China & Saudi Arabia Sign $50B In New Energy, Security, and Investment Agreements

Chinese President Xi Jinping attended the Riyadh Gulf-China Summit for Cooperation and Development Summit. China signed several memorandums of understanding and more than 40 new energy, security, technology, and bilateral investment agreements with Saudi Arabia and other Arab gulf states totaling more than $50 billion. The new deals will increase the Saudi-China trade to nearly $140 billion annually compared to $24.7 billion of Saudi-U.S. trade.

During Chinese President Xi Jinping's speech on Friday, he stated he would work to buy oil and gas in Chinese Yuan. He stated China would use the Shanghai Petroleum and National Gas Exchange as a platform to carry out Yuan settlement of oil and gas trade.

Saudi Arabia still has substantial Dollar-denominated assets, including $121 billion in U.S. Treasuries and $608 billion in the U.S. stock markets. In 2020, Saudi Arabia held $184.4B in U.S. Treasuries. Two years later, Saudi Arabia has reduced its Treasury holdings by 34.4% to $121B. Saudi Arabia is systematically de-dollarizing their economy and reducing Treasury holdings. Saudi Arabia knows how vital the Petrodollar agreement is for their investments. The Saudis want to retain $700+ billion and secure trade with China. They want their cake and eat it too. They have to be careful not to move too quickly. Accepting Yuan prematurely would put their $700+ billion at risk. What does that say about the importance of the Petrodollar agreement for the value of Dollar-denominated assets?

 In politics, the words not said are often as crucial as those spoken. The Saudi's statement was uncommonly forthright for a political response to a news outlet. Despite the strained U.S./Saudi relations, one still expects an ambiguous political word salad. A word salad like "Saudi Arabia values all our trading partners and looks to bring the best solution to all parties. Our long-standing relationship with the U.S. will continue to endure as we grow our relationship with China.” Instead, we got unambiguous, “It is not yet the right time.” The phrase “not yet” implies “not now but coming soon.”

More than the economic agreements, the security agreements may be the loudest warning for your portfolio. In October, OPEC denied White House requests to stall oil production slowdowns until after the elections. U.S./Saudi relations suffered strain after President Biden promised "consequences" for Saudi Arabia in response to the denial. Within a week, China and Saudi Arabia released a joint statement reaffirming their commitment to the oil trade's stability. A week later, Saudi Arabia lowered the oil price for Asia while raising it in Europe. 

At the time, MBS said China was Saudi Arabia's primary economic partner, and the U.S. was their military partner. (In the Petrodollar agreement, the U.S. promised to provide military support, and Saudi Arabia would keep the oil trade in Dollars.) Six weeks later, China and Saudi Arabia are signing military agreements. 

Military agreements are the realm of the U.S./Saudi relationship. China is wooing Saudi Arabia with the promise of military protection. In a marriage, this type of unfaithfulness would end in a divorce. Divorces are messy and very expensive. What would the U.S. lose in the divorce? What would you lose? Do you want to be holding Dollars when Saudi Arabia officially files for divorce from the Petrodollar? 

Saudi Arabia doesn't want to be holding dollars when the Petrodollar ends. Do you?

Precious metals are an excellent idea. Don't you agree?

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