Saudi Arabia and the Future of China-US Financial Balance of Power

Saudi Arabia controls a 10% of global oil production. They are the world’s biggest oil exporter with sales of $356 billion last year. China is the world’s biggest importer of oil. The annual value of global oil output is currently $2.5 trillion. If Saudi Arabia and OPEC were willing to accept China’s petroyuan contracts that would greatly boost the use of China’s currency compared to the dollar. The US dollar would still be dominant but it would be a significant shift.

There is a bill, No Oil Producing and Exporting Cartels Act, that has been re-introduced into the House and Senate in February, 2019 that would expose OPEC to US anti-trust legislation.

Saudi Arabia and OPEC have indicated that part of their response would be to accept China’s future contracts and petroyuan for oil sales. China has been trying to get more countries to accept oil and gas contracts in yuan. They have been able to get more traction by also backing the petroyuan with some commitments in exchangeability for gold.

Russia, Angola, Iran and Venezuela have been willing to accept some oil contracts in petroyuan.

Russia is China’s largest oil supplier and accepts Chinese RMB (the yuan) in payment. Iran is accepting yuan in payment for oil to evade US sanctions. Angola is China’s third largest supplier – and it not only accepts yuan in payment for oil, but made the China’s yuan its second currency in 2015, shifting firmly into China’s yuan-denominated circle of countries. Venezuela has been accepting yuan in payment for oil supplies since 2017.

Shanghai oil futures contracts by the end of September, 2018 had reached 16% of all contracts issued globally, while sales of WTI standard futures fell to 52% from 60% and those of Brent crude fell from 38% to 32%.

On March 22, 2019, 131 million barrels of Shanghai crude were traded with open interest of 28 million barrels. ICE Brent saw 946 million barrels traded with open interest of 2.4 billion barrels. This was more than eighty times that of the Shanghai crude and reflects the widespread use of Brent as a risk management tool across the global oil sector.

Shanghai crude has only been trading for 12 months – ICE Brent turned 30 last year.

Belt and Road

The countries aligned with China through the BRI (Belt and Road Initiative) form a significant monetary bloc and are already accepting the yuan as payment for commodities supplied to China, and as means of payment for goods supplied from China. In Pakistan with its large China Pakistan Economic Corridor the yuan is already the dominant currency held by the central bank in its reserves.

At the end of June 2018, the cumulative total of China’s commodity trade with BRI countries reached the equivalent of US$5 trillion – with the yuan being the primary vehicle for this enormous trade volume. HSBC (Hong Kong Shanghai Bank) forecasts the BRI is likely to add an extra $2.5 trillion in new trade internationally each year.

SOURCES- Asia Pacific Journal, Reuters
Written by Brian Wang,

12 thoughts on “Saudi Arabia and the Future of China-US Financial Balance of Power”

  1. Irrelevant topic. These are central bank reserves, and are only about 2% of global monetary assets, 85% of which is USD. The whole “reserve” topic is too small to write about. Wolf forgot to mention that in 2008-2012, about 80% of all the central bank reserves in EUR were pledged as collateral for the USD swap lines they ECB had with the Fed…..

    RMB outside of China doesn’t even register as a rounding error in global financial assets (which is just north of $230 trillion, $400 trillion if you include all capital stock).

  2. 98% of all BRI trade is denominated in USD. And 99% for rest of China trade. That, in itself, is enough evidence to reject any notion of “petro/soy bean/semiconductor/ RMB”. But I have to say, the Chinese propagandists are pretty good at putting ideas into people’s heads.

  3. Chinese hand-waving (whatever the hanzi character is for that). Aramco will never sell oil or gas to China for RMB. Many reasons. One, money tied up in a non-convertible currency that can only be spent on Chinese produced items (85% of imports to KSA are non-China). No flexibility. KSA is a dollarized country, and Aramco specifically. Especially if they float a part of Aramco on the Big Board, you won’t be seeing any RMB contracts. The other side of Aramco’s (and KSA, same thing) balance sheet is USD, you’ll have a asset-liability mismatch with a non-convertible liability. Why even think about it the risk, there is no hedge? Usually buyers of product have leverage, but not when it comes to oil and gas. Here, the seller does, and China is in very weak negotiating position. Even with a steep price premia. KSA, and Arabia in general is a hugely face-saving culture (much like Asia). Selling oil for potentially useless RMB is not a winning strategy, with risk to lose face, make mistakes. Lastly, the US will never let KSA do this. The U.S. has tremendous leverage over KSA.

    China is floating this concept because of one reason – they are running out of money. Their fx reserves are down over a trillion and when the trade embargo (call it for what it is) kicks in, their cash burn will last about 24 months. It will take longer if they quit the BRI strategy, but that would be a huge face loss. I bet China rather runs out of cash before losing face.

  4. Stalin’s Soviet Union sounds pretty bad to me. From Wikipedia:

    “Prior to the collapse of the USSR and the archival revelations, some historians estimated that the numbers killed by Stalin’s regime were 20 million or higher.”

  5. The yuan is schizophrenic, like the government it represents. That is a lesson that countries such as Iran, Venezuela, Angola, Pakistan, and the other world superstars must learn.

  6. Libya and Gaddafi the bad guys?
    And why?
    The Soviet Union bad guys?
    You have watched one too many Hollywood movies my friend!

  7. Being the largest importer is a sign of weakness not of strenght
    Being the largest exporter means that you are strong economically
    China is starting to undermine the dollar just now
    Give them some time
    My forecast is that the yuan will pass the 30% mark within 5 years. then the dollar will be cooked

  8. What’s that Chinese saying about the ideogram for “disaster” having both “luck” and “opportunity” little ideograms penned in as well?

    Truth: every nation has to DEFEND her sovereignty in world trade, politics, jurisprudence and academics.  

    Even the “bad actor” countries, once Libya and Moammar Qaddifi, once Iraq and Saddam, once Venezuela then again and now Venezuela, and once Cuba and Castro, and still kind of, … once the Soviet Union, and still kind-of the Russian Federation, once Cambodai, once Myranmar, once … 

    Some countries have engineered quite strong currencies, a combination of quantity, liquidity, fiduciary conservativeness, adherence to Bretton Woods II, and a dynamic economy producing a supercapacity of goods and services, military competence, pölïtical acuity and both academic and industrial prowess.  

    In so doing, the EuroZone created its reserve currency.
    The US does. Britain does.
    China, late to the game, does, but not to the same degree. 
    Japan does, tho’ she’s a bit small. 

    China now produces a majority of items that non-productive nations might want to import. They’re masters of it. Tools, computers, chips, phones, internet stuff, foodstuffs, toys, garments, rugs and furnishings, everything. 

    So, the “petroyuan” is a compelling trade currency for the Great Oil Barons of the Mideast. Take a bunch of Chinese money, send them oil…, then buy a bunch of stuff back from them with it. Seems fair. 

    Just saying,

  9. People must be getting desperate if they believe that is even a possibility. Besises thw Prince would not even consiser it until Iran is destroyed because they know what would happen to them otherwise.

  10. Petroyuan might not be a good idea if China wants to devalue their currency. The price of a barrel of oil could skyrocket if the market believes that currency devaluation is a given in the future.

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