What impacts will the signing of the bilateral currency swap agreement between China and Saudi Arabia, with a scale of 50 billion yuan/26 billion Saudi Riyals, have?

The Essence of Currency Swap is Related to Credit and Interest Rates of Both Parties

The essence of bilateral currency swap is mutual credit between the two parties. You can borrow up to 50 billion RMB from me, and I can borrow up to 26 billion Saudi Riyals from you. Therefore, currency swap has nothing to do with exchange rate fluctuations, but only with the sovereign credit and interest rates of both parties.

Moreover, after obtaining credit, the actual use of the currency requires loan application and approval, so there is a certain level of security. That’s why the People’s Bank of China’s “Renminbi Internationalization Report 2023” specifically mentions that “the scale of swaps is different from the actual amount of funds used”:

The People’s Bank of China has signed bilateral currency swap agreements with central banks or monetary authorities of 40 countries and regions, and currently there are 29 valid agreements with a swap scale exceeding 4 trillion yuan. The scale of swaps is different from the actual amount of funds used. As of the end of September 2023, the overseas monetary authorities' actual utilization of renminbi balances was 117.1 billion yuan. As of the end of September 2023, the actual utilization of foreign exchange swap funds by the People’s Bank of China converted into renminbi was 3.43 billion yuan.

Furthermore, there is another layer of information in the above text. Overall, the two parties have granted each other a credit of 4 trillion yuan, but the outstanding amount of loans applied to us from overseas is 117.1 billion yuan, and the outstanding amount of loans applied to the other party from us is 343 million yuan. In other words, in practice, we primarily provide loans in RMB to the other party, which is in line with intuition.

Turning back to Saudi Arabia, the quality of this bilateral currency swap agreement is quite high, and the reasons are as follows:

• Saudi Arabia has relatively high sovereign credit.
• In the trade between China and Saudi Arabia, China has a deficit, so there is no need to worry about sovereign credit issues, and it is more capable of exporting RMB.
• Saudi Arabia itself is an energy and Middle East power, which provides a booster or catalyst for RMB to enter a wider range of countries and markets.

The Benefits of RMB Currency Swap

In fact, there are many advantages, as mentioned earlier. Let me first give you a brief summary, and then add a few additional points.

1. Reducing exchange rate volatility and lowering exchange costs.

This is easy to understand. When I have your currency and you have mine, there is no need to convert to a third-party currency, so the intermediaries no longer profit from the exchange rate difference.

2. Increasing investment and trade convenience.

If a Saudi company wants to invest in a Chinese company, they need to have RMB. Previously, they needed to borrow USD from a bank or hold USD, and then exchange it for RMB. Now they can directly borrow RMB from a bank. Don’t think of this as just an extra step in the middle. Sometimes you can’t borrow USD from a bank, and even if you have USD, you may not be able to exchange it for enough RMB. Although this situation may not exist in the case of Saudi Arabia, reducing risk is always better than taking more risk. Convenience will definitely promote mutual investment to some extent.

3. Avoid depleting one’s foreign exchange reserves. It is even possible to increase one’s USD reserves by borrowing RMB and then exchanging it back into USD. This factor should not be applicable in Saudi Arabia, but it is of great help to other countries. It can even be said that many countries that have signed numerous foreign exchange swap agreements this year are doing so for this reason.

In addition to the above, I would like to add 2 more points.

First, it increases the international circulation of RMB.

For a currency to internationalize, it must meet two conditions:

1. Everyone is willing to use this currency.

2. When people want to use it, they can easily obtain this currency.

Currency swap definitely solves the second condition.

At the same time, it also promotes the first condition, because as more and more countries get used to using RMB, it means that countries other than China can do business with each other using RMB, making them more willing to hold and use RMB. Therefore, cultivating everyone’s habit of using RMB is very important.

Second, China currently has a surplus with many countries in the world (of course, we have a deficit with Saudi Arabia, as mentioned in the title). This means that the RMB we lend out will soon be used by them to purchase goods from us, and we will get it back.

Then after a period of time, when their loans mature, they will need to repay RMB. How to repay? Many countries may only be able to sell minerals, agricultural products, and use RMB for transactions in order to raise RMB to repay our loans. Once this process becomes large-scale and normalized, it means that our RMB can directly purchase assets of other countries. Even if some countries develop their economies in the future and no longer need to sell minerals or agricultural products to raise RMB, the use of RMB for transactions has become an industry practice that is unlikely to change easily.

