China and Saudi Arabia Deepening Financial Cooperation: Political and Economic Significance

Release Date : 2024-06-18

(Wo-chiang Lee, Professor, Department of Banking and Finance, Tamkang University)

The fifty-year-old “Petrodollar Agreement” between the US and Saudi Arabia expired on June 9 this year (2024). In the future, Saudi Arabia no longer needs to price its crude-oil exports in US dollars. The termination of this Agreement not only symbolizes Saudi Arabia’s intention to shift from its unique relations with the US to a closer one with China, but also presents a specific practice of “de-dollarization.” In other word, it’s of political and economic significance with China and Saudi Arabia deepening financial cooperation. 

Until 2023, Saudi Arabia’s non-oil economy contributes 50% to its real GDP, a historic high, reaching a total $453 billion, with continued growth of investment, consumer spending, and exports. Additionally, it’s private-sector investment has made remarkable performance in the past two years, with a growth rate of 57%, reaching an investment amount of $255 billion. With the increase and pushing forward of non-oil economy, Saudi Arabia expects to see a 4.1% growth in its 2024 GDP. Notably, Saudi Arabia is the biggest market for Islamic finance globally, with total Islamic assets across the board exceeding $826 billion, constituting around 33% of global Islamic finance assets. Saudi Arabia is also the largest issuer of Islamic sovereign bonds globally. According to the Capital Market Authority (CMA) of Saudi Arabia, foreign investors’ ownership in capital market have dramatically increased 300% from 2018 to 2022, reaching approximately $92.5 billion. The huge growth of foreign investments highlights the robust expansion of its finance market and increases international confidence in Saudi Arabia.

Shanghai Stock Exchange and the Saudi Stock Exchange signed a memorandum of cooperation in Riyadh in September 2023, marking a new phase of integration and cooperation between the two capital markets. Moreover, China’s first exchange-traded fund (ETF) investing in the Saudi market was approved yesterday, signifying the formal start of China’s public funds into direct investment in the Saudi market, opening a new window for investment in the Middle East, and marching toward a new milestone. Besides, Asia’s first Saudi ETF was listed in Hong Kong Stock Exchange on November 29 last year, marking the first step of integrating capital markets of Hong Kong and the Saudi Arabia. The CSOP Saudi Arabia ETF (the “Sub-Fund”) was listed in Hong Kong Stock Exchange with a market price of HK$78 per unit. The Sub-Fund is a milestone of finance connections under Belt and Road Initiative, which also symbolizes that Hong Kong would become an important partner in the process of Saudi’s “Vision 2030.” Beijing also renewed a bilateral local currency swap agreement with the Unite Arab Emirates, with a swap scale of RMB35 billion yuan over Dirhams18 billion for five years. A memorandum of understanding to enhance collaboration in digital currency development was also signed.

The Huatai-Pinebridge CSOP Saudi Arabia ETF (QDII) and China Southern Fund CSOP Saudi Arabia ETF (QDII) have been officially approved. These two ETF products track FTSE Saudi Arabia Index, launched at the end of November 2018. The Index covers more than 50 large and medium Saudi listed companies. Its constituent stocks consist of dominant sectors such as finance, raw materials, energy, telecommunication and public utility service. These sectors, highly related to the economic structure of Saudi market, account for 40.84%, 1693%, 12.14%, 8.52%, and 7.52% respectively as of June 13, 2024. The CSOP Saudi Arabia ETF is also the largest Saudi Arabia ETF globally, connecting with Saudi Arabia and sharing its vision. Through investing in Saudi stock market, one can control one of the fastest-growing major economies of the world

Xi Jinping arrived in Riyadh, the capital of Saudi Arabia, to participate in the first China-Gulf Cooperation Council (GCC) summit at the end of 2022. He met with Saudi Crown Prince Mohammed bin Salman and signed a Comprehensive Strategic Partnership Agreement. Xi expressed hopes to deepen energy cooperation on the existing basis with GCC states. He also encouraged GCC states to “make good use of Shanghai Oil and Gas Trading Center and use RMB (Yuan) as a platform for oil and gas transactions.” According to analysis of CNN, “this action gets China closer to its plan of strengthening the international status of its currency while weakening US dollar, even US economy”

With the increasingly close cooperation between China and Saudi Arabia, financial agencies play significant roles as business intermediaries or carriers for investment of various sectors. They could introduce funds from enterprises and family to both markets with greater flows and promote market information efficiency. The China-Arab Entrepreneurs Summit kicked off in Abu Dhabi in mid-May 2024. China Southern Fund (Southern Asset Management) was invited to this event, and both sides have made significant progress in mutual opening of capital markets. In particular, China’s Qualified Domestic Institutional Investors (QDII) funds have become more diverse in quantity and types, and there are also numerous QDII varieties on the market, driving a better cross-border investment product system, and satisfying the diverse and globalized allocation needs of domestic investor.

Fairly speaking, China is gradually expanding its connections and making friends with the Middle East while tension escalates between it and the West. It could eliminate the risk of “de-Sinicization of supply chain” led by the US and deepen its economic and trade relationship with the Middle East, which is undoubtedly a further step of “de-dollarization.”

Translated to English by Tracy Chou