The world’s most profitable company, Saudi Aramco, is going public and the ramifications are going to be seen in some unusual places such as China, which sees the oil trade as a way to challenge America’s supremacy in global commerce.
After months of speculation, Saudi Arabia’s state oil company officially announced its plan to go public this month. Last year, the company made US$111 billion in profit, and the price eventually set for its initial public offering could value the company at as much as $1.7 trillion. The Aramco IPO is critical to Saudi Crown Prince Mohammad bin Salman’s plans to modernize his country’s economy with a raft of initiatives, including the creation of a new “future” city in the Saudi desert, along with investments into future industries essential for the creation of a knowledge-based economy.
The lead-up to what will be the world’s biggest ever IPO has shone a spotlight on the company’s place in the global economy — not because of how much money it makes but because of who is interested in investing and why. Could foreign investors use Aramco to initiate major changes to the global currency system? The Chinese appear to think so.
Just before the IPO announcement, it was reported that China was considering acquiring a major stake in the company. Chinese state-owned entities led by the Beijing-based Silk Road Fund were in talks to invest $5 billion to $10 billion in the IPO. Prince Mohammad has always been open about wanting to attract major foreign stakes in Aramco. But China’s involvement in Aramco is fraught with its own complex geopolitical undertones.
Long before Donald Trump came to power and began a trade war with Beijing, China was making noises about challenging the US dollar’s dominance as the world’s universal currency. This would give China more control over its own economy and help with long-term economic projects designed to challenge the US as the world’s sole economic superpower. But unseating the dollar is much easier said than done.
Through infrastructure projects across the emerging world, China is extending its economic influence in a way that repositions global trade flows away from the West and into China. The ambitious Belt and Road Initiative, for example, is underpinned by several Chinese financial institutions like the Silk Road Fund, which extend credit to entities in Africa to Central Asia. Some of this money goes into infrastructure projects often carried out by Chinese companies, which inevitably leads to some poorer countries becoming trapped in debt to Beijing.
The Aramco public offering gives China an opportunity to gain a foothold at the center of the global oil industry. Oil is arguably the most important commodity traded in dollars, and disrupting the barrel-to-dollar peg could have profound consequences for China’s plans to join (or replace) the dollar as the global trading currency. A Chinese stake in the world’s largest oil company, therefore, would give Beijing power to influence how the commodity is traded. Meanwhile, the Chinese can also quietly position themselves as possible financiers of the Saudi crown prince’s transformation plans.
But let’s be clear: The renminbi is not about to replace the dollar as the global trading currency. Nor is Saudi Arabia likely to risk a major confrontation with its most important ally, the United States, and agree to Chinese demands for the renminbi to become the oil market’s trading currency.
Moreover, when it comes to global currency reserves held by central banks, the dollar is king. According to the International Monetary Fund, in 2017 the Chinese yuan made up only a tiny amount of allocated foreign-exchange reserves, whereas the Financial Times reports that more than 60% of global currency reserves are held in dollars. And despite China overtaking the US in gross crude-oil imports in 2017, Beijing has not managed to persuade major oil-producing nations to take that crucial step toward transforming the oil trade and abandon trading in dollar.
But cracks are starting to appear. Earlier this year, Saudi Arabia threatened to sell its oil in currencies other than the dollar if the United States passed legislation that would expose OPEC (Organization of the Petroleum Exporting Countries) member states to American antitrust laws. Never before had Riyadh reacted so dramatically. The bill never came into force, but if Saudi Arabia ditched the dollar, its position as the world’s primary trading and reserve currency would be seriously undermined and would reduce America’s economic power in global trade.
China is also playing a long game. Through various investments across the Persian Gulf region, the Chinese have been primarily interested in securing their own access to oil. With the ongoing US-China trade war, it’s highly unlikely Beijing would risk any serious escalation with Washington by using China’s clout to change the status quo and push for a change in oil trading in the Gulf. But China has made it clear that it wants the yuan to be a global trading currency and is strengthening relationships with oil-producing nations from the Persian Gulf to Russia.
The intention is clear: Beijing wants to push for change and is only waiting for the right time. And as much as the Chinese might want to use the Aramco IPO to effect this, the reality is that it won’t work out this way. Nevertheless, when the moment does actually come, China will be sure to be ready.