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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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The Wider Ramifications Of A China-Aramco Deal

Aramco pipelines

The Saudi government is indeed in advanced talks with several Chinese entities – sovereign wealth funds and oil companies – to sell a 1 per cent stake in its flagship company, Saudi Aramco, OilPrice.com can confirm from a number of banking and oil industry sources close to the deal.

The sale of such a strategic stake in such a key company in Saudi Arabia to a Chinese entity would mark a decisive shift of power in the Middle East towards China and away from the U.S., further fracturing the already-strained 1945 core relationship agreement between Washington and Riyadh. For China, Saudi has long been a prime target of its overarching strategy to replace the U.S. not just as the world’s largest economy by nominal GDP by 2030 at the latest (it is already the world’s largest economy by purchasing power parity, the largest manufacturing economy, and the largest trading nation) but also as the major geopolitical power in many of the U.S.’s key spheres of influence. Related: Russia Boosted Oil Production In April

It is vital to understand in this context that the sale of a significant stake in Aramco to China is not a new idea but rather was seriously considered back in 2017/18/19 by senior Saudis when it became clear that there was no interest by any major international stock exchange in being the international listing destination for Aramco’s planned initial public offering (IPO), analysed in depth in my last book on the oil markets. The New York Stock Exchange (NYSE) had been one of the original top-two favoured candidates, alongside the London Stock Exchange (LSE), as these two bourses are regarded as the most liquid, most traded, and most prestigious stock exchanges in the world. Early on, though, a number of major problems began to bubble up for a listing of Aramco in the U.S., including a growing awareness of the lies from Saudi Arabia about oil reserves, spare capacity, tax rates, concessions, and non-hydrocarbons activities plus Saudi Arabia’s perceived links with the ‘9/11’ terrorist attacks.

This overwhelmingly negative sentiment was pervasive in the U.S. even before Saudi continued the indiscriminate bombing of Yemen, led the way in the international ostracising of Qatar, kidnapped Lebanon’s then-President Saad Hariri and forced his resignation (allegedly), and murdered the journalist Jamal Khashoggi, which even the CIA said would never have been done without MbS’s personal go-ahead. The same concerns weighed on an international listing for Aramco on the LSE and attempts by LSE chief executive officer Xavier Rolet and then-U.K. Prime Minister Theresa May to forge some sort of compromise listing solution for Aramco in London ultimately failed due to investor concerns over the same issues plus the lack of transparency of Aramco and the likely treatment of minority shareholders.

Given this, and how much of his personal reputation he had invested in Aramco being able to easily offer 5 percent of its stock for at least US$100 million – which would value the entire company at US$2 trillion – Saudi Crown Prince Mohammed bin Salman (MbS) was desperate to save face any way he could and engaged in talks to do a private placement of Aramco’s entire 5 percent stake with Chinese buyers.

The beauty of this from MbS’s perspective was that all details of the deal would be kept secret including, most importantly for his international and domestic credibility, the price per share and, therefore, the overall valuation for Aramco that this price would imply. Almost perfect though this solution would have been (the only downside being that there would have been no truly international element to the IPO, as MbS had promised, although he could have argued that this was due to unfair prejudice on the part of the West against Saudi Arabia’s business practices) a problem arose with it in that China sought to tie in its assistance with the notion of Saudi Arabia accepting the renminbi (RMB) currency in payment for crude oil supplies.

This would have infuriated the U.S. for which the relationship with Saudi Arabia was already becoming increasingly strained, although it would have made sense for the Saudis, Mehrdad Emadi, head of global risk analysis firm, Betamatrix, in London, exclusively told OilPrice.com last week. “The vast majority of Saudi government borrowing in the previous few years had been denominated in U.S. dollars, so a switch away from dollar funding would have allowed Saudi more flexibility in its overall financing structure,” he said. Related: Three Things That Will Drive Oil Prices In May

Following this, the then-Saudi Vice Minister of Economy and Planning, Mohammed al-Tuwaijri, told a Saudi-Chinese conference in Jeddah at the end of August 2017 that: “We will be very willing to consider funding in renminbi and other Chinese products.” Even more telling was when he said that China was: “By far one of the top markets” to diversify the funding basis of Saudi Arabia and that: “We will also access other technical markets in terms of unique funding opportunities, private placements, panda bonds and others.” These comments came during the visit of high-ranking politicians and financiers from China to Saudi Arabia, which featured a meeting between King Salman and Chinese Vice Premier, Zhang Gaoli, in Jeddah. During this visit, Saudi first mentioned seriously that it was willing to consider funding itself partly in Chinese yuan, raising the possibility of closer financial ties between the two countries.

Indeed, at these meetings it was also decided that Saudi Arabia and China planned to establish a US$20 billion investment fund on a 50:50 basis. According to comments at the time from then-Saudi Energy Minister, Khalid al-Falih, this fund would invest in sectors such as infrastructure, energy, mining and materials, among other areas. The Jeddah meetings in August 2017 followed a landmark visit to China by Saudi Arabia’s King Salman in March of that year during which around US$65 billion of business deals were signed in sectors including oil refining, petrochemicals, light manufacturing and electronics.

