In a debate held last Wednesday (October 25) in IPRI (of which I'm director) with the American specialist in China from the Elliott Center for International Affairs of the George Washington University, Professor David Shambaugh, I questioned him about WAR. Not the real war, of course, but what I call the replacement of the old, geopolitical, cold war -- between USSR and the US -- by a new, geoconomic, Economic Cold War, that I see already dominated by the new global Empire, Xi Jinping's China. For me, China has already won this new Economic Cold War. Shambaugh denied it, saying that he sees no economic cold war at all, since China "is playing by the free markets rules", that is, it does not contest the world economic, largely liberal, order. For him, there is an "ideological Cold War", led by China, towards an antiliberal, or a-liberal, political order. That was, is not my point, which I agree. China is the most powerful promoter of an authoritarian type of political regime, but nevertheless is undertaking an economic cold war, that is undermining economic dominance of old advanced economies and building a new global economy that promotes a rare combination of free markets, economic interdependence and authoritarian States and a State sponsored bourgeoisie that is not the same as the old European bourgeoisie of the Enlightnment, and thus does not defends human rights and democracy.
This article, confirms my "theory" of a new Economic Cold War, an eroding process of the dollar dominance over international transactions of the last century towards a growing dominance of the yuan, which will grow among other currencies in the IMF's SDR. As the article concludes, investments in Western eyes are planned for 30 to 40 years. In China, investments are conceived for maintining impact over 100 years or more. "Socialism with Chinese Characteristics" is a complete bullshit, but the new State sponsored new economic order is real...
Paulo Roberto de Almeida
Brasília, October 26, 2017
China Is Eyeballing a Major Strategic Investment in Saudi Arabia’s Oil
Washington may have invented the petrodollar system, but Beijing is looking toward the future.
Chinese President Xi Jinping and Saudi Arabia's King Salman in Beijing on March 16. (Lintao Zhang/Pool/Getty Images)
Since the election of Donald Trump, relations between Saudi Arabia and the United States have seemingly returned to their halcyon days. Saudi officials have been energized by Trump’s desire to roll back Iranian influence and his support for Saudi economic reforms, and they are enthusiastic about the two countries’ newfound unity of purpose.
But Saudi Arabia is not just being courted by the Trump administration. Without the pomp and circumstance of the Riyadh summit, where Trump addressed representatives from across the Muslim world earlier this year, the Chinese government is taking quiet steps to bring Saudi Arabia’s hydrocarbon reserves firmly into its orbit. Through its ambitious Belt and Road Initiative and a reported offer to invest in the kingdom’s state-owned oil company, Saudi Aramco, the Chinese are laying the groundwork for a profound economic shift in the Middle East and the world.
As it has grown over the last three decades, China has slowly become a much more important energy partner to Saudi Arabia and Gulf states. Its emergence as an economic powerhouse has increasingly fueled its ambition to dictate the rules of the energy market: In recent years, it has scaled down its share of energy imports from OPEC members in favor of non-OPEC countries, primarily due to its preference to purchase oil and gas in yuan or the local currency of the exporter, rather than U.S. dollars. China imports approximately one-quarter of its energy from Saudi Arabia, but Russia recently supplanted the kingdom as China’s top energy producer.
China’s fastidious control over its own currency is the first step toward upending the way oil is traded.
China’s fastidious control over its own currency is the first step toward upending the way oil is traded.Forged by U.S. President Richard Nixon and Saudi King Faisal bin Abdulaziz Al Saud in 1973, the petrodollar system has wedded the greenback to the world’s most sought-after commodity. In return for conducting energy sales exclusively in dollars, the United States agreed to sell Saudi Arabia advanced military equipment. One obvious reason China wants oil to be traded in yuan is to increase global demand for yuan-denominated assets. This would increase capital inflows and may eventually lead to the yuan being a plausible global alternative to the American dollar. Saudi Arabia is OPEC’s historic swing producer and price arbiter — if it agreed to conduct transactions in currencies other than the dollar, other OPEC producers would be forced to follow suit.
Beijing’s thinking is also influenced by geopolitical calculations. China’s return on investment in Saudi infrastructure could take decades, but Beijing would gain a valuable foothold in the Gulf and possibly persuade one of the world’s leading oil producers to upend the way oil is traded. Moreover, Saudi Arabia and its Gulf allies, especially the United Arab Emirates, provide a valuable hub to Middle Eastern and African markets through their ports, airports, and global networks. This spring and summer, Beijing and Riyadh announced a number of deals in various sectors, including increased energy exports and a reported $20 billion shared investment fund.
The equation is much more difficult for Saudi Arabia and the other oil-producing countries in the Gulf. On one hand, Saudi Arabia’s alliance with the United States, however shaky, is the bedrock of regional security. On the other hand, growth in energy consumption will continue to be centered east of the kingdom, not west.
The Chinese have not given Saudi Arabia much time to consider its options. Chinese state-owned oil companies PetroChina and Sinopec have already expressed interest in a direct purchase of 5 percent of Saudi Aramco. This could prove to be a boon for Crown Prince Mohammed bin Salman, who has been eager to achieve a $2 trillion valuation of Aramco in a highly anticipated initial public offering, which is currently scheduled for 2018.
Considering the depressed state of the oil market, investors may be hesitant to meet the targets for Aramco’s valuation that the Saudi leadership has laid out. A private Chinese placement could solve this dilemma — and allow Riyadh to delay the IPO in the hopes that oil prices will improve. While this investment may not explicitly require that Saudi Arabia agree to trade in yuan, it would give China leverage toward that goal. For Mohammed bin Salman, Chinese investment in Aramco could kick-start a new economic partnership with Beijing.
For Mohammed bin Salman, Chinese investment in Aramco could kick-start a new economic partnership with Beijing.As part of its economic reform, Saudi Arabia’s ambitious Vision 2030 plan intends to raise foreign direct investment from 3.8 percent of GDP to 5.7 percent, or an additional $12 billion per year. It is a far safer bet that China would be able and willing to inject that type of money into Saudi Arabia than U.S. private equity and hedge funds. The main reason for this is the difference in Chinese and Western time horizons when considering return on investment. While Western governments and companies have historically had appetite for infrastructure projects that offer a return on investment in a maximum of 30 to 40 years, the Chinese are playing a much longer game — in some cases investing in projects that break even in more than 100 years.
