China’s President to Visit Saudi Arabia

December 7, 2022 438 view(s)

Chinese President Xi Jinping will arrive in Riyadh, Saudi Arabia, on Wednesday to attend the Riyadh Gulf-China Summit for Cooperation and Development. The conference will last three days. Several Arab Gulf leaders will also participate in the conference. The Chinese delegation is expected to sign dozens of agreements with Saudi Arabia and other Arab states covering energy, security, and investments.

The conference comes at a fragile point in U.S.-Saudi relations. In October, the White House pressured Saudi Arabia to delay its oil production until after the November election. Saudi Arabia ignored the request and implemented the decrease. The White House accused Saudi Arabia of siding with Russia and was in danger of losing support in Washington. Saudi Arabia dismissed the accusation as a political gambit to avoid bad news on election day. Some Democratic Congressional leaders called for the U.S. to reevaluate its relationship with Saudi Arabia and suspend all arms sales.

A day later, President Biden vowed consequences for Saudi Arabia. Saudi Arabia took several steps to align further with China. Ten days after the President's threat, China and Saudi Arabia released a joint statement reaffirming their commitment to strengthening ties and long-term stability of the oil markets. One week following the statement, Saudi Arabia lowered oil prices for Asia while raising them for Europe. China was the big winner of the price reduction. A few weeks later, the Chinese President is coming to a conference to sign new economic, security, and energy agreements with Arab Gulf oil producers. It seems naive to think the acceleration of cooperation is a coincidence.

Saudi Arabia is the largest oil exporter, and China is its largest importer. China purchases oil from 44 countries, with Saudi Arabia and Russia being the primary providers. As seen on the chart, China’s top 15 importers represent 92.5% of all China’s imports. Saudi Arabia accounts for 17.4% of China’s oil imports. Nations likely to participate in the conference represent about 50.4% of China’s energy needs. Earlier this year, Saudi Arabia and China began negotiations to transact for oil in Chinese Yuan.

China and Saudi Arabia already have multiple intertwined energy and financial interests. The Saudi state-run Aramco has supply deals with at least six Chinese refiners and ownership stakes in several others. For example, Aramco recently invested $10B to build a refinery in Northeast China. The refinery should be operational in 2024. Aramco owns a 25% stake in another Chinese refinery in the Fujian province. Aramco has different size ownership stakes in a handful of other refineries. The Chinese Silk Road fund owns more than $25B worth of the pipelines Aramco uses for business. The Saudi utility developer ACWA Power has jointly agreed with the Silk Road Fund to build a power plant in Uzbekistan. The state-run Chinese Energy Engineering Corp is building a solar power plant in Saudia Arabia. The conference will not be the first time China and Saudi Arabia have negotiated strategic financial or energy partnerships.

What is at Stake?

Saudi Arabia is the recognized leader of OPEC. The balance of power between East and West is mainly determined by OPEC oil policies, with Saudi Arabia yielding most of that power and influence. In 1974, the U.S. and Saudi Arabia made a strategic agreement called the Petrodollar, which kept the balance of power in the West. The U.S. promised military protection and cheap arms. Saudi Arabia promised the oil trade would be kept in Dollars. This agreement has allowed the U.S. to operate at enormous deficits and create unfathomable debt. The structure of the Petrodollar agreement gave rise to the very dangerous Modern Monetary Theory (MMT) that liberal academics think is a good idea. The basic idea is that the U.S. can print unlimited Dollars because it is the primary reserve currency.

Except for Iran, there is no question whether other Arab Gulf producers will follow Saudi Arabia’s directions. However, despite their hatred and fighting a proxy war in Yemen, Iran and Saudi Arabia have formally applied to join the BRICS (Brazil, Russia, India, China, and South Africa) economic alliance. The conference is a meeting of the minds of BRICS and OPEC to expand their loyalties, investments, and energy deals. The BRICS have repeatedly stated their goal to overthrow the Dollar hegemony by creating a basket of commodity-backed currencies as an alternative for international transactions.

The writing is on the wall, and the facts speak for themselves. Saudi Arabia has applied to join the BRICS. The Saudis and Chinese intertwined their economies and openly told the world they would expand their relationship further. Economic alliances will last longer than military alliances. The winds of power are blowing East, which means real trouble for the Dollar and Dollar-backed assets.

Some people are in denial and ignore the signs that the world will drastically change soon. Does "soon" mean this year? Next year? Ten years? The timeline is not clear, but the outcome is. The Dollar will lose value as more international transactions happen in currencies other than the Dollar.

Gold doesn't change molecularly. You could melt it and still have the same number of molecules and the same weight value. One ounce of gold is the same as one ounce of gold a hundred years ago, making it a great measuring stick of the Dollar's purchasing power. In 1913, the price of gold was $20.67 per ounce. At the time of writing, an ounce of gold is $1779.04. Gold did not grow in value by 8,606.86%. The Dollar lost that much purchasing power. The thing to understand is that when the Dollar loses purchasing power, the price of gold goes up.

Suppose President Xi Jinping's visit will further cooperation between OPEC and the BRICS. In that case, the question becomes, do you believe the long-term result will be a stronger or weaker Dollar? If you think the Dollar weakens, then you agree that all Dollar denominated paper assets are at risk. What will you do to protect your purchasing power?

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