Bilateral Currency Swap Agreement is Beneficial to the Internationalization of the RMB

On November 20th, the People’s Bank of China (PBOC) signed a bilateral currency swap agreement with the Saudi Arabian Monetary Authority. The swap scale is 50 billion RMB and the agreement is valid for three years with the possibility of extension.

This event can be analyzed in conjunction with another headline news today that reads “Argentina Had a Change of Leadership”.

The newly elected Argentine President, Miguel, had a major campaign slogan that proclaimed to “blow up” the Argentine Central Bank. He advocates for Argentina to fully adopt the US dollar as its official currency to replace the continuously depreciating peso. He strongly supports a free economy and calling for the closure of the Argentine Central Bank.

He supports the implementation of relaxed gun control policies, opposes the legalization of abortion, and even supports the legalization of organ trade.

He also enjoys surfing online and is fond of social media. He often makes shocking statements, and his behavior is also quite exaggerated, earning him the nickname “Argentinian Trump”.

After Miguel was elected as the President of Argentina, Trump immediately congratulated him in a tweet, saying, “I am proud of you. You will turn your country around and make Argentina great again!”

But Miguel is unlikely to make Argentina great again.

Interestingly, the person who claims to close the Argentine Central Bank is an economist by profession.

Miguel majored in economics at university, obtained a degree in economics, and became a university professor. He also worked as a consultant and analyst for various companies and public institutions.

However, he holds extreme economic views.

He is a staunch supporter of neoliberal economics and advocates for anarchocapitalism.

He claims that “taxation is theft!” and “the state is a devilish invention; the system cherished by God is a free market.”

Therefore, he proposes to significantly reduce taxes and public spending. He even wants to privatize all aspects of Argentina’s pension, healthcare, education, and prison systems to reduce government expenditure.

In fact, behind his extreme “neoliberal economic” views lies the facilitation of US economic and financial colonization of Argentina.

Therefore, judging from his campaign platform, it is clear that he is a comprehensive pro-American, belonging to the far right in Argentina.

Because he proclaimed to close the Argentine Central Bank and fully adopt the US dollar, many people associate this with our previous currency swap agreement with Argentina.

This association is understandable and the concern is reasonable.

However, there are always some people with ulterior motives who take advantage of this situation to discredit the currency swap tool. In fact, they are merely siding with the US dollar hegemony.

They always like to use the phrase “currency swap tool,” which is an internationally common tool, to criticize us.

Let me clarify a few things here.

1. The currency swap agreements we have signed with many countries are accurately referred to as “central bank-managed currency swaps” rather than “commercial currency swaps,” which are two different things.

The main difference lies in the fact that the counterparties of “central bank-managed currency swaps” are only the central banks of the other countries, with their national credit as endorsement, and they do not need to bear any other risks, including exchange rate risk.

2. The currency swap agreement has a fixed exchange rate. In June, there was a wave of public opinion that the Argentine currency was depreciating, and there was a claim that we “lost money” in the currency swap with Argentina. However, this is a misinterpretation.

In fact, as early as 2014, there were claims of losses in the Sino-Russian currency swap due to the sharp depreciation of the ruble, and the central bank had already clarified this.

The clarification by the central bank is very clear: the currency swap is based on the exchange rate on the trading day to exchange the equivalent amount of the other party’s currency. At maturity, the principal is returned, and the other party also needs to pay interest.

The amount of RMB we lend will be returned in full at maturity, with no exchange rate risk.

In fact, the currency swap serves the purpose of reducing exchange rate risk. Therefore, it is even more necessary for countries like Argentina, which have long-term currency depreciation, to use currency swaps to reduce the exchange rate risk in their trade with us.

However, if the new Argentine President indeed closes the Argentine Central Bank and fully dollarizes the country, it is highly likely that our currency swap with Argentina will be hindered, which is inevitable.

But this impact only affects future cooperation. After the currency swap agreements we have entered into with Argentina expire, Argentina will still need to repay the corresponding amount in RMB.

The termination of future cooperation does not mean defaulting on the debt. These are two different matters.

The “central bank-managed currency swap” is a transaction between the central banks of both parties, and the currency swap between the two parties is a kind of debt relationship, backed by the credit of the Argentine government.

We have provided RMB loans to the Argentine Central Bank, which constitute a debt.

Even if the new Argentine President really closes the Argentine Central Bank, it does not mean that Argentina can evade its debt obligations.

If it were so easy to default on debt, countries would have closed their central banks long ago.

