China’s next move in RMB internationalization may come from ground zero of the petrodollar agreement
On Aug. 25 it was reported that Saudi Arabia was preparing to expand its borrowing into a currency other than the dollar by agreeing to begin selling bonds in exchange for Chinese Yuan.
As the Middle Eastern oil power, and heart of the long-standing petrodollar agreement, has over the past few years sold debt primarily in dollar denominations to keep their economy afloat following years of low oil prices, Saudi Arabia is realizing that the dollar itself is coming under extreme pressures and a diversification of currencies has now become a necessity.
SAUDI Arabia is willing to consider funding itself partly in the Chinese currency, a senior Saudi official said yesterday, raising the possibility of closer financial ties between the two countries.
The Saudi government has started borrowing tens of billions of dollars abroad in the past year to cover a big budget deficit caused by low oil prices, but its foreign bond issues and loans have been denominated entirely in US currency.
Obtaining some funds in yuan could give Riyadh more financial flexibility and would mark a success for China, the biggest market for Saudi oil, in its drive to make the yuan a top international currency.
‚ÄúOne of our main objectives is to diversify the funding basis of Saudi Arabia,‚ÄĚ Vice Minister of Economy and Planning Mohammed al-Tuwaijri told a Saudi-Chinese conference in Jeddah. –¬†Shanghai Daily
This move could have many potential outcomes for both the U.S. and for China as it signals a sea-change in Saudi’s reliance on the U.S. and the West, and it also means the Saudi Kingdom is recognizing China’s growing influence in both banking and the Yuan’s role in the monetary system.
Over the past 7-12 months, the RMB has seen a significant slowdown in China’s desire for global expansion, and that has been in part due to currency issues in the West that have led the EU, U.S., and Britain to focus more on their own monetary systems than on global trade settlement options. ¬†But as it appears that the dollar’s days of monetary hegemony could be coming to an end, this move by the Saudi’s could be a fresh catalyst for China to continue expanding the Yuan’s use in economies throughout the world.
Kenneth Schortgen Jr¬†is¬†a writer for¬†The Daily Economist,¬†Secretsofthefed.com,¬†Roguemoney.net, and¬†Viral Liberty, and hosts¬†the popular¬†youtube podcast¬†on Mondays, Wednesdays and Fridays.¬†Ken can also¬†be heard Wednesday afternoons giving an weekly economic report on the¬†Angel Clark radio show.