What is a currency swap agreement?
A currency swap agreement is a contract between two parties to exchange a certain amount of their local currencies at a predetermined rate and date. The purpose of such an agreement is to facilitate trade and investment between the two countries, as well as to enhance financial stability and cooperation.
Currency swap agreements can also help the parties to hedge against exchange rate fluctuations, reduce the dependency on the US dollar, and diversify their foreign exchange reserves.
Why did China and Saudi Arabia sign a currency swap agreement?
China and Saudi Arabia signed a currency swap agreement on Monday, November 20, 2023, during the visit of Chinese President Xi Jinping to Riyadh, the capital of the kingdom. The agreement was one of the 35 deals signed between the two countries, covering various fields such as energy, trade, infrastructure, health, culture, and education.
The currency swap agreement, which is worth 35 billion yuan ($5.4 billion) or 7.5 billion riyals ($2 billion), is expected to boost trade and investment between the two countries, as well as to strengthen their strategic partnership.
According to the official Saudi Press Agency (SPA), the agreement will “enhance the availability of liquidity in the financial markets, support the stability of the exchange rate, and facilitate the use of local currencies in trade and investment transactions.”
China is Saudi Arabia’s largest trading partner, with bilateral trade reaching $78.4 billion in 2022, according to Chinese customs data. Saudi Arabia is also China’s largest supplier of crude oil, accounting for 19% of China’s total oil imports in 2022, according to the International Energy Agency (IEA).
The currency swap agreement is also seen as a sign of China’s growing influence and presence in the Middle East, a region that has traditionally been dominated by the US and its allies. China has been expanding its economic and diplomatic ties with the countries in the region, especially those involved in its Belt and Road Initiative (BRI), a massive infrastructure and development project that aims to connect Asia, Europe, and Africa.
What are the implications of the currency swap agreement?
The currency swap agreement between China and Saudi Arabia has several implications for the two countries, as well as for the region and the world.
- For China, the agreement is part of its efforts to internationalize its currency, the yuan, and to challenge the dominance of the US dollar in the global financial system. China has signed currency swap agreements with more than 40 countries and regions, including the United Arab Emirates, Qatar, Turkey, Iran, and Pakistan, in the Middle East. The agreement with Saudi Arabia, the largest economy and the most influential country in the region, will further enhance China’s role and influence in the region.
- For Saudi Arabia, the agreement is part of its efforts to diversify its economy and reduce its reliance on oil revenues, which have been affected by the volatility of oil prices and the global energy transition. Saudi Arabia has been pursuing a vision 2030 plan, which aims to transform the kingdom into a modern and diversified economy, with a focus on sectors such as tourism, entertainment, technology, and renewable energy. The agreement with China, the world’s second-largest economy and the largest market for Saudi oil, will provide more opportunities and incentives for Saudi businesses and investors to expand their presence and activities in China.
- For the region, the agreement is part of the changing dynamics and alignments in the Middle East, which have been shaped by the US withdrawal from Afghanistan, the Iran nuclear deal, the Yemen war, and the Covid-19 pandemic. The agreement reflects the growing cooperation and coordination between China and Saudi Arabia, as well as their mutual support and respect for each other’s core interests and sovereignty. The agreement also signals the willingness of the two countries to de-escalate tensions and resolve conflicts in the region, such as the Saudi-Iran rivalry, the Qatar-Gulf crisis, and the Israel-Palestine issue.
- For the world, the agreement is part of the shifting balance of power and the emergence of a multipolar world order, which is characterized by the rise of China and other emerging powers, and the relative decline of the US and its allies. The agreement shows the increasing divergence and competition between China and the US, as well as the challenges and opportunities for cooperation and dialogue on global issues such as climate change, trade, and security.