Therefore, even if the new Argentine President truly closes the Argentine Central Bank and even terminates the currency swap agreement with us in advance, Argentina will still need to repay us the RMB we lent to them.

If Argentina fails to repay, it would be a default, which would deal a fatal blow to Argentina’s financial and economic system.

Of course, I cannot say that the new Argentine President is completely impossible to default, as he is a madman and anything is possible.

But if the new Argentine President really wants to default, he will bear the corresponding enormous cost. He needs to consider the consequences himself.

Overall, the change of leadership in Argentina has little impact on us.

In terms of the internationalization of the RMB, it doesn’t matter if we lose one Argentina and gain one Saudi Arabia.

We cannot interfere in the affairs of Argentina, and this is how dealing with countries in South America is. They are extremely anti-American when they lean left and extremely pro-American when they lean right. As long as there is a change in ideology, policies can make a U-turn of 180 degrees, making it difficult to ensure continuity.

But we cannot stop currency swaps or the internationalization of the RMB just because of Argentina’s extreme case. It would certainly be foolish to throw the baby out with the bathwater.

Of course, these debates have little overall impact on us, at most misleading some uninformed people.

We will continue to promote the internationalization of the RMB step by step.

Recently, the RMB exchange rate has also appreciated, which is partly due to the recent weakness of the US dollar, but there are also factors of the RMB’s own strength.

Therefore, compared to the fact that Argentina has a new madman in power today, establishing a currency swap with Saudi Arabia is much more important.

Although the scale of the currency swap agreement we established with Saudi Arabia is only 50 billion RMB, starting from zero to one is always the most difficult part, and all subsequent steps are just increasing the numbers.

Saudi Arabia is one of the foundations of the US dollar’s dominance in oil. Establishing a currency swap with Saudi Arabia allows us to more conveniently use our own currency for bilateral trade in the future, including oil trade.

Of course, this does not mean that in the future, Saudi Arabia will use the RMB for all oil trade with us. The scale of our oil trade with Saudi Arabia is too large to be satisfied with just 50 billion RMB. Most of our oil trade with Saudi Arabia will still be conducted in US dollars.

However, at least this is the beginning of an attempt. In the future, we and Saudi Arabia will inevitably use the RMB for settling oil transactions comprehensively, but this requires a gradual process and must be taken step by step.

The currency swap agreement with Saudi Arabia is mainly to allow both countries' currencies to circulate more easily and for Saudi Arabia to have more RMB to import our goods.

Once Saudi Arabia is accustomed to using the RMB to import our goods, such as some “customized” products tailored to Saudi Arabia, it will have more motivation to acquire RMB in the future.

And the easiest way for Saudi Arabia to acquire RMB is to settle oil transactions with us in RMB.

Therefore, this currency swap agreement is more about allowing Saudi Arabia to become familiar with using the RMB to import our goods.

In fact, currency swap agreements are common tools for countries. For example, the United States often uses currency swap agreements to lend a large amount of US dollars to central banks around the world, which is an important basis for the US dollar hegemony.

When the United States uses currency swap agreements, there is no criticism or claim that the US will suffer heavy losses. As soon as we use currency swap agreements, they immediately use this normal tool to discredit us. This is typical double standards.

In fact, our establishment of currency swap agreements with more and more countries is a spontaneous and normal behavior resulting from the weakening of US dollar hegemony.

As countries increasingly need to bypass the US dollar in their trade with us, we need to establish currency settlement systems with more and more countries in our own currency. This is an important basis for the internationalization of the RMB.

When we encourage foreign businesses to import goods from China, we encourage them to use the RMB to purchase Chinese products. But the main problem here is that there was not a large amount of RMB overseas in the past, so many foreign importers did not have RMB on hand and could not find a place to borrow RMB, making it difficult for them to import our goods using the RMB.

The currency swap agreement is actually designed to solve this problem.

Through currency swap agreements, we lend a large amount of RMB to the other country’s central bank at a fixed exchange rate. Then the other country’s central bank can lend the RMB to commercial banks in their country, allowing those foreign importers to borrow RMB directly from domestic commercial banks and subsequently use these RMB to import our goods. This is the primary purpose of currency swap agreements.

According to a report from Reuters on the 17th, the continuous development of RMB-denominated international bonds and the rise of RMB loans abroad have enabled the RMB to surpass the euro and become the world’s second-largest trade financing currency.

In fact, this trade financing currency is related to our establishment of currency swap agreements with more and more countries.

The PBOC has always encouraged the wider use of the RMB overseas and encouraged domestic banks to provide loans to international companies.

