How Xi Jinping is challenging dollar dominance with landmark Saudi deal

When Xi Jinping visited Riyadh, Saudi officials rolled out not a red but a purple carpet.

The Chinese president’s plane was escorted by Saudi jets spurting green and white smoke to symbolise the colours on the Gulf nation’s flag. Celebratory cannons were fired. A royal guard on Arabian horses escorted President Xi to the Royal Palace.

The warm reception during the visit last December was symbolic of deepening ties between China and Saudi Arabia. Long one of the US’s closest allies in the Middle East, Beijing is trying to woo the Kingdom towards the East – and Saudi leader Mohammed bin Salman appears open.

President Xi has ambitions to challenge the global dominance of the dollar. One way to do that would be to start trading oil and gas in renminbi.

Saudi Arabia, the world’s largest crude oil exporter, has traded oil entirely in dollars since 1974. But talks about pricing sales to China, Saudi’s largest trading partner, in renminbi have been accelerating. In November, China made a breakthrough.

China and Saudi Arabia signed an agreement to set up a currency swap line worth 50bn yuan (£5.5bn). The landmark deal means Saudi Arabia has free access to a supply of Chinese currency at a set exchange rate, and vice versa for Beijing and the Saudi riyal.

Swap lines in themselves are uncontroversial. China has one with the UK, and the deal with Saudi Arabia is small in scale, worth only a fraction of Saudi Arabia’s total trade with China. But the deal is a significant turning point.

If China’s oil and gas trade operates in renminbi, it will be outside the Western financial system and effectively unsanctionable.

Oil Tanker
If China’s oil and gas trade operates in renminbi, it will be effectively unsanctionable – China Daily/Reuters

Establishing the framework of a swap deal also allows it to be scaled up relatively easily. While 50bn yuan is small, the total size may well grow.

“It’s mostly a signal that Saudi is willing to use renminbi,” says Alicia García-Herrero, chief economist for Asia Pacific at French investment bank Natixis and a senior fellow at European think tank Bruegel.

Saudi Arabia is under pressure to accept the renminbi because Russia, China’s largest oil trading partner, already does.

The idea of China seriously challenging the dollar’s dominance has been dismissed by many economists as far-fetched. The dollar is still in a different league globally because such a large share of public and private debt worldwide is held in dollars.

The US currency is used in nearly half of all payments worldwide, while the renminbi is used in less than 4pc, according to Swift data. The dollar is freely convertible, the renminbi is not and China has restrictions on capital flows.

But the number of transactions involving the renminbi is rising at breakneck speed. In the last three years, global use of the Chinese currency in trade finance has tripled. In September, it overtook the euro as the second-most used currency in global trade. Data from the People’s Bank of China shows that, globally, central banks’ use of Chinese swap lines has roughly quadrupled since 2020.

“It is making exponential gains in the share of trade finance,” says Phyllis Papadavid, senior research advisor at Asia House. “It is making gains in its use as a reserve currency. The overall share is still quite low, but the trajectory is very rapid.”

In several decades’ time, it is feasible that the renminbi could challenge the dollar, says Julia Gurol-Haller, lecturer at the Chair for International Relations at Freiburg University.

“I think in the very, very long run this could be something that manifests.”

In the more immediate future, China may be able to protect its energy security as tension with the US intensifies.

“It takes the dollar out of the loop,” says Christopher Vassallo, a researcher at the Asia Society Policy Institute’s Center for China Analysis. “If China wants to pay Saudi Arabia for a certain amount of oil imports, they can use their currency.”

Putin
President Xi is more vulnerable to financial sanctions than Vladimir Putin – Alexander Kazakov/Shutterstock

This has become a mounting concern for Beijing since the onset of the war in Ukraine.

“Beijing watched Washington impose sanctions on Russia’s dollar reserves that simply made the dollar not useful for Russia,” Vassallo says.

President Xi is more vulnerable to financial sanctions than Vladimir Putin because China’s economy is much more dependent on imports and exports. Boosting renminbi trade with allies helps to insulate China from any US intervention.

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By Published On: December 25, 2023Categories: UncategorizedComments Off on How Xi Jinping is challenging dollar dominance with landmark Saudi deal

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About the Author: Patriotman

Patriotman currently ekes out a survivalist lifestyle in a suburban northeastern state as best as he can. He has varied experience in political science, public policy, biological sciences, and higher education. Proudly Catholic and an Eagle Scout, he has no military experience and thus offers a relatable perspective for the average suburban prepper who is preparing for troubled times on the horizon with less than ideal teams and in less than ideal locations. Brushbeater Store Page: http://bit.ly/BrushbeaterStore

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