The Saudi Central Bank, SAMA, and the People's Bank of China, PBoC, have signed a three-year local currency swap agreement. The deal is expected to enhance trade and investment between the two countries and promote the use of the yuan and the riyal in international transactions.
Announced on Monday, the deal has a maximum value of 50 billion yuan or 26 billion riyals ($6.93 billion). However, a separate release by China suggests a possible extension to over three years.
As the world's top oil exporter, Saudi Arabia's decision to engage in this deal suggests a potential move away from the U.S. dollar, the dominant currency in global oil trade. This is in line with the global de-dollarization trend.
Trade, cultural partnership
The two countries have moved beyond their traditional hydrocarbon-based relationship in recent years, expanding cooperation into various sectors.
According to Chinese customs data cited by Reuters, China imported 65 billion worth of Saudi crude oil in 2022. This figure accounts for 83 percent of the country's exports to China.
Although Chinese President Xi Jinping talked to Gulf Arab leaders in December about China's intention to purchase oil and gas using yuan, traders note that the currency has not been used in buying Saudi crude yet.
An August report by the Saudi General Authority for Statistics revealed that the Kingdom's exports to China reached SR13.7 billion ($3.65 billion). Meanwhile, the Kingdom's imports from China were at SR11.8 billion ($3.14 billion).
One month later, Saudi Arabia and China signed a memorandum of understanding (MoU) to share expertise in modern transportation systems. This agreement focuses on advancing roads, developing autonomous vehicles, enhancing shipping and optimizing port operations using high-tech methods.
Within the same month, Saudi Arabia received official Approved Destination Status from China, strengthening the nations' tourism relationship. The status facilitates Chinese citizens' travel to the Kingdom through group tours.
Last month, Saudi Arabia's Literature, Publishing and Translation Commission collaborated with China's National Press and Publishing Administration to promote literary translation. This partnership aims to bolster cultural connections, facilitate content exchange and strengthen literary cooperation between both countries.
PBoC's swap agreements
The agreement with SAMA is the 30th swap signed by the PBoC over the past decade. A report released last month revealed that China's swap agreements had topped 4 trillion yuan ($560.4 billion).
China has been actively expanding its network of currency swap agreements with several nations in recent years. In 2012, China signed a swap agreement with the United Arab Emirates, followed by Qatar in 2014 and Egypt in 2016. This year, China signed swap agreements with countries like Argentina.
"China seems to be using swap lines in a very different way to the U.S.," Weitseng Chen, associate professor at the National University of Singapore, told Reuters.
"[China] uses it as a credit line, so it's on a constant basis, instead of a one-time, one-off thing during a financial crisis."
Recent events, such as the Russia-Ukraine conflict and rising U.S. interest rates, give China pricing power as some countries shift to accept the yuan in trade.
China's efforts have shown promise, with yuan-denominated contracts on the Shanghai International Energy Exchange (INE) gaining traction and challenging the dominance of dollar-denominated products traded in hubs like New York and London.