Saudi Arabia’s Crown Prince Mohammed bin Salman last week hosted a series of meetings in Riyadh between China’s President Xi Jinping and the leaders of countries in the Arab League, like some even more twisted version of the ‘Love Island’ dating program, in which the winners among the Arab League suitors ultimately are inveigled into enormous debt by the tall, dark and interesting Xi, and then into lifelong political and economic servitude when they cannot repay it. Whatever the pretext for this gathering, its ultimate mission was clearly stated at the series of meetings in January 2022 between senior officials from the Chinese government and foreign ministers from Saudi Arabia, Kuwait, Oman, Bahrain, and the secretary-general of the Gulf Cooperation Council (GCC). At these meetings, the principal topics of conversation were to finally seal a China-GCC Free Trade Agreement and to forge a “deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat.” At last week’s meetings, President Xi and Crown Prince Salman signed a China-Saudi partnership pact with King Salman, demonstrating still-deepening ties. The new pact pledges ‘cooperation’ in just about everything a country does, including finance and investment, innovation, science and technology, aerospace, oil, gas, and renewable energy, and language and culture. Whether Crown Prince Salman or any of the other Muslim leaders of the Arab League countries have registered precisely how China’s cooperation in language and culture manifested itself in its dealings with the Muslim Uighurs remains unclear.
Having got all the names gathered to sign these all-consuming cooperation agreements, Xi then identified two ‘priority areas’ that he believes should be addressed as quickly as possible: the transition to using the Chinese currency, the renminbi, in oil and gas deals done between the Arab League countries and China, and to bring nuclear technology (to do with power generation only, of course) to targeted countries, beginning with Saudi Arabia. On the first of these thinly-veiled programs to shift the centre of global power away from the U.S. and towards China, Xi said that the Shanghai Petroleum and Natural Gas Exchange would be “fully utilised in RMB [renminbi] settlement in oil and gas trade.”
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The trade-off for countries in the Arab League, the GCC, and any countries in the MENA region not covered by these organisations was clearly reiterated by Xi, although the spoiler alert is that it is all to do with money. “China will continue to import large quantities of crude oil on a long-term basis from GCC countries, and purchase more LNG,” he said. Presumably, just in case any of the assembled Presidents had not heard the bribe being offered clearly enough, he added: “We will also strengthen our cooperation in the upstream sector, engineering services, as well as storage, transportation and refinery of oil and gas.”
To look at the first of Xi’s urgent priorities – moving away from the core U.S. dollar pricing of the energy markets and substituting the renminbi instead – to begin with. China has long regarded the position of its renminbi currency in the global league table of currencies as a reflection of its own geopolitical and economic importance on the world stage. As analysed in depth in my latest book on the global oil markets, an early indication of China’s ambition for the RMB was evident at the G20 summit in London in April 2010, when Zhou Xiaochuan, then-governor of the People’s Bank of China (PBOC), flagged the notion that the Chinese wanted a new global reserve currency to replace the U.S. dollar at some point. He added that the RMB’s inclusion in the IMF’s Special Drawing Right (SDR) reserve asset mix would be a key stepping-stone in this context, and this occurred in October 2016.
China has also long been acutely aware of the fact that, as the largest annual gross crude oil importer in the world since 2017 (and the world’s largest net importer of total petroleum and other liquid fuels in 2013), it is subject to the vagaries of U.S. foreign policy tangentially through the oil pricing mechanism of the U.S. dollar. This view of the U.S. dollar as a weapon has been powerfully reinforced since Russia’s invasion of Ukraine and the accompanying U.S.-led sanctions that ollowed, the most severe of which – as with sanctions on Iran from 2018 – relate to exclusion from use of the U.S. dollar. The former executive vice-president of the Bank of China, Zhang Yanling, said in a speech in April that the latest sanctions against Russia would “cause the U.S. to lose its credibility and undermine the [U.S.] dollar’s hegemony in the long run.” She further suggested that China should help the world “get rid of the dollar hegemony sooner rather than later.”
Saudi Arabia, still regarded in the Middle East as one of its two leading powers – the other being Iran – has long been receptive to the idea of replacing the U.S. with the Chinese renminbi for its energy dealings with China. In August 2017, just after Saudi Arabia had been defeated in its 2014-2016 Oil Price War that it instigated to derail the threat to its power from the then-nascent U.S. shale oil sector, the then-Saudi Vice Minister of Economy and Planning, Mohammed al-Tuwaijri, told a Saudi-China conference in Jeddah that: “We will be very willing to consider funding in renminbi and other Chinese products.” Even more tellingly he said: “China is by far one of the top markets’ to diversify [the funding basis of Saudi Arabia] … [and that] We will also access other technical markets in terms of unique funding opportunities, private placements, panda bonds and others.” Given that the vast majority of Saudi government borrowing (including large bond and syndicated loan facilities) in the previous few years is denominated in U.S. dollars, a switch away from U.S. dollar funding would allow Saudi more flexibility in its overall financing structure, albeit after an initial dislocation connected to its de facto currency peg to the U.S. currency.