By exporting more RMB through currency swap agreements, we enable countries around the world to possess more RMB, thereby promoting more trade settlements in the RMB.

Of course, there are advantages and disadvantages to everything. Insufficient RMB overseas is a problem, but having an excessive amount of RMB abroad can also bring new problems, such as the possibility of the RMB exchange rate being beyond our control.

However, this is a matter of finding the right balance and not a problem with the currency swap tool itself.

In fact, when establishing currency swap agreements with each country, we carefully determine the swap amount based on the bilateral trade volume between the two parties, rather than allowing unlimited swaps.

As long as we find a balance, we can direct the pros and cons to a more favorable situation for us.

We must view everything dialectically instead of being extreme.

Source: “Plain Language Current Affairs” public account.

Author: Xinghua Dabai.

Help in Reducing the Volatility of the US Dollar

Well, it’s still a long way to go to replace the US dollar system.

However, it is still very helpful in reducing the volatility of the US dollar.

Whether it is using shadow banking or willing to grant mutual credit based on local currency, this is a major progress compared to the year 9798.

It will not easily be blown up by a tightening cycle of the US dollar like in the past.

Of course, countries like Saudi Arabia and China will not be blown up.

Nowadays, the financial systems of many small Southeast Asian countries are also becoming more sophisticated, with more international credit, much of which comes from China.

If the Fed can still be considered a central bank of the world, the essence of this swap credit is the global shadow banking system, although it cannot be completely replaced, it can reduce the extreme volatility caused by the arbitrary actions of the US empire.

Saudi Arabia and China Trade: Long-term Strategy

This is a typical long-term strategy, and this agreement is short-term beneficial to Saudi Arabia, and long-term perhaps beneficial to China.

Because although China-Saudi Arabia trade has been steadily growing, it comes down to oil, oil, oil.

China-Saudi Arabia trade import and export statistics

Therefore, while China has a trade surplus with almost the whole world, it has a huge trade deficit with Saudi Arabia, at least according to the 2022 data, the total amount China imports from Saudi Arabia is twice that of its exports.

If oil purchases from Saudi Arabia can be settled in the currencies of both countries, then this agreement would be a windfall. But unfortunately, Saudi Arabia is still unwilling or unable to break the situation of settlement in US dollars for oil, perhaps because they are still hopeful for Trump’s comeback.

Because oil is still traded in US dollars, Saudi Arabia mainly holds US dollars. However, in recent years, Saudi Arabia’s imports from China have also grown substantially.

China’s export volume to Saudi Arabia has changed.

Since 2019, China’s export volume to Saudi Arabia has made a qualitative leap. Besides daily necessities, China companies have recently won bids for the infrastructure projects in the red sea future city (Neom) that Saudi Arabia is dedicated to building. This has led to a significant increase in imports from China, including construction materials such as steel and cement as well as green energy products such as solar and wind power. China will certainly not settle these products in US dollars, so Saudi Arabia needs a large amount of Chinese yuan. Thus, this currency swap agreement came into existence.

Under this agreement, Saudi Arabia can obtain a large amount of Chinese yuan to buy goods from China, and China currently has no direct use for a large amount of Saudi riyals. It can only be used for investment in Saudi Arabia, such as sovereign wealth funds. However, because the red sea future city is basically being constructed by China, the Chinese side is certainly aware of the progress and clear about the investment targets. So the investment direction should be here. However, Prince Mohammed bin Salman’s vision for this future city is too perfect, so perfect that I can only see it in movies at present. Therefore, it is difficult to say when it will be completed, which is why I mentioned that it is perhaps beneficial to China in the long run.

Overall, I think it is still slightly more advantageous to Saudi Arabia, but there’s nothing we can do. After all, they have extremely high political value, especially in the current era.

Physical and Long-Term Supply Agreements Provide Support for Riyal Scale

The Riyal scale is supported by physical assets at the very least. If there are long-term supply agreements denominated in the local currency that provide support, this scale may be enlarged to some extent…

Saudi Arabia: Worth cooperating in multiple areas, hosting Esports World Cup

Saudi Arabia is an interesting country. It doesn’t seem like the kind of energy-dependent nation that just sits back and waits for death. Apart from the currency swap agreement with China, Saudi Arabia has been doing quite a few things domestically that haven’t received much international attention.

Recently, luxury electric vehicle manufacturer Lucid announced that it would issue additional shares to raise $3 billion in funding, with $1.8 billion coming from its largest shareholder, the Saudi sovereign wealth fund (PIF).

