China wants to buy more oil from Saudi Arabia – and that could eat away at the dollar, a think tank strategist says

Saudi Crown Prince Mohammed bin Salman and Chinese President Xi Jinping in Hangzhou, China, in September 2016.Lintao Zhang/Getty

George Glover Dec 9th, 2022

• China is willing to import more oil from Saudi Arabia, President Xi Jinping said Friday.

• That could spur "de-dollarization", if Saudi Arabia agrees to accept yuan payments.

• "This trend is already beginning," a think tank strategist said.

China wants to buy more oil from Saudi Arabia, its President Xi Jinping has said — a move that some economists have warned could chip away at the US dollar's global dominance.

Xi said China will "expand the scale of crude oil trade" with the Middle Eastern country on a state visit Thursday, according to a foreign ministry statement. He also agreed to step up coordination with Saudi Arabia on energy policy in his meeting with Crown Prince Mohammed bin Salman.

The meeting, which signaled a warmer relationship between Beijing and Riyadh, comes after the US and its allies brought in a ban and price cap on Russian oil exports. Those are just the lastest in a string of Ukraine war sanctions that have spooked the Chinese and Saudi authorities, according to experts.

The meeting wrap-up made no mention of the idea that Saudi Arabia may start accepting payments in China's yuan payments for its crude exports — something the two countries were reported to have under active discussion earlier this year, in a possible pivot away from the dollar.

That would drive up the likelihood of "de-dollarization" – the replacement of the dollar as a global reserve currency.

"This trend is already beginning," Gal Luft, a director at the Institute for the Analysis of Global Security think tank, told CNBC on Friday.

"There's no reason why two countries that already have vast exposure to the US dollar should maintain their trade in a third-party currency."

China is already paying for Russian energy with the yuan, which now accounts for nearly half of Moscow's currency market.

The dollar has surged in 2022, boosted by the Federal Reserve's interest rate hikes, which have attracted foreign investors seeking higher yields. The US Dollar Index – which measures the greenback's value against a basket of six other currencies – has jumped 9.16% year-to-date.

"The Saudis have a lot to buy from China and China has a lot to buy from Saudi Arabia," Luft said. "Why should they transact in a third-party currency and incur all of these exchange-rate costs?"

Oil contracts are based on crude benchmarks like Brent futures and West Texas Intermediate futures, which are priced in dollars. That means countries have to buy dollars to purchase oil, supporting the greenback's value.

The western sanctions against Russia have led to a cooldown in the relationship between the US and both China and Saudi Arabia.

"Don't forget that both China and Saudi Arabia have been shocked by what they've seen the Americans and the Europeans doing to the Russians in terms of freezing central bank assets and so forth," Luft said.

"That's something that really shook them because today it's Russia, tomorrow it's them," he added.

"That certainly has an impact on their decision-making, and I think that de-dollarization is already starting to happen."