Saudi Arabia’s King Salman bin Abd al-Aziz Al Saud on 29 March approved a Memorandum of Understanding for the country to become a diplomatic partner of the Shanghai Cooperation Organisation (SCO), a China-led regional trade and security alliance. This followed Xi Jinping’s state visit to Saudi Arabia in December 2022, his first to Riyadh since 2016. In this note, we look at how this new phase in the Sino-Saudi relationship is likely to evolve.
- Economic relations is likely to remain at the heart of the China-Saudi relationship in the coming years, and further bilateral investment projects and energy cooperation are likely to be announced in the coming months.
- A strengthened relationship will sustain China’s energy stability and help Saudi Arabia build a more rounded, internationalist policy stance that is more independent of the US.
- China’s investment in Saudi Arabia will continue to increase, with its scope expanding beyond Beijing’s traditional focus on energy to include sectors such as construction, telecommunications, artificial intelligence and sustainable energy.
- Beijing remains likely to refrain from deep involvement in security matters in the Middle East and North Africa (MENA) region.
Key partners
China is Saudi Arabia’s largest trading partner, with USD 116.04bn in bilateral trade in 2022, a 32.9% increase from 2021. China is the world’s largest buyer of crude oil, and it buys more from Saudi Arabia than any other country. Crude oil accounted for 77% of China’s total imports from the kingdom, and this does not include China’s voluminous imports of plastic and other crude oil derivatives.
What outcomes from Xi’s visit?
Xi’s visit in late 2022 was an opportunity for Crown Prince Mohammed bin Salman (MbS) to show off to the kingdom’s largest trade partner how much the country had changed in the previous six years and highlight to a key stakeholder the areas of mutual benefit for the next six years and beyond. The visit concluded with at least 40 initial investment agreements worth more than SAR 110bn (USD 26.6bn) in total.
As a result of these agreements, Chinese investment into Saudi Arabia will increase beyond the traditional focus on the energy sector. Infrastructure and logistics, highlighted by China’s Belt and Road Initiative (BRI) and Saudi’s Vision 2030 economic diversification plan, will receive stronger support from both governments. Meanwhile, Saudi Arabia will seek to maintain a high level of engagement with Chinese firms in areas such as sustainable energy (including renewables and potentially hydrogen), telecommunications, and cyberspace and artificial intelligence (including networks and cloud services).
The trip and its agreements were a follow-up to the “comprehensive strategic partnership” agreement signed during Xi’s 2016 visit. This designation put the kingdom in one of the highest tiers of Chinese diplomatic partnerships as China seeks to secure energy supply and counter the US-led international agenda. The joint statement also highlighted the enhanced bilateral partnership in the petroleum sector. However, despite intense media attention on crude oil trading in Chinese yuan (RMB), no concrete initiatives were mentioned in the statement, and the multi-billion US dollar deals remain potential rather than guaranteed.
“It's the economy, stupid”
A continued commitment from Saudi Arabia will be an important part to Beijing’s efforts to stabilise foreign investment amid its slowing economy and ongoing tensions with the US. Chinese official media branded a large refinery and petrochemical investment by a major Saudi Arabian oil company as “a win-win strategic move”. Beijing will continue to welcome investment from Riyadh, especially stable and long-term investment from the sovereign wealth fund.
And for all the debate about whether there is a future role for China in Saudi’s diplomatic and security interests, and a desire to see this purely through the framing of geopolitical competition between Washington DC and Beijing, the heart of this relationship is and will remain economic in the coming years.
What Riyadh wants and needs
To be able to build the components of the Vision 2030 economic diversification plan, the kingdom needs foreign direct investment, (oil) revenue, workers and materials. All of these things China can provide: Chinese construction companies will usurp US firms from their historical role as external construction and development partners in Saudi Arabia; Chinese-owned infrastructure will be put into the new “smart cities” systems that are a cornerstone of the futuristic elements of multiple giga-projects; and Chinese joint investment will drive more manufacturing, from electric vehicles to building construction materials. All of which will provide China with overseas investment opportunities while Beijing also expands its global influence.
Whither Saudi-US ties?
However, Riyadh is not becoming closer to Beijing at the expense of Washington DC. Instead, it is building a more rounded, internationalist and independent policy stance in Riyadh, and changing external perceptions of Saudi foreign policy interests.
For Riyadh and Beijing, developing deeper ties will bring as well aspolitical and security ones. Saudi could yet become a fully-fledged member of the SCO, which would promote further economic and diplomatic ties with member states.
Riyadh has looked to flatter China by creating pathways for ties to deepen elsewhere: one clear recent example of closer Saudi-Chinese diplomatic coordination yielding wider benefits is in the 10 March Iranian-Saudi agreement to restore bilateral diplomatic ties, with the signatures facilitated by Beijing. For China, ensuring the security of Gulf waterways of the Red Sea, Arabian Sea and Persian Gulf) and the three crucial choke points (the Suez Canal, Bab al-Mandab and the Strait of Hormuz) which transport its vital energy supplies is an absolute necessity; being perceived as having skin in the game to indirectly lower security risks in the region through facilitating improved Tehran-Riyadh ties helps achieve that security and economically focused goal, whilst also giving it just a touch more diplomatic clout in the MENA region. However, Beijing is likely to refrain from deep or more extensive involvement in security matters in the MENA region.
Where do they go from here?
Saudi and China have been negotiating a free trade agreement (FTA) since 2004 under the rubric of the Gulf Cooperation Council (GCC); ambitious FTAs always take time, but the approaching 20-year anniversary of the start of negotiations – with no clear plan for a bilateral FTA in sight – highlights how the true potential of Saudi-China ties remains unfulfilled.
From the Saudi perspective, indicating even a small shift away from the US dollar is a largely symbolic diplomatic move given the ongoing challenges in its relationship with the US. Using RMB for payments will facilitate direct trade with China and lower exchange costs, but outside of paying Chinese companies for new projects over the next decade, there are more risks than opportunities for Riyadh in encouraging large-scale RMB usage.
Yet all the signals of the last months show that there is a definitive commitment to creating mutual material benefits over a five-to-ten-year timeframe. The most progress is going to be made in the sectors where China has an acute advantage: construction, telecommunications, artificial intelligence, and sustainable energy. As Chinese firms looks to new markets for their products, financial technology and manufacturing also have positive outlooks.