China’s Saudi bond sale hints at ongoing de-dollarization push
Deepening bilateral financial ties could signal a fundamental shift in global trade as Beijing lays the ground for challenging dollar dominance
In a significant move reflecting the evolving financial ties between China and Saudi Arabia, over the past month, media sources have reported that China has chosen Riyadh as the venue for its first U.S. dollar-denominated sovereign bond sale in three years, valued at USD 2 billion. This strategic decision underscores a deeper financial collaboration between the two nations, and a notable early step in a wider trend of de-dollarization.
Looking beyond the bond sale, a broadening of bilateral investment flows may signpost a more significant shift in how Beijing and Riyadh conduct trade. We explain how increased transaction volumes could pave the way for more CNY-denominated trade, and uncover how China plans to lend credibility to an internationalized Yuan. We wrap up by showcasing how we are capitalizing on the shifting macro landscape with a straightforward play.
Recent developments show Sino-Saudi financial ties permeating beyond the state level
Although international dollar bond sales comprise a relatively small portion of China's government financing, they serve as a key benchmark, allowing global investors a straightforward path to engage with Chinese sovereign debt. The bond listing is expected to capture the interest of Saudi and regional investors who historically have limited access to Chinese debt markets. The implications of Saudi Arabia’s potential emergence as a recurring partner in Chinese debt issuance could be significant. The bond sale follows a series of recent milestones highlighting deepening financial ties between the two nations.
Notably, the SAB Invest Hang Seng Hong Kong Exchange-Traded Fund (ETF) (SAB HK; 9411) recently launched on Saudi Arabia’s Tadawul Stock Exchange, issued by Saudi investment firm SAB Invest. Similarly, alongside it, the Albilad CSOP MSCI Hong Kong China Equity ETF (ALBILAD Hong Kong China; 9410) debuted with an initial size exceeding USD 1.2 billion, making it the largest ETF in the Middle East.
That’s not to mention the launch of the CSOP Saudi Arabia ETF (2830.HK) launched in November 2023, which we wrote about and bought into shortly after its launch though performance have largely been flat since its inception.
By offering Saudi investors access to a diversified HK/China basket of companies, and Chinese investors to buy the Saudi basket, both sides are offered international alternatives to the traditional Western markets.
The first half of 2024 also saw the launch of two Saudi ETFs on the A-share market, along with the Kingdom’s USD 925 billion sovereign wealth fund (Public Investment Fund – PIF) signing six MoUs of up to USD 50 billion with major Chinese financial institutions, including four state-owned banks in August to encourage two-way capital flows via both debt and equity.
Prior to 2015, the PIF, primarily focused on domestic infrastructure investments, which accounted for 98% of AUM. Fast forward to date, overseas investments contribute 20%. The PIF already have a QII license in a place for Chinese investments. This enables then to directly invest in CNY-denominated stocks, rather than having to go through third parties.
Publicly-available data on PIF investments in China may only show the tip of the iceberg, with the fund holding stakes in:
PDD Holdings (PDD.N) - position market value ~USD 169 million
Alibaba (BABA.N, 9988.HK) - position market value ~USD 138 million; and
Flat Glass Group (6865.HK) - position market value ~USD 37 million.
However, as of July 2024, their investments in the Chinese market reached around USD 22 billion, mostly focusing on emerging fields such as autos, healthcare and technology. Saudi Aramco (2222.SE), of which PIF is a main shareholder, also appears to be recycling its revenues from oil sales to China, back into that market with significant direct investments into petrochemicals and oil-related projects.
The flourishing bilateral investment landscape leads us to the main thrust of this article - how will China’s trading partners, now flush with Yuan, deploy their newfound reserves if all goes to Beijing’s plan? How are China’s policymakers paving the way for a more trustworthy and credible internationalized Yuan? And what does this mean for investors looking to capitalize on this trend?