By Nicholas Larsen, International Banker
Regarding the advancement of global peace, security and economic stability, few days have been more profound than Friday, March 10, when Saudi Arabia and Iran announced their agreement to restore diplomatic relations. But perhaps just as significant as the peace deal itself was the revelation that China, not the United States, had hosted the talks between the two longstanding Middle Eastern adversaries and played a crucial mediating role in brokering the final peace deal. As such, it reflects just how productive the recent warming of relations between China and the Arab states is proving for the world’s economic and geopolitical landscapes.
“The three countries announce that an agreement has been reached between the Kingdom of Saudi Arabia and the Islamic Republic of Iran, that includes an agreement to resume diplomatic relations between them and re-open their embassies and missions within a period not exceeding two months, and their agreement includes their affirmation of the respect for the sovereignty of states and the non-interference in internal affairs of the states,” the agreement’s “Joint Trilateral Statement by the People’s Republic of China, the Kingdom of Saudi Arabia, and the Islamic Republic of Iran” read. “They also agreed to implement the Security Cooperation Agreement between them…and the General Agreement for Cooperation in the Fields of Economy, Trade, Investment, Technology, Science, Culture, Sports and Youth…. The three countries expressed their keenness to exert all efforts towards enhancing regional and international peace and security.”
The historic announcement marks China’s most significant achievement in the Arab world since it began expanding its diplomatic and economic engagements with the oil-rich region in recent years. It should be noted that Chinese-Arab economic relations have existed for millennia, with trading between the two thriving for more than 2,000 years, particularly through the ancient Silk Road trading routes, which saw Chinese porcelain, silk, tea, paper-making and printing techniques highly sought after by the Arab world, and Arabian astronomy, the Arabian calendar and various medicines heading in the opposite direction.
But China’s astronomical rise over the last couple of decades has seen it unequivocally achieve the status of an economic superpower—one of arguably only two in the world today—meaning that its consumption needs and production capabilities have dramatically expanded, along with its diplomatic influences. Heightened bilateral economic engagements in recent years between China and the Arab states have thus emerged as natural consequences of this expansion.
This expansion was initially reflected by China aggressively boosting its investment and construction exposure to Arab nations via its signature global infrastructure-development project, the Belt and Road Initiative (BRI). According to the Shanghai-based Green Finance & Development Center (GFDC), Iraq was the largest beneficiary of BRI loans in 2021, claiming around $10.5 billion in construction contracts in a year that was rounded off with the announcement that China would build a whopping 1,000 schools in the country. And last year saw Middle Eastern countries collectively expand their BRI cooperation with China, receiving about 23 percent of BRI engagements in 2022 (up from 16.5 percent in the previous year) and about 21 percent of China’s investment volume—twice the share of 2021. Saudi Arabia was the second-largest national recipient of BRI investments last year, at $5.6 billion, behind only Hungary.
But it is becoming increasingly clear that the December 7-10, 2022, visit by China’s President Xi Jinping, at the invitation of Saudi Arabia’s King Salman bin Abdulaziz Al Saud, has turbocharged China-Arab economic cooperation. Indeed, the visit included the Saudi-Chinese Summit, as well as the launch of the first-ever China-Arab States Summit and China-Gulf Cooperation Council (GCC) Summit, all of which led to the signing of around $50 billion of investment agreements, as confirmed by the Kingdom’s minister of investment, Khalid Al-Falih. Both private- and public-sector deals were reportedly struck, mainly tied to the expansion of crude-oil trading volumes and oil infrastructure between the two parties, and non-oil trading and joint quality investments were boosted.
China’s Ministry of Foreign Affairs confirmed that the two sides would “focus on economic development and promote win-win cooperation”, including strengthening synergies between their development strategies and promoting “high-quality” BRI cooperation. “They should consolidate cooperation in traditional areas including economy and trade, energy and infrastructure development,” the Ministry added. “In the meantime, the two sides should strengthen new sources of growth such as green and low-carbon development, health and medical services, and investment and finance, and expand new frontiers including aviation and aerospace, digital economy and peaceful use of nuclear energy.”
The Saudi side, meanwhile, “expressed its aspiration to attract Chinese expertise to participate in the future mega-projects in the Kingdom, in addition to its keenness to enable Saudi investments in the People’s Republic of China and overcome the difficulties such investment may face”, according to the joint statement of the Saudi-Chinese Summit. The Saudi side “also stressed the importance of attracting international Chinese companies to open regional headquarters in the Kingdom, and appreciated the interest of a number of companies in that regard as they are obtaining licenses to establish their regional headquarters in the Kingdom, to ultimately benefit from the exceptional Chinese experiences and capabilities for the benefit of the economies of the two countries.”
Of note was the confirmation by the Saudi minister of finance, Mohammed Al-Jadaan, on January 17 that Saudi Arabia is open to discussions about trading in currencies other than the US dollar, which followed President Xi Jinping’s request during his December visit to the Persian Gulf oil producers to begin accepting payments in yuan. “There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal,” Al-Jadaan told Bloomberg Television. “I don’t think we are waving away or ruling out any discussion that will help improve the trade around the world.”
While such a move is unlikely to seriously—or, indeed, imminently—threaten the global dominance of the petrodollar, it does indicate both the keenness of China to export its currency for widespread global adoption as well as the willingness of the Arab states to diversify away from the greenback, which is the de facto currency used by the world to buy and sell crude oil and other leading commodities in international markets. And should Saudi Arabia continue to show openness towards greater use of the yuan within its global oil-trading activity, other states will likely follow suit in increasing numbers.
Indeed, Iraq’s central bank confirmed on February 22 that it would allow trade with China to be settled directly in yuan for the first time. “It is the first time imports would be financed from China in yuan, as Iraqi imports from China have been financed in dollars only,” the government’s economic adviser, Mudhir Salih, told Reuters, as Iraq seeks to improve its access to foreign currency to make up for its lack of dollars in local markets. Salih acknowledged that the move would not extend to Iraq’s oil trade at present. But given that China is Iraq’s main source of imports after Turkey (as per 2022 figures), yuan settlements increasingly make sense for Baghdad, as they will for more countries in the region and beyond as they continue to boost trading volumes with China.
And with China having scored such a resounding victory with the recent détente between Saudi Arabia and Iran, the prospect of sustained peace and economic cooperation in a notoriously volatile region might never be closer than it is today. “This is a victory for dialogue, a victory for peace, offering major good news at a time of much turbulence in the world,” China’s highest-ranked diplomat and the key architect of the peace deal, Wang Yi, said. “We will continue to play a constructive role in properly handling hotspot issues in today’s world in accordance with the wishes of all countries and demonstrate our responsibility as a major country.”
It is already becoming clear that the warming of China-Arab relations is having massive repercussions for the world as the economic and geopolitical balance of power shifts eastward. Such wins in a region once dominated by US influence will do little harm to China’s global reputation as it continues to demonstrate its credentials as a leading economic, diplomatic and geopolitical power. “Generally speaking, we welcome any efforts to help end the war in Yemen and de-escalate tensions in the Middle East region,” John Kirby, the White House’s National Security Council’s spokesperson, said of the deal.