Financial linkages take China-Saudi Arabia relations to the next level


Editor's note: Matteo Giovannini, a special commentator on current affairs for CGTN, is a finance professional at the Industrial and Commercial Bank of China and a member of the Global Young Leaders Dialogue. The article reflects the author's views, and not necessarily those of CGTN.

Recently, the Shanghai Stock Exchange and the Saudi Exchange have signed a memorandum of understanding (MoU) to foster closer ties between China and the Gulf nation in the financial area.

In recent months, the pace of diplomatic and economic relations between China and Saudi Arabia has gained steam in mainstream media, as a direct consequence of Chinese President Xi Jinping's trip to Riyadh last December where the two nations secured a large number of deals ranging from technology to energy and infrastructure.

On March 29, Saudi Arabia joined the Shanghai Cooperation Organization as a dialogue partner and on the same day, the New Development Bank announced to be in concrete talks with the largest Arab state in Western Asia regarding the possibility of membership. On August 24, the Kingdom was among six countries invited to join the BRICS as a new member starting from next year.

In this sense, the signing of the MoU between China and Saudi Arabia this time represents an attempt from the two nations to promote a convergence of the respective financial ecosystems to promote mutual economic development. Under the agreement, the two exchanges are expected not only to cooperate on cross-listings, financial technology solutions, and data exchange but also to share knowledge in the dual-listings of exchange-traded funds (ETFs).

ETF cross-border initiatives with foreign countries are nothing new to China. The country has already put in place an ETF Connect Scheme with the Japan Exchange, the Korea Exchange, and the Singapore Exchange. The addition of such a scheme with Saudi Arabia, the first one beyond East Asia, and an answer to strong regional demand for ETF products will have the effect of an increase in the level of accessibility to the Chinese financial market for foreign investors.

Achieving a higher level of connectivity in the financial area is in the interest of both nations. China has the necessity of providing alternative overseas funding avenues to its companies, at a time of lower global growth, while reducing the historical reliance on U.S. capital markets. Saudi Arabia has the goal of implementing the nation's Vision 2030, a government program aimed at obtaining increased economic diversification through a reduction in dependency on oil and an increase in inbound foreign direct investments to emerging sectors.

Numbers always help to gain a better understanding. Saudi Arabia is the world's seventh-largest stock market, with a total capitalization of $3 trillion, while China is the world's second-largest stock market, with a total capitalization of nearly $10 trillion.

Combining the size of the two bourses, through an alignment of financial interest, could have a domino effect in Western Asia. This is because Saudi Arabia is by all means considered the benchmark in the Middle Eastern region and every decision taken by the Kingdom is highly monitored and, in most cases, imitated by neighboring countries.

China is the Arab world's largest trading partner with a total trade volume of nearly half a trillion dollars. Considering that Saudi Arabia accounts for about 25 percent of the entire trade volume between China and the Arab countries, it is not hard to understand why Chinese financial institutions have decided to increase their local presence.

The establishment on September 5 of a Bank of China branch in the capital city of Riyadh, in addition to the opening of a Jeddah branch of the Industrial and Commercial Bank of China in May, is indicative of the determination of the world's second-largest economy to be at the forefront in facilitating trade cooperation between the two Asian nations.

Representatives attend an event to announce the opening of an ICBC Jeddah branch in Riyadh, Saudi Arabia, May 16, 2023. /Xinhua
Representatives attend an event to announce the opening of an ICBC Jeddah branch in Riyadh, Saudi Arabia, May 16, 2023. /Xinhua

Representatives attend an event to announce the opening of an ICBC Jeddah branch in Riyadh, Saudi Arabia, May 16, 2023. /Xinhua

An expanded level of economic activity between China and Saudi Arabia is going to be conducive to the promotion of local currency use for trade settlements, preventing the possibility of exchange-rate losses and insulating both countries from the risk that the U.S. uses the dollar as a financial weapon. 

With the Chinese yuan's global recognition and adoption level gaining momentum day by day, the decision of China and Saudi Arabia to enter a new stage of financial cooperation could not come at a better time.

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