Credit rating agency Standard & Poor’s said in a report released on Tuesday that strengthening economic ties between China and Saudi Arabia would promote the idea of using the yuan to buy oil, but it would take more time before such transactions become profitable.
Chinese President Xi Jinping’s visit to Riyadh in 2022, for the first time in six years to attend the first China-Arabic summit and to participate in the China-Gulf summit, triggered a wide range of measures to transform Saudi-Chinese relations from oil-based to more comprehensive.
The visit resulted in the signing of a comprehensive Saudi-Chinese strategic partnership agreement, and on the sidelines of which 34 agreements worth a total of $ 50 billion were signed between the two sides, covering the fields of tourism, entertainment, mining, renewable energy, and financial market development.
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Vision 2030
Charles Zhang, head of corporate division for the Greater China Region (S&P), noted that Saudi Vision 2030 for economic transformation will make relations between China and Saudi Arabia “very different from what we have seen in the past” and increase Saudi Arabia’s use of the yuan.
“This includes many sectors, much larger financial flows in both directions, and more companies,” Zhang said in an interview.
He stressed that ‘economic and strategic alignment in development plans’ could strengthen the yuan’s position in Saudi Arabia, despite widespread geopolitical tensions.
The report’s authors noted that China’s trade with the Middle East tripled over the past two decades adds possibilities for wider use of the yuan among Gulf states.
China promotes the yuan as an alternative currency in international trade and as a reserve currency to keep its cross-border financial activity stable in the face of exchange rate risks and the possibility of denying access to foreign institutions or international payment systems.
The yuan’s share of global trade has tripled over the past two decades, from 4 percent to 13 percent, according to S&P.
Deals to buy yuan oil will enable China to buy fuel without threat from its main geopolitical rival – the United States – whose dollar is used as a global reserve currency and has a great deal of economic influence.
However, the ratings agency said that using the Chinese currency — including to settle oil transactions as ‘petroyuan’ instead of ‘petrodollar’ — could be risky for now.
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Obstacles to the use of the yuan
The report identified the first obstacle in that the yuan is not widely used in international trade and finance. Accordingly, trading oil in yuan would pose additional risks to oil exporters, represented by huge inflows of Chinese currency. In the absence of tributaries to exchange it, these countries will need to convert it into other currencies, which means incurring additional costs, in addition to facing exchange rate risks.
Complicating matters further is the fact that the Saudi currency, like other Gulf currencies, is pegged to the US dollar, and if the dollar appreciates against the yuan, as was the case over the past year, selling oil in yuan would reduce Saudi Arabia’s income in local currency.
Moreover, Beijing has yet to draw up a roadmap for resolving issues such as currency liberalization. This leaves a high degree of uncertainty about the ability to manage future risks associated with the exchange of yuan oil and hinders the wider use of the currency in trade.
Some Middle Eastern countries have already begun to transform. Iraq allowed a yuan trade settlement with China for the first time in February 2023, and a month later China used its currency to buy LNG produced in U.A.E..
S&P’s Zhang said most Middle Eastern countries — especially the Gulf states — may follow Saudi Arabia’s lead in adopting the yuan more, but for decades. He added that oil-producing countries would use the yuan would largely depend on how well they could spend the currency as effectively as Riyadh.
Moreover, Beijing has yet to draw up a roadmap for resolving issues such as currency liberalization. This leaves a high degree of uncertainty about the ability to manage future risks associated with the exchange of yuan oil and hinders the wider use of the currency in trade.
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