Three global trends are coming together that could see the rise of the ‘petroyuan’, a move that could see China’s currency replace that of the US dollar in the oil market.
Firstly, Saudi Aramco, Saudi Arabia’s state-controlled oil company, has been raising bonds on the international market. Aramco needs cash to pay US$37.5 billion in dividends for the second half of 2020 and to fund its US$69.1 billion acquisition of 70 percent of Saudi Basic Industries (SABIC), paid by instalments until 2028. It raised a US$10 billion loan this year.
Secondly, the oil market has been hammered by COVID-19 as travel lockdowns bite. It has caused the biggest shock to global energy markets in decades. As a result, Aramco’s profit has dropped 50 percent for the first half of 2020. It isn’t alone – Western supermajors like Exxon and Chevron have also posted historic losses.
Thirdly, China has sought to promote international use of the yuan. As part of this strategy, it has aggressively promoted the ‘petroyuan’ – establishing a market for yuan-denominated crude oil futures in Shanghai, as well as encouraging oil producing countries like Nigeria, Venezuela, Iran, and Russia to accept the yuan as a form of payment.
“Long before Donald Trump came to power and began a trade war with Beijing, China was making noises about challenging the dollar’s dominance as the world’s universal currency,” noted Joseph Dana, editor-in-chief of emerge85, a lab that explores the change in emerging markets and its global impact.
“This would give China more control over its own economy and help with long-term economic projects designed to challenge the US as the world’s sole economic superpower. But unseating the dollar is much easier said than done.”
Aramco’s Yuan Bonds
This month however, Aramco has also raised the possibility of floating yuan-denominated bonds, a move that would mark a significant departure in a traditionally dollar-dominated industry.
A prospectus issued this month by the world’s largest oil company stated that renminbi notes “may be issued” under its bond program, though Aramco provided no details about the timing or scale of such an offering.
China is among the largest trading partners of Saudi Arabia, and one of the largest buyers of Saudi oil. In March 2017, King Salman signed up to US$65 billion worth of deals with Chinese President Xi Jinping during his visit to Beijing as part of the six-country trip through Asia. In 2019, Saudi Arabia exported US$40.1 billion worth of crude oil to China, or 16.8 percent of China’s total imported crude oil. Despite the COVID-19 pandemic, China’s appetite for oil is not expected to ease. Its transport sector is still heavily reliant on fossil fuels, while a burgeoning petrochemicals sector is racking up demand for crude oil.
The provision to include yuan-denominated bonds underscores both Asia’s growing importance to Aramco from a business perspective, as a high-demand market, and oil-producing countries’ deepening financial relationships with Beijing.
An issuance of yuan bonds by Aramco would also give the currency’s stature a substantial boost, as well as diversify funding sources for Aramco and the Saudi government, which owns the vast majority of the company.
As the Trump administration prepares to make way for incoming president-elect Joe Biden, Washington-Riyadh ties may be re-evaluated. Biden has been openly critical of Saudi Arabia and may strain the relationship with Riyadh’s ruling monarchs.
“It is past time to restore a sense of balance, perspective, and fidelity to our values in our relationships in the Middle East,” Biden told the Council on Foreign Relations last year. “We will make clear that America will never again check its principles at the door just to buy oil or sell weapons.”
However, what might be a barrier between building strategic ties with China is Saudi Arabia’s long-standing rivalry with Iran, which Washington supports through its ‘maximum pressure’ policy. Iran in particular was an early adopter of yuan-based oil sales given the US sanctions imposed on it.
This is not expected to change under a Biden administration. On the other hand, China is a part of the Joint Comprehensive Plan of Action (JCPOA) on the Iran nuclear deal. Biden has given hints that he may resurrect the nuclear deal, which floundered under President Trump.