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,