China’s push for yuan-based oil trade with Saudi Arabia began with President Xi’s first visit to the kingdom in January 2016. Two years later, in March 2018, the Shanghai International Energy Exchange launched its first ever renminbi-denominated crude oil futures contracts, establishing a yuan-based oil pricing system and an international benchmark that competes with the US’s West Texas Intermediate and London’s Brent.

Despite this early start, progress in yuan-based oil trade between the two countries remains limited due to major obstacles that challenge the economic rationale of such trades. The first obstacle is that the yuan is not broadly used in international trade and finance. Given this, trading oil in yuan will incur additional risks for oil exporters (see “Challenges To Trading Oil In Renminbi Remain Significant,” published on Oct. 5, 2023). 

Most major oil exporters have substantial positive trade balances with China (Figure 2). If their trade with the country were fully conducted in yuan, they would have much more income than outlays in the currency. While some of this could be held or invested, the excess “petroyuan” will need to be exchanged into other currencies, thereby incurring additional costs and exchange rate risks.

Complicating this is the fact that Gulf exporters’ currencies are pegged to the US dollar, including those of Saudi Arabia, UAE, Iraq, Oman, and others. If the dollar appreciates against the renminbi, as it has been for the past year, selling oil in yuan will cut their incomes in domestic-currency terms. 

Moreover, Beijing has yet to lay out a roadmap for resolving these issues and for liberalizing the country’s currency and capital account. This leaves a high degree of uncertainty on the ability to manage future petroyuan-related risks. It also obstructs broader use of the currency in trade despite the substantial progress made so far. 

Since then, the People’s Bank of China (PBOC) has promoted the currency’s use mainly via two channels. First, through expanding trade and setting up bilateral clearing and settlement infrastructure for the trading of goods in yuan. Second, through developing and deepening the offshore renminbi markets that enable international participants to access renminbi financial markets (see “Four Checkpoints On The Path To Greater Renminbi Internationalization,” published July 10, 2023). 

China has made meaningful progress in the first channel. Its share of world trade tripled over the last two decades, from 4% in 2002 to 13% last year (Figure 3). As growing trade increases the scope for settlement in yuan, use of the currency in crossborder trade settlement has also tripled in this period, rising from less than 1% in 2012 to over 3% last year (Figure 4). 

The renminbi is currently the third-most-used currency in SWIFT trade finance settlements, accounting for 5.3%, just behind the euro’s 5.9%, although both remain far from challenging the dollar’s dominant 84% position. 

Weak economic rationale means the yuan’s entry into oil markets may need to rely on non-economic factors such as strategic considerations.

Escalating geopolitical events, shifting national interests, and growing non-US trade, particularly with Asia, in recent years led some emerging economies to look to diversify their external relations. 

For example, during the BRICS summit in August 2023, some founding members of the group, which comprises Brazil, Russia, India, China, and South Africa, emphasized their intentions to increase direct local-currency transactions between member states. 

Some Gulf states, including Saudi Arabia, the UAE and Iraq, are also exploring ways to conduct trade in non-dollar currencies to broaden their economic diplomacy and foreign policy influence. Beijing’s stated interest in promoting renminbi use provides a strategic justification for use of the currency that extends beyond pure economic considerations of the past. 

Such justifications will not fully overturn challenges noted above, but they could lead to incremental or gradual progress in renminbi-based trade. While the prospect of this remains highly uncertain for crude, other oil products, natural gas, or other traded goods may be easier to implement, and may lead the way. 

These trends led Iraq to allow trade settlement with China in yuan for the first time in February 2023. A month later, China made its first purchase of liquefied natural gas produced in the UAE in yuan. As for oil, Russia mainly trades crude in renminbi currently, while Iran and Venezuela also sell some of their oil in euro and renminbi.  

The Saudis may have considered non-dollar oil trade as early as April 2019 (Figure 7), when Reuters reported that the kingdom raised this possibility to US officials and discussed it with other OPEC members. These talks did not lead to major actions, and they fell by the wayside during the COVID-19 years. 

