Fixed Income: Petroyuan

The Wall Street Journal reported yesterday that Saudi Arabia and China are in talks to price at least a percentage of the gulf state’s oil sales in Chinese yuan rather than US dollars.

The discussions are nothing new, the idea was first broached in 2016, however, they have gained traction recently over Saudi’s growing concern that the US’s commitment to the region is not what it once was. The reports states that the Saudis are angry over the US’s lack of support for their intervention in the Yemen civil war, along with Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have also said they were shocked by the abrupt US withdrawal from Afghanistan last year. It didn’t help that Biden said that the Kingdom should be a ‘pariah’ for the killing of Saudi journalist Jamal Khashoggi, when he was running for the White House.

China buys over 25% of all the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the internationalisation of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Aramco. If it were to happen, it would be a major shift for Saudi Arabia, as well as a major coup for China. As its stands Saudi prices all its ~6.2 million barrels of day of crude exports in US dollars. Globally, the majority of oil sales, over 80%, are traded in dollars, with the Saudis having done so since 1974, in a deal with the then Nixon administration that included security guarantees for the Kingdom.
 
However, these days rather than being a large importer of Saudi oil, over 2 million barrels a day 30 years ago, the US is now amongst the top oil producers in the world, importing less than 500,000 barrels a day. ‘The dynamics have dramatically changed. The U.S. relationship with the Saudis has changed, China is the world’s biggest crude importer, and they are offering many lucrative incentives to the kingdom’, said a Saudi official familiar with the talks. ‘China has been offering everything you could possibly imagine to the kingdom’, the official added.
 
China launched yuan priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, however, to date they haven’t made a dent in the dollar’s dominance of the oil market. The Chinese government has long pushed for the internationalisation of the yuan. Over the last few years, they have made progress, introducing not only oil but other commodity contracts priced in yuan and winning official reserve-currency status from the International Monetary Fund.

In December last year, according to SWIFT, the global provider of financial messaging services, the yuan became the fourth most active currency for global payments by value, with a 2.7% share. However, this is still less than 50% of the GDP total, with dollar and euro taking the top places with nearly 41% and over 36%, respectively.

Freddie Coldham
Fund Manager, Fixed Income