Saudi Arabia successfully conducts its first-ever yuan-denominated loan transaction with China.
The step will facilitate trade and investment between China and Saudi Arabia and promote the issuance of yuan-denominated loans to other countries in the region
The Export-Import Bank of China announced on 14 March 2023 that it has successfully issued the first yuan-denominated loan with the Saudi National Bank, the largest bank in Saudi Arabia, in order to facilitate financial cooperation under the framework of the Belt and Road Initiative.
The step will facilitate trade and investment between China and Saudi Arabia and mitigate financial risks due to exchange rate fluctuations and any potential future western sanctions. Furthermore, it will promote the issuance of yuan-denominated loans to other countries in the region. Iraq, Iran, and Egypt have already expressed openness to financially transact with China in yuan for trade settlement and/or loans.
In December 2022, Chinese President Xi during a visit to Saudi to sign the Comprehensive Strategic Partnership Agreement said that China will seek to deepen gulf countries’ access to the Chinese financial markets. The move shows the rising internationalisation of the yuan and its expansion from trade settlement to loans. In parallel to the announcement, on 19 March 2023, Saudi Arabia’s Finance Minister, Mohammed Al-Jadaan, affirmed the country was open to dedollarising part of its foreign trade.
The over-weaponization of the dollar is causing a backlash among the West allies in the Middle East as they fear a more hawkish Washington will undercut their development and investment plans with further sanctions. Hence, the Saudi step can be seen as hedging against further financial unrest.
Business implications
If the West imposes sanctions on Chinese financial institutions due to the war on Ukraine and/or a future prospective war on Taiwan, businesses operating in Saudi with links to Saudi banks with Chinese ties will be at risk of sanctions (direct or indirect) and it may be hard to ensure compliance. As a result, businesses may have to choose to reduce their operations in the country to reduce exposure.
On the positive side, many local businesses might benefit from the new source of financing to fund new business ventures creating more opportunities locally and boosting the job market and the economic diversification efforts of the Kingdom.