Escalating geopolitical events in early 2022 revived these considerations and created an opening for the yuan. This coincided with Beijing’s renewed push for the renminbi as soon as the country came out of the pandemic (Figure 9). 

In March 2022, The Wall Street Journal reported that Saudi Arabia and China were in active talks to price some of the kingdom’s oil sales in yuan, and that Saudi Aramco (Aramco) was considering including yuan-denominated futures contracts in its pricing model.

In December 2022, President Xi visited Riyadh for the first time in six years and attended the first China-Arab States Summit and the China-Gulf Cooperation Council (GCC) Summit hosted by Crown Prince Mohammed bin Salman.

President Xi told attending leaders that China will continue to import large quantities of oil and gas from the region and the Shanghai Petroleum and Natural Gas Exchange (SHPGX) “will be fully utilized for renminbi settlement in oil and gas trade.” 

President Xi’s visit set in motion a wide range of actions to transform Saudi-China ties from one focused on oil to one that is comprehensive in nature. These involve setting up new institutional and financial linkages between the two countries that will serve as new anchors for the diversifying relationship. While the Saudis have yet to fully join some related forums, and some new ties take the form of memoranda of understanding (MOU) rather than detailed plans, they nevertheless provide new channels for deepening relations and future renminbi use (Figure 9). 

Changes under this latest bilateral push are likely to be more lasting than previous efforts, as they are anchored by Vision 2030, Saudi Arabia’s plan to rapidly transform itself and diversify its economy. Overseen by Crown Prince Mohammed bin Salman (MBS), the plan could align the interests of the two countries for years to come.

Large-scale investment needs under the ambitious plan (see text box) present opportunities for Beijing’s collaboration. China has grown its economy tenfold in the last two decades with a track record of rapid urbanization, industrialization, energy transition, and manufacturing and technological development — all areas of focus under Vision 2030.

Leading Chinese firms also have considerable experience in developing mega projects at the pace and scale envisaged by the Saudi planners. Likewise, financial markets in Hong Kong and mainland China could facilitate Saudi ambitions under MBS to develop the Saudi stock exchange into one of the top exchanges in the world through sharing and collaboration on technology, knowhow, and reforms.

Reports by media outlets such as Bloomberg suggest that Saudis currently have little interest in accepting the yuan for oil payments despite their willingness to engage in related discussions. Challenges noted above, plus the kingdom’s need to manage its relations with both the US and China may leave the Saudis with a cautious view on these issues for some time

These views, however, may change over the long-term if broadening and deepening Saudi-China ties provide more outlets for the yuan’s use. This may help ease current economic disincentives and allow strategic justifications to be given more consideration.

Currently, if Riyadh were to settle more of its oil trade in renminbi, the Saudi treasury would collect increasingly more renminbi than it would need to spend, as the derivatives market for the yuan is thin, and risk management tools and trade finance in the currency are limited. Hence, holding and cumulating the inflow would raise risks, which would incentivize Saudi policymakers to spend it on Chinese goods and services.

One spending area is the construction of housing, infrastructure, and entertainment facilities in the kingdom, some of which are already underway. In December 2022, Chinese state-owned firms China State Construction and Metallurgical Corp. of China signed a US$2.8 billion deal with the Saudi Ministry of Municipal Rural Affairs and Housing to build more than 100,000 residential units and to build factories to facilitate the adoption of modern construction methods in the kingdom (Figure 10).

In April 2023, Shanghai Haichang Ocean Park signed an agreement with the Saudi Ministry of Investment to develop water parks, zoos, and entertainment centers across the kingdom, aiming to attract 100 million visitors by 2030. In June, Shanghai’s Envision Energy won the bid to supply 1.67 GW of wind turbines to the US$8.4 billion NEOM green hydrogen plant. In October, China State Construction won the second and third bids for the US$7.86 billion NEOM New City Traffic Tunnel, the pilot project of the US$500 billion new megacity NEOM, a key Vision 2030 project. 

