GP Short Notes # 685, 11 December 2022
On 8 December, China’s President Xi Jinping landed in Saudi Arabia for a three-day-long state visit. Chinese media claimed the visit was the country’s “biggest diplomatic initiative in the Arab world.” Xi Jinping signed a comprehensive strategic partnership agreement with Saudi Arabia and a series of investments and energy resources deals. Both countries signed 34 agreements on the following areas: information technology, genetics, mining, hydrogen energy and manufacturing. The Chinese delegation also agreed to set up an electric vehicle plant in Saudi Arabia. It also includes Huawei being allowed to provide cloud computing services and building high-tech complexes in Saudi Arabian cities.
On Iran, Xi agreed with the Arab concerns while Saudi officials agreed with Beijing’s one-China principle.
Xi engaged in two other summits during his visit to Riyadh: the China-Saudi-GCC Summit for Cooperation and Development and the Saudi-Arab-China Summit for Cooperation and Development. On 9 December, Xi Jinping met the Arab leaders from the Gulf, Africa and the Levant at a summit hosted by Saudi Crown Prince Mohammed bin Salman. He also held bilateral meetings with the Kuwait Crown Prince, Egyptian President, Iraqi Prime Minister, Sudanese leader, and Palestinian President. He stressed on the importance of stability in the oil markets. Xi said: “China will continue to firmly support the GCC countries in maintaining their own security and build a collective security framework for the Gulf. China will continue to import large quantities of crude oil from GCC countries on an ongoing basis.” More importantly, Xi announced that China would buy oil and gas in yuan instead of the US dollar.
What is the background?
First, China and Saudi Arabia relations. China, the second largest economy, has an incessant demand for petroleum products such as crude oil and LNG. To keep up with its growth rate, China depends heavily on the Middle East and Africa for its energy imports. Saudi Arabia exports almost half of China’s oil imports. The country also views China as a lavish spender and investor. Saudi Arabia looks up to China in the field of technological advancements. Riyadh will spend over USD 24.7 billion on secure, efficient and accountable digital platforms by 2025. China has been lauded as a “natural partner” for Saudi Arabia’s emerging science and technology industry.
Second, Saudi Arabia’s interests in China. Saudi’s deepening relationship with China results from the country’s leadership, who aim to move away from any form of polarisation of the international order. Saudi Arabia wants to create strong bilateral relationships with all big powers and maintain a balanced relations to protect its interests. While China replaced the US as Saudi’s export destination in 2017, Riyadh became the top invested country in the Arab world with 20.3 per cent of Chinese investments in the 2005-2020 period. The Saudi leadership is also looking forward to moving away from the US after the frigid interaction between Joe Biden and the Crown Prince in July 2022. Despite being a US ally in the Middle East, the Kingdom’s growing proximity with China is a change in the US-Saudi relationship.
Third, China’s engagement with the Middle East. Compared to China’s involvement in other continents such as Africa and Southeast Asia, Beijing’s involvement in the Middle East has been slow to catch up. Relations with the Arab countries started picking up with the Belt and Road Initiative and comparatively low-key deals signed between countries. However, China’s engagements with the Gulf states have attracted attention in the past few decades. In 2014, Xi promised to double China’s engagement with Arab countries by 2023. In January 2022, China hosted the Arab Gulf Foreign Ministers in Beijing to discuss issues of common interest and deepen relations. In November 2022, China’s state-owned Sinopec signed a USD 60 billion deal with QatarEnergy for a period of 27 years. It has also signed a series of agreements with Iran worth USD 400 billion and Israel worth USD 18 billion on ports, transportation, railways, telecommunication, renewable energy and pharmaceuticals.
Fourth, China’s desire to replace the dollar with the yuan. In the furtherance of its end goal of replacing the US as the world’s superpower, China has been pushing for trading in the Chinese currency instead of the US dollar. To be accepted as the global currency, central banks must possess over USD 700 billion worth of yuan in forex reserves. In 2015, 18 local financial institutions in China and 17 Russian institutions agreed to establish an efficient payment mechanism to assist the trade between the countries. In the same year, the yuan was awarded the status of a reserve currency by the IMF. China has since been pushing for contracts which use the yuan as the trading currency. China once again pushed for an alternative payment system during the Shanghai Cooperation Organization’s summit in Uzbekistan in September 2022. As of September 2022, Russian businesses also opted to use the yuan to settle their payments, resulting in a boost in the yuan’s borrowing.
What does it mean?
The increasing Chinese involvement in the Middle East is a cause of concern for the US and Russia. Media sources comparing the US President Joe Biden’s visit to Saudi Arabia in July 2022 observe a massive change in the Kingdom’s approach. Analysts hint at a growing discomfort between the US and Saudi Arabia’s relations, caused by the Jamal Khashoggi’s murder, the human rights issues and its energy policies.
The deepening relations between China and the GCC are also a cause of concern for Russia as it competes with the Gulf to sell oil to its largest customer. It has already been offering big discounts after the Ukraine war; competing with the Gulf may become deeply disadvantageous for Russia.