In another shift by the world’s top crude exporter toward Asia, Saudi officials are allegedly in active talks with Beijing to sell some of the Gulf nation’s oil in yuan rather than dollars, people familiar with the matter claim as cited by the Wall Street Journal reported Tuesday.
Saudi Arabia trades exclusively in US dollars since 1974 it received security guarantees from Washington in exchange for its loyalty to the petrodollar system.
The discussions between the two countries about pricing the oil contracts in yuan were initiated back in 2016, but they were recently reignited by the growing Saudi concerns over Washington’s commitment to the kingdom’s security and its dissatisfaction with the US government’s policies.
Considering the fact that over a quarter of the oil that Saudi Arabia exports ends up in China, denominating those deals in yuan would significantly boost the Chinese currency’s international profile.
With China being the kingdom’s largest trade partner, economic ties between Beijing and Riyadh have grown though many analysts doubt China’s willingness to replace the US as a security guarantor for the region.
According to the China Global Investment Tracker, which is run by the American Enterprise Institute, Saudi Arabia is among the top three countries in the world for Chinese construction projects and a central pillar of China’s Belt and Road infrastructure initiative.
Such a move would mean a profound shift for the oil market considering that over 80% of global oil sales are currently transacted in the US dollar, which has dominated the global financial system as a medium of exchange since WW2.
The US dollar supremacy is also the key reason why the US is able to impose powerful sanctions on countries like Russia and Iran and to cut them out of international financial transactions.
The Kingdom’s departure from dollars in oil contracts could also gain more traction and aid Beijing’s efforts to convince more countries – especially amongst the US’s foes- and international investors to transact in its currency.
Some Saudi officials favor the shift to the yuan saying it would reduce the risks associated with the capital controls Beijing imposes on its currency since the Kingdom could use part of new currency revenues to pay Chinese contractors involved in mega projects within the kingdom domestically.
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