The Saudi construction sector is well-suited for such collaboration, as it has been historically open to international contractors. According to one estimate by MEED, a Middle East consultancy, firms from outside the region have been contracted to build nearly US$30 billion of projects in the kingdom. Currently, of the 10 largest contractors by contract value in Saudi Arabia, six are Chinese firms, including China Harbour Engineering Co., China Machinery Engineering Corp., Sinohydro, China Railway Construction Corp., China State Construction Engineering Corp., and China Gezhouba Group Corp. (Figure 8).

Other areas to spend future yuan inflows include industrial and renewable sectors. During President Xi’s visit, the 44% PIF-owned ACWA Power signed agreements on the construction of renewable energy projects in the kingdom with SPIC Huanghe Hydropower Development Co., China Southern Power Grid International, China Energy International, Jinko Solar Co., Sungrow Power Supply Co., and Jolywood Solar Technology Co., including a US$1.5 billion renewable project with Power China. 

In May 2023, a joint venture (JV) was set up between Baoshan Iron and Steel (50%), PIF (25%) and Aramco (25%) to build an US$875 million “green” plant that will be the first steel plate plant in Saudi Arabia and the Gulf. Also, in June 2023, the Saudi Ministry of Investment signed a US$5.6 billion JV with the Shanghai-based electric vehicle maker Human Horizons for the manufacturing and sale of EVs in the kingdom and the Gulf. This follows a similar US$500 million deal signed between Sumou Holding and China’s Enovate Motors six months earlier.

Aside from spending future petroyuan inflows in the kingdom, Riyadh can also invest it in China itself. Such outlets include Aramco’s expanding downstream footprint in China as well as PIF’s diversifying range of investments in Chinese firms.

Aramco’s major investments in China before President Xi’s visit include its US$11.8 billion, 35% interest in an integrated refining and petrochemical complex in Panjin, Liaoning in February 2019 (Figure 11). During President Xi’s visit, Aramco signed an agreement with Shandong Energy Group to develop Aramco’s downstream projects in Shandong. Three months later, in March 2023, Aramco acquired 10% of Rongsheng Petrochemicals (Rongsheng), Jiangsu Shenghong Petrochemical Industry Group, and Shandong Yulong Petrochemical Group (Figure 11). 

This flurry of investments continued into this year. In January, Aramco announced plans to buy up to 50% of Ningbo Zhongjin Petrochemical from Rongsheng. In February, the company announced plans to buy 10% of Hengli Petrochemicals from the Hengli Group. In May, Sabic, an Aramco subsidiary, invested 51% in a US$6.4 billion JV petrochemicals complex in Fujian, the largest foreign investment in the province.

PIF’s investments in China have also picked up pace. In February 2023, it invested US$265 million in VSPO to become the single largest shareholder of the Chinese e-sports company. In May this year, it subscribed to US$2 billion of zero-coupon bonds issued by Lenovo, convertible to 10.78% of Lenovo shares.

Along with Vision 2030 projects, the Saudi government may also need to ramp up spending for the planned hosting of the Asian Winter Games 2029, Expo 2030 and the FIFA World Cup 2034. 

These and other projects may involve increasing collaboration with Chinese parties (Figure 11), particularly if they develop a strong track record in the kingdom. China Railway Construction’s track record in building the Lusail Stadium for the 2022 World Cup in Qatar, for example, likely facilitated its winning bid to build the Jeddah Stadium and surrounding sports villages.

For China, yuan-based oil trade and the resulting Saudi need to spend future yuan proceeds would provide self-sustaining logic for Saudi Arabia’s participation in China’s Belt and Road Initiative. It could also support China’s digital currency push, which culminated to the first purchase of crude oil settled in digital yuan in October 2023, followed by the Saudis joining in June 2024 of mBridge, the central bank digital currency trial for trade settlements led by China and the Bank of International Settlements.

The shift by both countries toward full bilateral engagement have been described by observers as China’s pivot to the Middle East and Saudi Arabia’s pivot to China. These pivots are broad and diverse, anchored by aligning long-term interest on both sides that span beyondpure economic considerations. It may be these forces from Saudi Arabia, as well as other oil exporters in the Gulf, that will ultimately facilitate renminbi-based oil trade.