Yuan-paid China-Saudi oil trade facing tough challenges

There are few outlets for spending these proceeds

DUBAI: The prospect of yuan-based oil trade between Saudi Arabia and China faces significant challenges and may take decades to achieve substantial scale, according to S&P Global.

However, deepening bilateral ties and aligning long-term interests between Beijing and Riyadh could help facilitate the process.

Recent discussions about China potentially paying for Saudi oil in renminbi have sparked expectations that a larger portion of their trade could be conducted in yuan.

Few outlets for spending proceeds

However, the renminbi’s limited use in international trade and finance presents obstacles. There are few outlets for spending these proceeds, and accumulating such inflows could incur substantial costs and increase currency risks.

As a result, the use of the yuan in Saudi-China oil trade remains limited, despite Riyadh’s willingness to engage in discussions and Beijing’s efforts to promote the currency, according to the rating agency.

Despite these challenges, China’s rapidly growing trade with the Middle East supports the long-term potential for broader renminbi adoption by Gulf nations.

China’s trade tripled

Over the past two decades, China’s trade with the region has more than tripled. From 2009 to 2023, Beijing’s imports from the Middle East surged to $217 billion, while exports increased to $169 billion.

Saudi Arabia has kept pace with this growth, remaining China’s largest trading partner in the Gulf. The share of oil in China’s imports from Saudi Arabia has steadily increased from two-thirds a decade ago to 84% last year.

Meanwhile, Riyadh’s trade surplus with Beijing has expanded from lows of $5 to $10 billion in 2015-2016 to as much as $20 to $40 billion over the past three years.

“If Saudi-China oil trade were fully conducted in renminbi, it would be challenging to hold, spend, or convert the resulting tens of billions of petroyuan through existing bilateral or international channels,” S&P Global noted.

As a result, despite booming trade between the two nations, the yuan has made limited progress as a significant currency for oil settlement, the report concluded.