This caveat of selling oil to China denominated in RMB and not U.S. dollars, OilPrice.com understands from sources close to the current Saudi Aramco talks with China, is still central to the conditionality of Beijing taking the 1 percent Aramco stake. “Increasingly marginalising the U.S. dollar in favour of boosting the role of the renminbi is also a central lever through which China is seeking to undermine the U.S.’s influence around the world,” highlighted Emadi.

In fact, as early as the G20 summit in London in April 2010, Zhou Xiaochuan, then-governor of the People’s Bank of China (PBOC), flagged the notion that the Chinese wanted a new global reserve currency to replace the U.S. dollar at some point. The long-planned sequencing for this to occur was: the renminbi’s inclusion in the Special Drawing Rights (SDR) reserve asset mix (which happened in 2016); increasing its use as a trading currency (which naturally followed that); its use as the key currency of an international energy trading exchange (which occurred with the launch of the renminbi-denominated Shanghai International Energy Exchange in 2018); and increasing calls from big oil producers and other major trading nations to use the renminbi (which has occurred frequently since the renminbi’s inclusion in the SDR mix).

Only recently in this latter context, for example, Leonid Mikhelson, chief executive officer of Russian oil major, Novatek, said that future sales to China denominated in renminbi are under consideration and that U.S. sanctions accelerate the process of Russia trying to switch away from U.S. dollar-centric oil and gas trading and the damage from potential sanctions that go with it. “This has been discussed for a while with Russia’s largest trading partners such as India and China, and even Arab countries are starting to think about it... If they do create difficulties for our Russian banks then all we have to do is replace dollars,” he said. “The trade war between the U.S. and China will only accelerate the process,” he added.

Moreover, under the auspices of former U.S. President, Donald Trump, when a sea-change in foreign policy occurred that meant that U.S. dollar-centric sanctions changed from being merely an instrument of policy against countries to the policy itself, momentum has built in many key petro-states for a change away from dependence on the U.S. dollar, said Emadi. “For a long time there was no real alternative for big oil producers such as Iran, Venezuela, and even Russia that were on one of the U.S.’s sanctions lists to sell their oil in any other currency than the U.S. dollar but increasingly there will be other options, with China leading this strategic shift,” he told OilPrice.com. “The U.S.’s view is that its dollar is the only game in town but to use its currency to punish other countries is highly likely to work in favour of the decisive marginalisation of the power of the U.S. dollar, and therefore also of the U.S., within the next decade,” he concluded.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on May 04 2021 said:
    Saudi Aramco is offering to sell to China 1% stake reportedly for $19 trillion. But this sale will never go through because it doesn’t involve production assets but only visible assets like petrochemical plants, refineries and pipelines.

    Moreover, neither China nor any buyer in the world will be willing to pay $19 trillion for 1% stake without a fully independent audit of Saudi proven oil reserves. Paying $19 trillion for assets like refineries and petrochemical plants might be excessive even for China. The authenticity of Saudi reserves was the major reason why Saudi Aramco’s foreign IPO failed. The other reason is the risk of US litigation relating to the 9/11 bombing of the World Trade Centre in New York.

    The potential sale to China has nothing to do with the petro-yuan. China can demand any day of the year that Saudi Arabia accepts the petro-yuan as payment for its Saudi crude oil imports or else it will lose its market share in the Chinese oil market. But China isn’t in a rush knowing that the petro-yuan is going from strength to strength in the global traded oil market and that time is on its side.

    Sooner or later, Riyadh will find itself between a rock and a hard place – lose the Chinese market or spark the ire of Washington.

    On balance, I think Saudi Arabia will compromise by accepting the petro-yuan for oil exported to China and the Asia-Pacific countries, the Euro for exports to the European Union (EU) and the petrodollar for exports to the United States. Even such a compromise will still tip the balance in favour of the petro-yuan since 75% of Saudi oil exports go to China and the Asia-Pacific region.

    The Chinese would like to see global currency usage reflect the shift in global economic power. At the moment, most global trade is conducted in US dollars and more than 60% of all global foreign exchange reserves are held in US dollars. This gives the United States an enormous built-in advantage not least among them using the dollar in sanctions against any country that the United States wants to impede its progress or doesn’t see eye to eye with.

    The petrodollar system provides at least three immediate benefits to the United States. It increases global demand for US dollars. It also increases global demand for US debt securities and it gives the United States the ability to buy oil with a currency it can print at will. In geopolitical terms, the petrodollar lends vast economic and political power to the United States. Maintaining the petrodollar is America’s primary goal. Everything else is secondary.

    Furthermore, China knows that by undermining the petrodollar it also undermines the US financial system and causes the dollar to devalue quickly.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Robert Berke on May 04 2021 said:
    “Importantly, the Crown Prince said Saudi Arabia “firmly supports China’s legitimate position on the issues related to Xinjiang and Hong Kong, opposes interfering in China’s internal affairs under any pretext, and rejects the attempt by certain parties to sow dissension between China and the Islamic world.”
    Plainly put, Saudi Arabia has undercut the current US campaign against China regarding Xinjiang. It is a snub to the Biden administration. https://asiatimes.com/2021/04/the-china-iran-pact-is-a-game-changer/.

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