Turning to the second of Xi’s urgent priorities – bringing nuclear technology to the Arab League and GCC countries, starting with Saudi Arabia – there is a peculiar timing attached to the statement. Just before Christmas last year, news emerged that U.S. intelligence agencies had found that Saudi Arabia was manufacturing its own ballistic missiles with the help of China. Given China’s long-running and extensive ‘assistance’ to Iran’s nuclear ambitions, as analysed in full in my latest book on the global oil markets, this information was received very poorly in Washington, with the focus being on what Beijing’s endgame might be in building out the nuclear capabilities of rival key states in the Middle East.
Currently, the only Arab nation to have nuclear reactors is the UAE. Even with the U.S.’s extensive presence of military huge military bases in and around the UAE, Washington was “extremely concerned”, as a senior figure in the U.S. energy security complex exclusively told OilPrice.com last year, to find that China had been building a secret military facility in and around the UAE port of Khalifa. Based on classified satellite imagery and human intelligence data, U.S. officials stated that China has been working to establish “a military foothold in the UAE.” The UAE authorities stated that they were not aware of such activity being conducted by China at one of their biggest ports with months of extremely high levels of movement of enormous Chinese ships in and out of it day and night.
Saudi Arabia has stated several times that it wants to add around 17 gigawatts (GW) of nuclear capacity by 2040 and, to this end, wishes to bring two nuclear reactors with a combined capacity of 3.2 GW online by 2030. Previously, the Kingdom had been in talks to acquire nuclear technology from the U.S. under the ‘1-2-3’ protocol. As highlighted in 2019 by then-U.S. Energy Secretary, Rick Perry, Saudi Arabia had told the U.S. that it wanted to go ahead with a full-cycle nuclear programme, including the production and enrichment of uranium for atomic fuel. At that point, the U.S. made it clear that in order for U.S. companies to compete for Saudi Arabia’s project, Riyadh would need to sign an accord on the peaceful use of nuclear technology with Washington. The ‘1-2-3’ protocol was intended to limit the enrichment of uranium for arms purposes. Whether China will insist on such a protocol, or if it is in place will insist that it is adhered to also remains to be seen.
By Simon Watkins for Oilprice.com
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The first is the use of China’s petro-yuan for payments for China’s oil and gas imports from the Gulf Cooperation Council (GCC) countries. Speaking at the China-Arab States Summit, the Chinese leader demanded that they accept the petro-yuan as payment for China’s oil imports and also gas imports (from Qatar) from the region. It was inevitable that President Jinping would make such demand because China is the world’s largest economy based on purchasing power parity (PPP), it is the largest importer of crude oil and gas, it accounts for the largest share in global trade and its currency the Yuan has been one of five global reserve currencies since October 2019. Moreover, China is the principal market to where the bulk of Aran Gulf Countries’ oil and gas go.
Were Saudi Arabia and other GCC countries to accept the petro-yuan for payment, this would cut the petrodollar’s share in global oil trade by an estimated 21%. And with Russia selling its 8.0 million barrels a day (mbd) of crude and petroleum products in rubles and China paying for its almost 12 mbd of oil imports in petro-yuan, the petrodollar share could plummet by 60%. This could easily lead to a devaluation of the dollar by a quarter or a third against other major currencies and will undermine the US financial system which is the core of the US economy.
The second priority was to accelerate the signing of a free trade agreement with the GCC countries. This could open the way for the flow of hundreds of billions of Chinese investments to the Arab Gulf region along with free zones for Chinese factories to operate from the Gulf where energy prices are the cheapest in the world. In return, Saudi and other Gulf States could also invest in China the workshop of the world as part of their economic diversification.
The third priority is to sign a strategic partnership between China and Saudi Arabia going beyond energy and acting as a counterbalance to the United States.
The fourth priority is bringing Chinese nuclear technology to the GCC countries, starting with Saudi Arabia. Saudi Arabia has stated several times that it wants to add around 17 gigawatts (GW) of nuclear capacity by 2040 but without any restrictions on enriching uranium as the United States was demanding. Whether China will agree to that remains to be seen. However, China’s technical help to North Korea’s nuclear programme could mean that it won’t object to the Saudi demand.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert