Deepening economic relations between China and Saudi Arabia will encourage the use of the yuan for oil purchases, S&P Global Ratings said in a report on Tuesday. However, it will take some time for these transactions to become profitable.
Non-oil-based ties between the two countries, boosted by President Xi Jinping’s visit to the Gulf state in December 2022, are expected to provide “more opportunities” for the use of the Chinese currency in paying for bilateral projects “across a growing range of sectors.”
Riyadh’s Saudi Vision 2030 economic transformation initiative will shape Sino-Saudi relations “very different from what we have seen in the past” and increase the use of the yuan in Saudi Arabia, said Charles Chang, Greater China country head at S&P.
“This affects many sectors, larger financial flows in both directions and many more companies,” Chang said in an interview.
“The economic and strategic orientation with regard to development plans” could further strengthen the yuan in Saudi Arabia despite general geopolitical tensions, he added.
01:34
China builds world’s ‘heaviest’ oil and gas platform for Saudi Arabia
China builds world’s ‘heaviest’ oil and gas platform for Saudi Arabia
The yuan’s share of world trade has tripled in the last two decades, according to S&P, from 4 percent to 13 percent.
However, the use of the Chinese currency – including for processing oil transactions as the petroyuan instead of the petrodollar – could currently be risky, the rating agency said.
The limited use of the yuan in international trade and finance means that accumulation of the currency outside China would incur “significant costs” and “increase currency risks.”
Most major oil exporters, including Saudi Arabia, Oman and Kuwait, have “significant” positive trade balances with China. A switch to pure yuan trading, S&P said, would generate more revenue than expenditure for them.
“Some of it could be held or invested, but the surplus petroyuan must be converted into other currencies, creating additional costs and exchange rate risks,” the report said.
In some countries in the Middle East, the turnaround is already taking place.
S&P’s Chang said most Middle Eastern countries – particularly the Gulf states – could follow Saudi Arabia’s example and adopt the yuan on a larger scale, but only after decades. The use of the renminbi in oil-producing countries will largely depend on whether they can effectively issue the currency like Riyadh, he added.
According to the S&P report, China may need to take the next step.
“Beijing has not yet presented a roadmap to resolve the problems and liberalize the country’s currency and capital movements,” the authors say. “This leaves a high degree of uncertainty about its ability to manage future petroyuan-related risks.”
