While China's oil majors Petro China and Sinopec Corporation had shown interest in Saudi crown jewel Aramco IPO earlier this year, Riyadh is now showing eagerness to borrow funds in China's yuan denominated currency. HSBC's CEO for the Middle East and North Africa Georges Elhedery was quoted earlier in the year by news agencies in Dubai that the region's debt capital market is likely to exceed last year's record of over $60 billion.
Saudi Arabia has been making substantial borrowing in the last two years to finance its budget deficit that cropped up largely because of the global decrease in oil prices and also funding the growing cost of open ended Yemen war now running in its third year. There is another factor - its large defense spending. While Riyadh is said to have its own compulsions for procurement of armaments, it has become the world's third largest spenders in defense - below the United States and China. The Russian Federation trails in the fourth position.
Saudi budget in 2015 was financed through oil revenue to the tune of 73 per cent and budget deficit that year rose to 16.3 per cent compared to only 3.4 per cent in 2014, according to the Economic Monitor. There was no improvement seen since that time but subsequent agreements to purchase of huge armaments from the US following President Trump's Middle East visit earlier this year, has reportedly caused a big dent in its not insubstantial foreign exchange reserves.
Soon after the oil crunch began to bite the economy, the Saudi administration, led by 31-year old Crown Prince Mohammad bin Salman, launched a major reforms programme-- National Transformation Plan (NTP) in April 2016. The NTP is called "Vision 2030" and its basic goal is to reduce the importance of oil to the Saudi economy. It sought to diversify the country's economy with an initial $72 billion investment programme.
DIVERSIFYING BORROWING FROM ABROAD: A Reuters report from Jeddah says the Saudi government has started "borrowing tens of billions of dollars abroad in the past year to cover the budget deficit, but (all) its foreign bond issues and loans have been denominated in the US currency." The report quoted a senior Saudi official attending the China-Saudi Arabia investment conference held in Jeddah in late August as saying that his government would consider funding itself "partly in Chinese yuan".
Analysts pointed out that a decision by the Saudis to obtain funds in yuan could give Riyadh more financial flexibility and would also mark a success for China in its drive to make yuan a top international currency. The Saudi decision, if implemented, is expected to help each other out.
China had already sought to participate in the Aramco IPO some time ago, but the IPO deal itself is yet to be finalised. Aramco is gearing up for a five per cent share listing next year, aiming to get a valuation of up to $2 trillion in what could be the world's biggest initial public offering. Knowledgeable Saudi sources say, Aramco is yet to make a decision on the international venue for the IPO, but "given the size and nature of the industry" it is likely to be New York.
Informed sources also said that Global exchanges such as London Stock Exchange are pitching to win a slice of Aramco's IPO, which Western experts have predicted would generate huge demand from strategic investors regardless of where it is listed.
Meanwhile, the Saudis are showing their keenness to involve China to play a much bigger role in funding some of their development projects.
Saudi Vice- Minister of Economy and Planning Mohammad al-Tuwaijri told the Saudi-Chinese economic conference in Jeddah earlier in August:
"One of our main objectives is to diversify the funding basis of Saudi Arabia."
CHINA'S PANDA BONDS AND $20B INVESTMENT FUND: Tuwaijiri said that Riyadh would try to raise funding abroad not only to cover the budget deficit but also "more importantly", to finance major investment projects that would expand the country's economy and create jobs. He told a questioner: "Ideally, we would be funding through project finance and bond markets and other means."
He did not, however, explain what he meant by "other means," but added: "We will do through access to investors or bodies of liquidity in the markets. China is by far one of the top markets….We will also access technical markets in terms of unique funding opportunities, private placements, panda bonds and others."
China's trade with Saudi Arabia, according to the latest available figures, was about $52 billion in 2015. In that year, China imported goods worth $30 billion (crude oil and petrochemicals) while it exported mechanical products, electronics and clothing worth $21.76 billion. The two-way trade is said to be rising at a faster rate.
Saudi Energy Minister Khalid al-Falih, who has also attended the Jeddah conference, has separately told Reuters that Saudi Arabia and China planned to establish a $20 billion investment fund on 50:50 basis. He said: "It is preliminary at this stage, but the commitment from the top is there."
Establishment of such funds jointly in many countries has become a new phenomenon in China's investment plans to cement bilateral economic ties with other countries. For example, according to reports, in December 2015, Beijing had announced setting up a $10 billion fund with the United Arab Emirates and in October last year, establishment of such a fund was proposed with France. The fund's size was not mentioned.
China's panda bonds are fully yuan denominated ones from non-Chinese issuers and are sold within China. The ICBC International, a wholly-owned subsidiary of China's largest commercial bank ICBC has responded positively to the Saudi advances.
ICBC International's CEO An Liyan, while attending the Jeddah conference in August suggested that her bank was prepared to sponsor Saudi issues of panda bonds. Usually, the Chinese officials do not make any formal commitment unless they have done their home work thoroughly and obtained the permission from their policy makers.
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