China investment in Saudi Arabia’s Saudi Aramco

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China President Xi Jinping Saudi Arabia King Salman Bin Abdulaziz Al Saud
China’s
President Xi Jinping shakes hands with Saudi Arabia’s Crown
Prince Salman Bin Abdulaziz Al Saud after a welcoming ceremony at
the Great Hall of the People in Beijing March 13,
2014.

REUTERS/Lintao
Zhang/Pool


  • Through its reported offer to invest in Saudi Aramco,
    the Chinese are laying the groundwork for a profound economic
    shift in the Middle East and the world.
  • China has the potential to upend the way oil is
    traded. 
  • Saudi Arabia and China stand to gain from this
    geoeconomic shift — but what about the United States?

 

Since the election of Donald Trump, relations between Saudi
Arabia and the United States have seemingly returned to their
halcyon days.

Saudi officials have been energized by Trump’s desire to roll
back Iranian influence and his support for Saudi
economic reforms, and they are enthusiastic about the two
countries’ newfound unity of purpose.

But Saudi Arabia is not just being courted by the Trump
administration. Without the pomp and circumstance of the Riyadh
summit, where Trump addressed representatives from across the
Muslim world earlier this year, the Chinese government is taking
quiet steps to bring Saudi Arabia’s hydrocarbon reserves firmly
into its orbit.

Through its ambitious Belt and Road Initiative and
a reported offer to invest in
the kingdom’s state-owned oil company, Saudi Aramco, the Chinese
are laying the groundwork for a profound economic shift in the
Middle East and the world.

As it has grown over the last three decades, China
has slowly become a much more
important energy partner to Saudi Arabia and Gulf states.

Its emergence as an economic powerhouse has increasingly fueled
its ambition to dictate the rules of the energy market: In recent
years, it has scaled down its share of energy imports from OPEC
members in favor of non-OPEC countries, primarily due to its
preference to purchase oil and gas in yuan or the local currency
of the exporter, rather than U.S. dollars.
China imports approximately
one-quarter of its energy from Saudi Arabia, but Russia recently
supplanted the kingdom as China’s top energy producer.

China’s fastidious control over its own currency is the first
step toward upending the way oil is traded. 

China’s fastidious control over its own currency is the first
step toward upending the way oil is traded. 

In return for conducting energy sales exclusively in dollars, the United States
agreed to sell Saudi Arabia advanced military equipment.Forged by
U.S. President Richard Nixon and Saudi King Faisal bin Abdulaziz
Al Saud in 1973, the petrodollar system has wedded the greenback
to the world’s most sought-after commodity.

One obvious reason China wants oil to be traded in yuan is to
increase global demand for yuan-denominated assets. This would
increase capital inflows and may eventually lead to the yuan
being a plausible global alternative to the American dollar.
Saudi Arabia is OPEC’s historic swing producer and price arbiter
— if it agreed to conduct transactions in currencies other than
the dollar, other OPEC producers would be forced to follow suit.

Beijing’s thinking is also influenced by geopolitical
calculations. China’s return on investment in Saudi
infrastructure could take decades, but Beijing would gain a
valuable foothold in the Gulf and possibly persuade one of the
world’s leading oil producers to upend the way oil is traded.

Moreover, Saudi Arabia and its Gulf allies, especially the United
Arab Emirates, provide a valuable hub to Middle Eastern and
African markets through their ports, airports, and global
networks. This spring and summer, Beijing and Riyadh announced a
number of deals in various sectors,
including increased energy exports and
a reported $20 billion shared investment fund.

The equation is much more difficult for Saudi Arabia and the
other oil-producing countries in the Gulf. On one hand, Saudi
Arabia’s alliance with the United States, however shaky, is the
bedrock of regional security. On the other hand, growth in energy
consumption will continue to be centered east of the kingdom, not
west.

The Chinese have not given Saudi Arabia much time to consider its
options. Chinese state-owned oil companies PetroChina and Sinopec
have already expressed interest in a
direct purchase of 5% of Saudi Aramco. This could prove to be a
boon for Crown Prince Mohammed bin Salman, who has been eager to
achieve a $2 trillion valuation of Aramco in a highly anticipated
initial public offering, which is currently scheduled for 2018.

Considering the depressed state of the oil market, investors may
be hesitant to meet the targets for Aramco’s valuation that the
Saudi leadership has laid out. A private Chinese placement could
solve this dilemma — and allow Riyadh to delay the IPO in the
hopes that oil prices will improve. While this investment may not
explicitly require that Saudi Arabia agree to trade in yuan, it
would give China leverage toward that
goal. For
Mohammed bin Salman, Chinese investment in Aramco could
kick-start a new economic partnership with Beijing.

For Mohammed bin Salman, Chinese investment in Aramco could
kick-start a new economic partnership with Beijing.

 As part of its economic reform, Saudi Arabia’s
ambitious Vision 2030 plan intends to raise foreign direct
investment from 3.8% of GDP to 5.7%, or an additional $12 billion
per year.

It is a far safer bet that China would be able and willing to
inject that type of money into Saudi Arabia than U.S. private
equity and hedge funds. The main reason for this is the
difference in Chinese and Western time horizons when considering
return on investment. While Western governments and companies
have historically had appetite for infrastructure projects that
offer a return on investment in a maximum of 30 to 40 years, the
Chinese are playing a much longer game — in some cases investing
in projects that break even in more than 100 years.

Saudi Arabia and China stand to gain from this geoeconomic shift
— but what about the United States? For all its talk of remaking
the U.S. economy, the Trump administration must heed the changing
economic currents. Given the depths of Beijing’s interest in
Saudi Aramco, it seems many policymakers in the Gulf and the West
do not fully appreciate the geopolitical interests at stake.
Aramco, formerly the Arabian-American Oil Company, will not
rebrand itself — but it may effectively become “Archco,” the
Arabian-Chinese Oil Company.

Asked how he went bankrupt, a character in Ernest
Hemingway’s “
The Sun Also Rises” responded:
“Two ways. Gradually and then suddenly.”

It’s unlikely the petrodollar system will be fully replaced
by an equivalent “petroyuan” system, but the dollar’s monopoly on
major oil sales may loosen gradually — and then suddenly. That
gradual process may have already begun.

Get the latest Oil WTI price here.

Read the original article on Foreign Policy. “Real World. Real Time.” Follow Foreign Policy on Facebook. Subscribe to Foreign Policy here. Copyright 2017. Follow Foreign Policy on Twitter.



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