Lucid’s public offering of 173,544,948 shares was priced to raise approximately $1.2 billion. At the same price, they also privately issued a batch of shares to PIF, raising $1.8 billion. With this additional offering, PIF maintained its 60.5% ownership stake.

Besides investing in Lucid, Saudi Arabia has also previously invested in Tesla. As an oil-producing country, they have a keen awareness of the crisis and are hedging their bets. Not long ago, the Saudi Arabian sovereign wealth fund was in talks with Chinese electric vehicle manufacturer Foton, with plans to invest at least $250 million in the company.

While many people may already be aware of Saudi Arabia’s investment in Newcastle United, it may come as a surprise that they are also investing in esports. Crown Prince Mohammed bin Salman, who is also the Prime Minister, announced that Saudi Arabia will launch an annual Esports World Cup, with the first event set to take place in Riyadh next summer. Bin Salman stated that the tournament will include the “most popular games in the world” and offer the “largest prize pool in esports history,” surpassing the prize pool of this year’s Dota 2 tournament held in Riyadh.

Starting next year, Saudi Arabia will officially host tournaments for multiple esports titles, including Dota 2, Fortnite, CS:GO, FIFA 23, and StarCraft II, and provide substantial prize pools.

These two cases demonstrate that Saudi Arabia has its own ideas and is definitely not a role that relies on a specific country or power. Among the various currency swap partners with China, Saudi Arabia should be the “most powerful.” Saudi Arabia has always sought to be “recognized” by the world and attempted to change its image of being “feudal and wealthy.” This type of agreement with China fulfills Saudi Arabia’s wishes. For us, we can report that the Chinese yuan is going to Saudi Arabia, and on the Saudi side, they can report that the Saudi riyal is going overseas.

Regarding the issue with Saudi Arabia, I personally believe that it is a personal problem of a certain prince and does not hinder Saudi Arabia from being a partner worth cooperating with.

The Impact of the Abolition of the Peso

I am still quite concerned about the peso.

Yesterday, after the Argentinean general election, the peso was abolished. So, what happened to the pesos that were previously acquired through currency exchange?

Benefits of Currency Swap in the Examples of China and Saudi Arabia

First, let’s explain what currency swap is using the examples of China and Saudi Arabia:

Currency swap refers to the direct exchange of currencies between two countries using their own national currencies. The specific benefits are as follows:

First, there is no need to rely on a third currency (such as the US dollar).

Second, the exchange rate is fixed, eliminating exchange rate risks. After the currency swap agreement is signed, the exchange rate between the two parties is locked. Taking the currency swap between China and Saudi Arabia as an example, the exchange rate is 1 RMB to 0.52 Saudi Riyal, which is similar to the current market exchange rate.

During the term of the currency swap agreement, regardless of how the foreign exchange market fluctuates, this exchange rate will not be affected.

Third, and importantly, bilateral trade between the two countries generally does not require the consumption of their own foreign exchange reserves.

If there is no bilateral currency swap agreement, when both parties engage in international trade, they usually need to pay in international currencies (such as the US dollar, euro, etc.) and consume the corresponding foreign exchange reserves. Currency swap effectively solves this problem.

When Chinese Company A needs to purchase oil, it can directly pay the corresponding amount in RMB to the Saudi account, and the corresponding amount in Riyal will be paid to the counterparty Company B in Saudi Arabia.

Saudi Company C needs to import new energy vehicles from Chinese Company D, it can directly pay in Riyal to the Chinese account, and China can then pay in RMB to Company D.

It can be said that bilateral currency swap has numerous benefits and will greatly facilitate economic and trade exchanges between the two countries.

As of November 2023, the People’s Bank of China has entered into 30 effective bilateral currency swap agreements with other countries and regions (including Saudi Arabia). As of the end of September 2023, the total swap size exceeded 4 trillion RMB (Note: swap size is different from the actual amount of funds used).

As of the end of September 2023, foreign currency authorities have utilized a balance of 117.1 billion RMB. As of the end of September 2023, the People’s Bank of China has utilized a balance of foreign currency swap funds equivalent to 3.43 billion RMB. [1]

It is expected that in the current context of the continuous internationalization of the RMB, bilateral currency swap and other tools such as bilateral currency settlement will inject more momentum into China’s bilateral trade with other countries.

Balancing U.S. Foreign Aid.

The country that receives the most foreign aid from the U.S. is Israel –

The Saudis have this idea where they feel like I buy all these weapons from you every year, and then you turn around and give the money to Israel –

So there must be a “balance”.