The Wider Ramifications Of A China-Aramco Deal

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By Simon Watkins

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. 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.

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.

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