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KSA, China Suspend Dollar Transactions; Action or Reaction?

Is it a Strategic Shift in Saudi Arabian Economic Vision? Or Simply an Emergent Strategy to Sustain Global Oil Competitiveness?

China and Saudi Arabia just announced the two countries’ will remove the US dollar from oil transactions between the Kingdom and their largest commercial partner; China, effective last week, according to several news reports, in a precursor move to pave “mutually” prosperous economic relations on the medium and long terms, leading to the total dispensing of the USD exchange medium in KSA-China transactions.

Alternatively, the Direct Exchange system, devised recently in Saudi Arabia, which foregoes the SAR-USD Peg in certain commercial transactions, will allow for oil transactions with China to be conducted in Saudi’s local currency, which, according to experts interviewed by the Huffington Post Arabi, would be beneficial for both countries, while on the other hand, weighing heavy on the Dollar, possibly prefacing the breakage of the dollar peg entirely, for Saudi Arabia.

Notably, China happens to be Saudi Arabia’s largest oil partner, at a daily acquisition rate of 1.1 billion barrels, bulking at nearly 15 per cent of the Saudi Arabia’s total annual production of oil.

More so, according also to the Huffington Post Arabi, China was also cited as Saudi Arabia’s largest commercial partner in 2015, with a bulk transaction value of USD49.2 billion, comprising a massive 13 per cent of total global Saudi commercial activity for the same year.

Saudi Economics Columnist, Fadel Boenein, in an interview Turkish Anadolu news agency, says that the new exchange arrangement will boost trades and commercial activity between the two countries, which may actually be true, but more importantly, Boenein highlights that it is highly out of the ordinary for Saudi Arabia to make such a move, while not all unexpected of China, whom have been negotiation with other major trading partners to substitute Dollar-mediated transactions with direct national currency exchange transactions for years.

Was this All China’s Doing?

Purely from a strategic, Chinese perspective, this does not seem out of vogue; china has been working to overthrow the USD exchange peg in commercial transactions globally.

Back in February, Russia and China announced the same thing; all transactions between the two massive economies are done without the exchange mediation of the American dollar.

As a result, in addition to the humongous scale of global activity carried out in Chinese currency, the International Monetary Fund (IMF) has just announced, also early in October, that the Chinese Yuan has been admitted into the global Special Drawing Rights (SDR) exchange basket of currencies, next to the US Dollar, the Euro, the Japanese Yen, and the Sterling Pound, as reported by The Economist and Daily China.

As likely as that may be for China, for Saudi Arabia, the announcement may have come as a surprise; but not just yet, since Saudi’s Riyal, unlike China’s Renminbi (another name for the Yuan, meaning “the people’s money”), is still tied to the dollar in all other global transactions, which suggests this that agreement is in fact, or at least for the most part of it, no more than a mere economic shift to increase Saudi competitiveness in the global oil marketplace, in a simple response to changes in the supply-demand dynamic, with massive outputs surpassing demand, in light of troubling industry indices and bleak outlooks on the near future.

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