How Xi Jinping is challenging dollar dominance with landmark Saudi Arabia deal

The warm welcome of the Chinese President during his visit to Riyadh has become a symbol of deepening ties between China and Saudi Arabia. Photo: Royal Court of Saudi Arabia/Anadolu Agency

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

The Chinese president's plane was accompanied by Saudi planes emitting green and white smoke, symbolizing the colors in the sky. Flag of the Persian Gulf country. Celebratory cannon shots rang out. Royal Guards on Arabian horses accompanied President Xi Jinping to the Royal Palace.

The warm welcome during his visit last December symbolized deepening ties between China and Saudi Arabia. Beijing, long one of the United States' closest allies in the Middle East, is trying to woo the Kingdom to the East, and Saudi Arabia's leader Mohammed bin Salman appears open.

President Xi has ambitions to challenge US global dominance. dollar. One way to do this is to start trading oil and gas in yuan.

Saudi Arabia, the world's largest exporter of crude oil, has traded oil exclusively in dollars since 1974. But talk of selling prices to China, the yuan, Saudi Arabia's largest trading partner, is accelerating. In November, China made a breakthrough.

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

The swap lines themselves are not controversial. China has an agreement with the UK, and the deal with Saudi Arabia is small in scale and represents only a fraction of Saudi Arabia's total trade with China. However, this deal marks a major turning point.

If oil and gas trading in China is carried out in yuan, it will be outside the Western financial system and effectively not subject to sanctions.

If China Oil and gas trading is carried out in RMB, so it is effectively not subject to sanctions. Credit: China Daily/Reuters

Creating a swap deal structure also makes it relatively easy to scale up. Although 50 billion yuan is a small amount, the total amount may well increase.

“This is basically a signal that Saudi Arabia is ready to use the yuan,” says Alicia Garcia-Herrero, chief Asia-Pacific economist at French investment bank Natixis and senior fellow at European think tank Bruegel.

Saudi Arabia is under pressure to accept the yuan because Russia, China's largest oil trading partner, is already doing so.

The idea that China would seriously challenge the dollar's dominance has been dismissed by many economists as far-fetched. The dollar is still in a different league in the world, as the majority of public and private debt around the world is held in dollars.

US currency is used in almost half of all payments worldwide, while the yuan is used . less than 4%, according to Swift. The dollar is freely convertible, the yuan is not, and China has capital restrictions.

However, the number of transactions involving the yuan is growing at a breakneck pace. Global use of Chinese currency in trade finance has tripled over the past three years. 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 central banks' use of Chinese swap lines around the world has roughly quadrupled since 2020.

“The share of trade finance is growing exponentially,” says Phyllis Papadawid. , Senior Fellow at Asia House. “It benefits from being used as a reserve currency. The overall share is still quite low, but the trajectory is very fast.”

It is possible that in a few decades the yuan could challenge the dollar, says Julia Gurol-Haller, lecturer at the department of international relations at the University of Freiburg.

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“I think that in a very, very long time This may become something obvious.”

In the near future, China may be able to protect its energy security as tensions with the United States increase.

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

President Xi Jinping is more vulnerable to financial sanctions than Vladimir Putin. Photo: Alexander Kazakov/Shutterstock

This has become a growing problem for Beijing since the war in Ukraine began.

“Beijing watched as Washington imposed sanctions on China. Russia's dollar reserves, which simply made the dollar useless for Russia,” says Vassallo.

President Xi is more vulnerable to financial sanctions than Vladimir Putin because China's economy is much more dependent on imports and exports. Expanding yuan trade with allies helps insulate China from any U.S. interference.

“In the short term, it's about the security of energy needs,” says Gurol-Haller.

The cornerstone of this strategy is The Middle East, and Saudi Arabia knows it.

“I was in Riyadh when the war broke out in Ukraine, and you could immediately see the rise of this new consciousness, the sense that this is our moment,” Gurol-Haller says. «Countries in the region have realized that they can use relationships with other major players in a different way.»

Before the war, Saudi Arabia employed a hedging strategy aimed at maintaining a balance between the United States and China, Gurol-Haller says. “Since February 2022, we have seen a dramatic shift towards China as an economic partner.”

China is Saudi Arabia's top export destination by value, and the Kingdom is China's second-largest oil supplier after Russia.

In March, China brokered a reconciliation agreement between Saudi Arabia and Iran, leaving the US on the sidelines.

“This shows that regional players no longer view China as just an economic partner, but as a rising political or security force,” says Gurol-Haller. “This is a paradigm shift.”

This summer, Saudi Arabia was invited to join the BRICS alliance. Photo: Gianluigi Guercia/AFP

That same month, Saudi Arabia agreed to join the Shanghai Cooperation Organization, a security alliance that includes China and India. This summer, Saudi Arabia received an invitation to join the BRICS alliance of Brazil, Russia, India, China and South Africa.

BRICS members are discussing how to create a common currency that can be used in emerging markets.

Gurol-Haller says: “This is so much discussed in this growing, non-Western or anti-American bloc. . This is the financial side of a larger geopolitical phenomenon, the goal of which is to reduce dependence on the US in terms of security and economics, and then in terms of currency.”

The next step for China and China. Saudi Arabia could be a potential partner on the stock exchange. In February, Hong Kong chief executive John Lee traveled to Saudi Arabia to encourage national oil giant Saudi Aramco to pursue a secondary listing in Hong Kong.

“The overall momentum of this building an anti-Western bloc will create geopolitical consequences for the US,” Gurol says. Haller. “In the Middle East we are already seeing a diminishing role for the United States. This is precisely the phenomenon that such swap lines reinforce.”

Although the dollar's dominance remains for now, the Beijing-Riyadh alliance shows that its primacy will not remain unchallenged.