China is betting big on Saudi Arabia, this time by offering to pour money into the upcoming stock exchange listing of Saudi Aramco. Mohammed bin Salman, Deputy Crown Prince of the kingdom, has said that Aramco is worth $2 trillion. A recent report by executives within the oil company suggested that this valuation was out by around $500m. As CNBC pointed out rather sarcastically, this is roughly the value of Amazon and Netflix combined.
Saudi salesmanship aside, the flotation is still set to be a pivotal moment for the country. This is as much about geopolitics and choosing alliances as it is about modernising the economy. According to a well-informed Reuters report released last week, China Investment Corporation (CIC), the $800 billion sovereign wealth fund which includes the mega oil producers Sinopec and PetroChina, and other state-owned banks would commit ahead of time to buying a large, fixed amount of stock during the listing period. This is meant in part to sway Aramco towards a Hong Kong listing, putting that stock exchange in contention with competitors in Japan, London and New York.
China and Saudi Arabia have been cooperating on energy matters for a while, although not so much on oil as more future-friendly sustainable sources. Contrary to popular belief about China being a coal-burning, eco-unfriendly monster, the country is leading the way in solar energy expansion and in February doubled its output over a year. That now makes it the biggest producer of solar power in the world. Beijing plans to invest $364 billion in renewable power generation by 2020. Meanwhile, Saudi Arabia plans to generate nearly a third of its power needs from solar energy by 2034. Back in 2014, China became a major partner to Riyadh on solar issues, advising on technicalities and providing some investment.
The kingdom is not just harnessing its abundant sunny weather. Last year, Riyadh launched a “$30bn-$50bn” investment in nuclear energy, again partnering with Chinese state-owned entities, although how much of this has actually flowed into production is unclear. The relationship isn’t just about the future though; China is currently Saudi Arabia’s largest trading partner, purchasing more than one million barrels of crude oil daily. The Chinese have offered help on solar and nuclear power; Saudi engineers have offered in return their expertise on petrochemical goods.
This week, Charles Li Xiaojia, the Chief Executive of HKEX Hong Kong announced that talks were ongoing to take on Saudi Aramco’s listing. The stock exchange is hoping to launch the listing alongside “IPO Connect”, its new trading medium designed to allow mainland investors in China to connect with new listings. He cited the strong political relationship between Saudi Arabia and China in his favour, but he has already been forced to take a twenty-five per cent bonus cut for lack of winning similar listing opportunities. The competition is stiff; London and New York are more conventional destinations for oil companies looking to raise capital.
Nevertheless, a listing partly in China-Hong Kong fits with Saudi strategy. While relations with America are unlikely to change substantially in the near future, Trump has sent jitters around the world, even if he is making generally positive noises on issues like Iran. Still, the White House is now seen as far more unpredictable, and has proven that even the position of America as a stable democracy is far from certain.
More importantly, by 2030, Chinese demand for oil is expected to reach more than 16 million barrels per day, while US demand is expected to decrease. The future is east. As certain analysts have pointed out, Saudi Arabia is one of several Muslim countries choosing to place more focus on partners towards the rising sun rather than to the West. The list includes Egypt, Indonesia, Iran, Iraq, Kazakhstan, Malaysia, Mauritania, Nigeria, Pakistan, Sudan and Turkey. Offering part of the Aramco listing to China may be a way to deepen this relationship.
That sense of a tilt from the leading GCC state towards Beijing was even more on show last month. King Salman visited the Chinese capital as part of an Asia tour, and signed an eye-watering $65 billion in deals. Beijing seemed to understand that Saudi Arabia sees itself not just as a nation but as the leader of the Islamic world, with President Xi Jinping saying that, “For a long time, China and Islamic countries have respected each other and had win-win cooperation, and have created a model of the peaceful coexistence of different cultures.”
Saudi Basic Industries Corp (SABIC) and Sinopec, which already run a chemical plant in Tinajin, agreed to develop petrochemical projects in both China and Saudi Arabia. There was also a memorandum of understanding for China North Industries Group to explore construction projects. The partner company in Saudi Arabia was — you guessed it — Saudi Aramco. Beijing should feel optimistic that Riyadh will throw them something from the Aramco table, whenever the listing takes place, and however much the company ends up really being worth.