’s activity has risen to its second highest level ever in 2021 . ”

China is the world's largest importer of crude oil, with a daily average of 10 million barrels, and comes second after the United States in terms of consumption, with a daily average of 13 million barrels per day.

China is the world’s largest importer of crude oil, with a daily average of 10 million barrels, and comes second after the United States in terms of consumption, with a daily average of 13 million barrels per day.

However, the use of the yuan in world trade still did not exceed 2.7 percent, a modest ratio compared to the 41 percent who enjoyed the US dollar, which held first place for decades. And 36.6 percent who enjoy the euro.

The report pointed out that sterling alone had 5.9 per cent of market use, which is more than double the use of the yuan, even though the UK has a much smaller economy, while the Japanese yen uses as much as the yuan at 2.6 percent.

Despite the significant increase in the importance of the Chinese economy worldwide, the importance of the yuan as a currency has improved only slightly from its highs in 2015, when it reached fourth place.

Why is the yuan used only in 2.7% of global transactions despite being 14 percent of global GDP?

The yuan is the only currency issued by a global economic firm that has capital controls and fixed rates.

As such, any holder of Chinese currency faces a constant threat of sudden devaluation of the currency and the inability to use it freely for payments.

This is exactly what happened in 2015, when China’s central bank announced a sharp currency devaluation.

In this context, Al-Ghamdi believes that despite Beijing’s ambition to price many commodities in the Chinese yuan, especially oil, to increase the strength of the yuan as a reserve currency, China at the same time “does not want to reach it quickly for fear for a rise in the yuan exchange rate in a negative way. ” in its exports, “which could disrupt the project to generalize its use (the yuan).

Chinese capital management

The yuan can not replace the US dollar due to capital controls, fixed prices, and even worse, because the monetary policy of the People’s Bank of China is more aggressive than that of the Federal Reserve, which is a significant drop in global demand to the yuan.

One country is able to “save” it … How will Russia handle its “junk” oil?

Russian oil exports have declined as a result of Western sanctions imposed on them as a result of the war against Ukraine, while some parties have found an opportunity to buy this oil following the reluctance of original customers to become more cautious, according to ‘ a report by the magazine Economist.

It is also noteworthy that even large Chinese oil companies prefer the US dollar in international transactions.

If we look at the Shanghai Commodity Index, it can be seen that the yuan’s use in global oil transactions is very limited.

China’s seemingly large reserves of gold amount to less than 0.3% of money supply (M2) and its undoubtedly large US dollar reserves, at $ 3.35 trillion, barely cover its foreign exchange liabilities.

If oil and commodity producers in other countries, especially Latin America, have accepted China’s currency in the past, it was because of the huge debt obligations they had with the Asian giant, rather than for practical reasons related to the use of the reserve currency.

Therefore, the report advises any commodity producer intending to use the RMB instead of the USD to know that capital controls and price controls are very important threats, and there is no real indication that the PBoC will change any of these threats.
Based on these data, the report concludes that Saudi Arabia can use some yuan in its oil exports, but the truth is that no capital-controlled paper currency is a real alternative to other paper currencies, especially the major ones. one, the US dollar.

The report concluded: “Saudi Arabia may turn to gold or cryptocurrencies, but the latter will not replace the secure, printed paper currency, the US dollar.

Nouf, in turn, believes that strengthening the yuan at the expense of the dollar is not necessarily in the interest of countries whose local currency is pegged to the dollar, such as the Gulf countries and many other countries, and the reason is that the strong yuan means the weakness of the dollar, and therefore the weakness of those currencies pegged to the dollar.

In this regard, Nouf says, “The balance of international currencies and the difference in their strength among them is not an easy comparison, but rather that China itself will be affected by the weakness of the dollar against the yuan because its exports are very will be expensive for many countries linked to the dollar, while having large investments in US securities such as equities and bonds. Therefore, a weaker dollar also means poor returns on its investments.

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