Chinese President Xi Jinping is visiting Saudi Arabia this week for the first time in nearly seven years, during which he is expected to sign billions of dollars in deals with the world’s biggest oil exporter and meet with leaders from across the world. Middle East.
The visit is a sign that China and the Gulf region are deepening economic ties at a time when US-Saudi relations have collapsed following OPEC’s decision to cut crude oil supplies. As Xi wrote in an article published in Saudi media, the trip was aimed at strengthening China’s relations with the Arab world.
China is Saudi Arabia’s largest trading partner and a growing source of investment. It is also the biggest buyer of oil in the world. Saudi Arabia is China’s largest trading partner in the Middle East and the world’s largest supplier of crude oil.
“Energy cooperation will be at the center of all discussions between Saudi-Chinese leaders,” said Ayham Kamel, head of the Middle East and North Africa research team at Eurasia Group. “There is great recognition of the need to build a framework to ensure that this interdependence is taken into account politically, particularly given the scale of the energy transition in the West.
Governments around the world have pledged to drastically reduce carbon emissions over the next few decades. Countries like Canada and Germany have doubled their investments in renewable energy to accelerate their transition to net zero economies.
The United States has dramatically increased its domestic oil and gas production since the 2000s, while accelerating its transition to clean energy.
The Russian invasion of Ukraine in February sparked a global energy crisis that caused all countries to rush to bolster their supplies. And the West has further muddied oil markets by imposing an embargo and price cap on the world’s second largest exporter of crude.
Energy security has also increasingly become a key priority for China, which itself faces significant challenges.
Last year, bilateral trade between Saudi Arabia and China reached $87.3 billion, up 30% from 2020, according to figures from China Customs.
Much of the trade was oil-based. China’s crude oil imports from Saudi Arabia were worth $43.9 billion in 2021, accounting for 77% of its total merchandise imports from the kingdom. This amount also represents more than a quarter of Saudi Arabia’s total crude exports.
“The stability of energy supplies, both in terms of price and quantity, is a key priority for Xi Jinping as the Chinese economy remains heavily dependent on imports of oil and natural gas,” said Eswar Prasad, professor of trade policy. at Cornell University.
The world’s second largest economy is heavily dependent on foreign oil and gas. 72% of its oil consumption was imported last year, according to official figures. 44% of natural gas demand also came from abroad.
To At the 20th Party Congress in October, Xi stressed that energy security is a top priority. The comments came after a series of severe power shortages and the spike in global energy prices following Russia’s invasion of Ukraine.
As the West shunned Russian crude in the months after the invasion, China took advantage of Moscow’s desperate search for new buyers. Between May and July, Russia was China’s top oil supplier, until Saudi Arabia reclaimed the top spot in August.
“Diversity is a key ingredient for China’s long-term energy security, as it cannot afford to put all its eggs in one basket and become captive to another power’s energy and geostrategic interests,” said Ahmed Aboudouh, nonresident researcher of Middle East programs at the Atlantic Council, a DC-based research institute.
“Although Russia is a source of cheaper supply chains, no one can guarantee with the utmost certainty that Sino-Russian relations will continue to consolidate in 50 years,” Aboudouh said.
The Saudi Press Agency quoted Saudi Energy Minister Prince Abdulaziz bin Salman as saying on Wednesday that the kingdom would remain China’s “credible and reliable partner in this field”.
Saudi Arabia also has strong motivations to deepen its energy ties with China, according to Gal Luft, co-director of the Institute for Global Security Analysis.
“The Saudis fear losing market share in China to a tsunami of heavily discounted Russian and Iranian crude,” he said. “Their goal is to ensure that China remains a loyal customer even when competitors offer [a] cheaper product.
Oil prices have fallen back to where they were before the war in Ukraine on fears of a sharp global economic downturn. The extent to which the Chinese economy can accelerate next year will have a huge bearing on the severity of this crisis.
Beyond security of supply, Saudi Arabia could offer Beijing another prize with bigger geopolitical ramifications.
Riyadh is in talks with Beijing to price some of its oil sales to China in the Chinese currency, the yuan, rather than in US dollars, according to a Wall Street Journal report. Such a deal could give a boost to Beijing’s ambitions to expand the Chinese currency’s global influence.
It would also undermine the long-standing agreement between Saudi Arabia and the United States that requires Saudi Arabia to sell its oil only for US dollars and to hold its reserves partly in US Treasury bonds, all in exchange for American security guarantees. The “petrodollar system” helped preserve the dollar’s status as the world’s premier reserve currency and means of payment for oil and other commodities.
Although Beijing and Riyadh never confirmed the reported talks, analysts said it made sense for the two sides to explore the possibility.
“In the near future, Saudi Arabia could sell some of its oil and receive income in Chinese yuan, which makes economic sense because China is the kingdom’s largest trading partner,” said Naser Al Tamimi, associate researcher. principal at ISPI, an Italian thinker. tank on international affairs.
Some believe this is already happening, but neither China nor the Saudis want to point it out publicly.
“They know all too well how sensitive this issue is [is] for the United States,” Luft said. “Both parties are overexposed to the US currency and there is no reason for them to continue to conduct bilateral trade in the currency of a third party, especially when that third party is no longer a friend of one. or the other.”
Xi’s visit could mark another step “in the erosion of the dollar’s status” as a reserve currency, he added.
However, there are limits to growth links between Riyadh and Beijing.
“The Biden administration’s approach to the Middle East has concerned the Saudis, and they see a growing relationship with China as a hedge against potential U.S. abandonment and a leverage tool in negotiations with the United States. United,” said Jon B. Alterman, director of the Middle East program at the Center for Strategic and International Studies, a Washington DC-based think tank.
The Biden administration has shifted its political priorities, emphasizing the fight against China. At the same time, he has indicated his intention to reduce his own presence in the Middle East, raising concerns among his allies that the United States may no longer be as engaged in the region as it once was. .
“All that said, China-Saudi relations pale in both depth and complexity compared to Saudi-American relations,” Alterman said. “The Chinese remain a novelty for most Saudis, and they add up. The United States has been the foundation of how Saudis see the world and how they have seen it for 75 years. »
Despite the possibility of switching to yuan transactions, it is too early to say that Saudi Arabia will abandon the dollar in pricing its oil sales, analysts have said.
Kamal of Eurasia Group says it is “highly unlikely” that Saudi Arabia will take such a step unless there is an implosion in US-Saudi relations.
“In essence, there could be discussions about the price of barrels to China in yuan, but that would be limited in size and would likely only correspond to bilateral trading volumes,” he said.
Cornell University’s Prasad said countries like China, Russia and Saudi Arabia are all keen to reduce their dependence on the dollar for oil contracts and other cross-border transactions.
“However, in the absence of serious alternatives and with few international investors willing to trust the financial markets of these countries and their governments, the dominant role of the dollar in global finance is hardly seriously threatened,” did he declare.
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