What happens in China does not stay in China

There is a well-known saying that what happens in Vegas stays in Vegas, but conversely what happens in China does not stay in China, given that global economic superpower’s effect on other economies and welfare.

This is especially true for oil exporters banking on China’s continued economic growth and oil imports to reduce their fiscal deficits. It is important to understand China’s current economic and stimulus policy measures and some of the issues it is facing like ongoing Evergrande crisis.

The Chinese Communist Party is the main arbiter of economic policy, with President Xi Jinping exercising wide powers in setting the direction and tone of future actions.

On July 29, Xi presided over the fourth of eight Central Financial and Economic Affairs Commission meetings scheduled this summer.

The Beijing meeting formulated monetary policy guidelines for the second half of 2021, and stressed that the People’s Bank of China, the country’s central bank, should adhere to a “prudent monetary policy that is flexible, reasonable and appropriate, and comprehensively use a variety of monetary policy tools to attain sufficient liquidity.”

So far so good, but in reality how is this to be translated and what is its impact on trading partners?

Some emphasis was placed on new items in light of current tensions in US-China relations.

The bank was directed to, first, continue to cut rates for open market operations or lower the RRRs, reserve requirement ratios, to spur small and micro business lending; and, second, to more actively and steadily push forward with the internationalization of the Chinese currency, the yuan/renminbi.

Meeting minimum economic growth targets has always been a matter of national pride in China. While many countries will be satisfied with economic growth of 2 or 3 percent, especially in light of the global pandemic slowdown, the Chinese are fixated on minimum growth of 6 percent.

By comparison, Saudi Arabia’s gross domestic product rose by 1.5 percent year-on-year by the end of Q2 2021, data issued by the General Authority for Statistics showed. Some analysts have recently upgraded their forecasts for the Kingdom’s economy from 2.2 percent to 4.8 percent in 2021, and from 4.1 percent to 6.3 percent in 2022.

Flooding in China since late July and the recent delta virus outbreak in several cities have had an impact on economic growth in the current quarter, putting pressure on the 6 percent growth target. However, the economic and financial fallout of Evergrande could have some major implications for the Chinese economy, as the global markets have been rocked by concerns over the firm’s ability to support is more than $300 billion of debts and looming interest payment deadlines that are likely to be missed.

The real estate industry is a major component of the Chinese economy accounting for almost 30 percent of the gross domestic product but on the bright side only around $20 billion of Evergrande’s debt are held by foreign investors. While the amount of foreign debt may be small, there will be a potential impact on China’s financial system as the company owes money to around 171 domestic banks and another 121 financial firms and if it defaults, these institutions might be forced to lend less leading to a credit crunch in China.

To date, the Chinese government has been quiet on whether it will bail out Evergrande, on the principle of “too big to fail,” with some predicting it might not, as this would fit in with Beijing’s aim to curb rampant corporate debt and bailing out the property giant would set a bad example.

The item of importance for countries such as Saudi Arabia and other oil exporters to China was payments and currencies, with the meeting urging the central bank to further promote the internationalization of the renminbi, including the development of offshore RMB markets, and cross-border trade and investment.

The bank was told to prepare for the possibility of US sanctions at some point by increasing the use of its cross-border interbank payment system instead of the widely used global SWIFT system. The meeting added that the bank should encourage Chinese foreign trade companies to conduct more forex business in RMB to avoid possible risks down the road.

The directive is far from a trifling issue, but is it realistic for China to impose this on a country such as Saudi Arabia compared with sanctions-hit states such as Iran and Venezuela?

Saudi Aramco is considering the sale of another 1 percent IPO tranche, which if valued at current Aramco market capitalization levels and a share price range of around SR34-35, will equate to $18.5 to $19 billion. This raises interesting options for the Kingdom on whether to sell to China or to another major energy partner, specifically India. Sanction-hit countries do not have the same luxury of choice that Saudi Arabia enjoys.

India is a more likely contender for the IPO tranche, and could avoid the Kingdom having to make a political choice between the US and China in a looming currency war.

The news that Saudi Aramco is in advanced talks to acquire a 20 percent stake in India’s Reliance Industries’ oil refining and chemicals business in an-all stock deal for about $20-$25 billion of Aramco shares indicates that this could be the most economically and politically acceptable path for the Kingdom, forging a closer alliance between the world’s biggest oil exporter and one of the fastest-growing consumer countries.

This option seems the most likely route given that Reliance appointed Aramco Chairman Yasir Al-Rumayyan to its board in June.

• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran.