China and Saudi Arabia sign currency swap accord to foster bilateral commerce, giving a boost to the yuan’s globalisation

The central banks of China and Saudi Arabia have agreed on their first currency swap to foster bilateral commerce denominated in the yuan and the riyal, taking a crucial step towards unlinking the world’s biggest oil trade with the US dollar.

The People’s Bank of China (PBOC) and the Saudi Central Bank (SAMA) signed a three-year swap agreement for a maximum value of 50 billion yuan (US$6.97 billion), or 26 billion riyal, according to statements on Monday by the two monetary authorities.

The pact, which can be extended by mutual agreement, reflects the strengthening collaboration between the two central banks, SAMA said. The Saudi central bank was looking to strengthen its connections with the PBOC via bilateral dialogues, collaborations in multilateral forums, as well as partnerships in international organizations, SAMA’s governor Ayman bin Mohammed Al-Sayari said in an emailed interview with the Post last month.

The agreement with SAMA is the 30th swap signed by the PBOC over the past decade, as the PBOC picked up the pace of the yuan’s worldwide usage. The Chinese central bank already has swap agreements with several countries in the Middle East: the United Arab Emirates in 2012, Qatar in 2014 and Egypt in 2016.
china and saudi arabia sign currency swap accord to foster bilateral commerce giving a boost to the yuans globalisation 1
Governor Ayman Al-Sayari inaugurated the opening ceremony of the Bank of China Limited branch in Riyadh. Photo: Twitter/SAMA

To reduce its dependency on US dollars, China has long been keen to increase the yuan’s use overseas. Russia’s invasion of Ukraine, as Western sanctions on Moscow showed how devastating it can be to depend on the dollar. In the last year, rising US interest rates also boosted the dollar’s value of the dollar, spurring some emerging economies to switch to cheaper yuan-denominated transactions.

The world’s second-largest economy, which is also the biggest global importer of crude oil, has been pricing the transactions of oil derivatives in its own currency since 2018. The contracts were designed to help China gain pricing power and internationalise the yuan, at a time when relations between Beijing and Washington were starting to strain.

china and saudi arabia sign currency swap accord to foster bilateral commerce giving a boost to the yuans globalisation 2
Saudi Central Bank’s governor Ayman bin Mohammed Al-Sayari (third left), Saudi Arabia’s Deputy Minister of Investments Saleh Al-Khabti (first right) and Bank of China’s president Liu Jin (second left) at the opening of the Bank of China’s branch in Riyadh on September 6, 2023. Photo: SAMA
That effort appeared to be bearing fruit, as yuan-denominated contracts on the Shanghai International Energy Exchange (INE) grabbed market share from dollar-denominated products traded in hubs like New York and London.

The internationalisation of the yuan was still a priority for the Chinese government, through the steady promotion of “bilateral local currency swaps and local currency settlement cooperation among central banks,” according to a November 9 article published by the PBOC’s Financial Stability Bureau.

China imported US$65 billion worth of Saudi crude last year, about 83 per cent of the kingdom’s total exports to China. Russia remained China’s top oil supplier last month, while imports from Saudi Arabia declined by 2.5 per cent from September amid restricted supply, according to Reuters.

Saudi Arabia seeks closer ties with central banks of China, Hong Kong

A currency swap is also crucial for the Saudi central bank to facilitate inbound investments to support the kingdom’s Saudi Vision 2030, a government programme aimed at reducing Saudi Arabia’s dependence on fossil fuels and diversifying its economy.

Bilateral dialogues can help the two nations foster mutual understanding by providing a platform to exchange “views, experiences, and policy insights,” said the SAMA governor, calling on central bankers on both sides to engage in dialogues at various levels, including high-level meetings and working groups.

The governor also encouraged Chinese banks to grow and expand in Saudi Arabia, highlighting the importance of foreign investment and fintech-driven financial inclusion. Bank of China opened its first branch in Riyadh in September, the second Chinese lender to establish a presence in the kingdom.

South China Morning Post

Related posts

Leave a Comment