Saudi PIF's new deals turbocharge financial synergy with China

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 non-resident associate fellow at the Center for China and Globalization. The article reflects the author's views and not necessarily those of CGTN.

The recent steps taken by China and Saudi Arabia to bolster their financial sector collaboration signify more than just another set of international agreements. These moves mark a strategic pivot that could reshape the economic landscapes of both nations and have far-reaching implications for the global financial system.

On August 1 Saudi Arabia's Public Investment Fund (PIF), the world's fifth largest sovereign wealth fund, signed memorandums of understanding (MOUs) with six major Chinese financial institutions worth $50 billion in total, indicating that bilateral collaborations in the financial sector are being further enhanced. The amount of the agreements is set to be deployed in the promotion of two-way capital flows between the countries through both debt and equity.

The news comes shortly after the successful debut in the Chinese mainland stock market of two exchange-traded funds (ETFs) tracking Saudi Arabia's largest companies, including oil giant Saudi Aramco, highlighting the strengthening links between the financial markets in China and the Middle East. A similar move, currently under development, is the launch of an ETF tracking Hong Kong's benchmark Hang Seng Index which will broaden ties between Saudi Arabia and China's financial markets.

For Saudi Arabia, the importance of economic diversification is of utmost importance. With an economy historically tethered to oil, the kingdom's Vision 2030 plan aims to broaden its economic base. Strengthening ties with China's robust financial market offers Saudi Arabia a pathway to reduce its oil dependency and stimulate growth in other sectors such as technology, renewable energy, and infrastructure. This collaboration aligns perfectly with the kingdom's goals, providing direct access to Chinese expertise, technology, and capital.

Increased bilateral financial cooperation means more than just inflows of capital. It represents mutual growth. Chinese investors are known for their keen interest and competence in infrastructure and development projects. With Saudi Arabia's ambitious projects like NEOM, a futuristic city project, Chinese capital and construction prowess can help bring such visionary projects to fruition, benefiting both economies.

On the flip side, Saudi investors gain access to one of the world's most dynamic markets. China's economy, despite facing challenges, continues to be a global engine of growth and a benchmark in innovation. In this sense, Saudi investments in China can tap into sectors such as fintech, e-commerce, and green technologies, yielding significant returns and technological know-how.

The financial sectors of both countries stand to gain substantially from an increased level of collaboration. For Saudi Arabia, a continuous integration with Chinese financial markets can lead to the introduction of new financial instruments and services, increasing market sophistication and depth. Saudi Exchange, also known as Tadawul – the stock exchange of Saudi Arabia, can benefit from Chinese participation, potentially increasing its liquidity and attractiveness to global investors.

For China, expanding its financial influence into the Middle East aligns with its broader Belt and Road Initiative. Saudi Arabia's strategic location and its own development ambitions make it a critical partner in this initiative. Chinese financial institutions can thus play a pivotal role in financing and facilitating BRI projects, fostering regional connectivity and economic integration.

Robust financial ties are a catalyst for enhancing trade relations. Easier financing and settlement of trade transactions can boost bilateral trade, benefiting a wide array of industries in both nations. The potential introduction of local currency settlements in bilateral trade could reduce dependence on the U.S. dollar, lower transaction costs, and mitigate exchange rate risks.

The strengthening of financial links between China and Saudi Arabia carries significant geopolitical weight. For Saudi Arabia, this partnership offers a counterbalance to its traditional Western alliances, providing it with greater leverage and strategic options. For China, deepening ties with a leading Middle Eastern power enhances its influence in a region critical to its energy security and geopolitical interests.

All things considered, the stepping up of bilateral collaboration in the financial sector between China and Saudi Arabia cannot be just seen as a strategic maneuver but as a visionary alignment of mutual interests. It promises to drive economic diversification and growth, foster financial market development, enhance trade, and strengthen geopolitical positions.

As both nations navigate the complexities of the global economy, their enhanced financial partnership could serve as a model for future international collaborations, underscoring the importance of strategic economic alliances in an increasingly interconnected world.

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