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The Risks of the China-Saudi Arabia Partnership

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The Risks of the China-Saudi Arabia Partnership

Geopolitical factors, as well as Saudi Arabia’s own domestic landscape, could limit the relationship’s potential.

The Risks of the China-Saudi Arabia Partnership

Chinese Premier Li Keqiang, right, shakes hands with Saudi Arabia’s King Salman at Great Hall of the People in Beijing (March 17, 2017).

Credit: Lintao Zhang/Pool Photo via AP

On January 18, Chinese Ambassador to Saudi Arabia Li Huaxin praised Saudi Arabia’s Vision 2030 project and called for tighter integration between Saudi Arabia’s economic diversification efforts and the Belt and Road Initiative (BRI). Li also expressed enthusiastic support for Saudi Crown Prince Mohammed bin Salman’s anti-corruption campaign, claiming that his efforts to strengthen the rule of law in Saudi Arabia would increase the country’s attractiveness as an investment destination for Chinese businesses.

While Li’s praise for Saudi Arabia’s economic reforms suggests that the Beijing-Riyadh partnership is on firm footing, growing concerns in the United States about the implications of Chinese investments for the Washington-Riyadh alliance and uncertainties surrounding the nature of the Saudi privatization process could limit the scope of China-Saudi Arabia economic cooperation. These factors could cause Beijing to eventually pivot more firmly toward Riyadh’s regional rivals, Iran and Qatar.

Saudi Arabia’s Balancing Act Between China and the United States

Even though Washington did not react strongly to China’s emergence as Saudi Arabia’s largest trade partner in 2010, many U.S. policymakers are concerned that China will make Saudi Arabia an unwitting pawn in its efforts to erode U.S. hegemony over global financial markets. These concerns have risen sharply since Saudi Arabia’s Vice Minister of Economy and Planning Mohammed al-Tuwaijri announced on August 24 that Saudi Arabia planned to partially cover its budget deficit in Chinese yuan to reduce its financial dependency on the U.S. dollar.

Many American economists have expressed alarm at Saudi Arabia’s willingness to borrow in Chinese yuan, as Riyadh’s decision could cause other oil-exporting countries to abandon the U.S. dollar in favor of the “petro-yuan.” A marked decline in the use of the U.S. dollar as the preferred credit-issuing currency by oil-producing countries would greatly weaken the U.S. dollar’s long-term viability as a global reserve currency.

As the United States views its alliance with Saudi Arabia as the lynchpin of its Middle East strategy, Washington will likely react strongly if Riyadh uses its influence within OPEC to strengthen the Chinese yuan. As Saudi Arabia remains dependent on U.S. arms sales to pursue its geopolitical objectives in the Middle East and counter Iran, intense U.S. pressure would likely cause Riyadh to distance itself from Beijing, limiting economic integration between the two countries.

In addition to setting informal limits on the scope and nature of Saudi Arabia’s economic partnership with China, Riyadh’s dependence on U.S. military equipment restricts its ability to purchase large quantities of Chinese arms. Historically, Saudi Arabia has only purchased arms from China to pressure the United States into selling Riyadh highly sophisticated weaponry. Saudi Arabia’s purchases of DF-3 missiles from China in 1987, and current procurements of Chinese stealth weaponry for military use in Yemen, exemplify its tactical approach to arms deals with Beijing.

As U.S.-Saudi Arabia relations have improved considerably under Donald Trump, the need for Saudi Arabia to purchase arms from China will likely decrease in the years to come. As Qatar has been able to covertly purchase Chinese SY-400 missiles with little U.S. scrutiny, and China has a long-standing defense partnership with Iran, the Chinese government is likely to forge stronger defense links with Saudi Arabia’s chief rivals, straining the Beijing-Riyadh partnership.

Even though Saudi Arabia has historically been able to cooperate with China in the nuclear energy sphere without U.S. criticism, the Trump administration’s depiction of China as an adversary in its 2018 National Security Strategy will increase U.S. government scrutiny over nuclear cooperation deals signed between Beijing and U.S.-allied countries. As U.S. Secretary of Energy Rick Perry has held negotiations with Saudi Arabia on a nuclear agreement, a hawkish tilt in Washington’s China policy could convert these discussions into a nuclear deal. The ratification of Perry’s proposed agreement would greatly expand the United States’ leverage over Riyadh’s nuclear policy and dilute the impact of China’s $2.43 billion nuclear manufacturing equipment investment pledge.

Privatization Uncertainties and the China-Saudi Arabia Partnership

While U.S. opposition is the largest immediate obstacle to China-Saudi Arabia economic cooperation, a shift in the economic conditions that have allowed Chinese investments to grow in Saudi Arabia could also weaken the partnership. In recent years, Chinese investors have made inroads in Saudi Arabia because of their willingness to directly cooperate with Saudi government enterprises, and provide capital to potentially risky economic diversification projects.

While these advantages remain intact, the nature of Saudi Arabia’s privatization strategy and success of Riyadh’s “Look East” strategy could eventually erode China’s privileged position. Although China will likely benefit from the upcoming Aramco IPO deal, extensive privatization outside the energy sector could weaken Beijing’s competitive position relative to the United States. The speed of Mohammed bin Salman’s proposed privatization plan could also drastically impact the success of Chinese investments.

Even though the trajectory of Saudi Arabia’s privatization reforms will impact many economic sectors, investment patterns in Saudi Arabia’s growing technology markets will be especially impacted by policy changes. If Mohammed bin Salman exercises restraint and embraces a cautious privatization plan, China’s business interests will be given a critical boost. Chinese technology companies like Alibaba and Tencent are conglomerates that can more effectively withstand state interference than their American counterparts, and will be able to leverage this advantage to entrench their dominance over time.

If Saudi Arabia undergoes rapid privatization and economic diversification, however, U.S. technology companies could gain the upper hand. The success of Twitter in Saudi Arabia highlights the brand power of U.S. technology companies, and a rapid withdrawal of government interference in the IT sector would allow Facebook and Google to leverage this marketing strength by creating a more level playing field for investment. Mohammed bin Salman’s willingness to enact impulsive reforms in the economic and political spheres makes this rapid privatization scenario a plausible one, and underscores the fragility of China’s influence over Saudi Arabia’s post-oil economy.

To compound China’s vulnerabilities in a rapid privatization scenario, Saudi policymakers view China as one of many potential investors in the Asia-Pacific region, and will work to prevent Beijing from gaining excessively large ownership stakes in infant industries developing within Saudi Arabia’s non-oil sectors. The Saudi monarchy’s circumspect attitude toward Chinese investment can be explained by Riyadh’s concerns that China will attempt to eventually convert its economic influence in Saudi Arabia into political influence, like it has in countries like Pakistan and the Philippines.

Saudi Arabia’s efforts to strengthen its economic partnerships with Russia, Japan, and India, in recent months, highlight its desire to avoid becoming dependent on Chinese capital. If Riyadh’s trade diversification strategy prevents Saudi Arabia from granting China preferential access to its consumer markets, Beijing could ultimately divert more resources to other Middle East states, like Turkey and Iran, to maximize the return on its capital investments.

Although China’s relationship with Saudi Arabia is likely to continue to strengthen for the foreseeable future, the strength of the U.S.-Saudi Arabia alliance, informal barriers to large-scale China-Saudi Arabia security cooperation, and Mohammed bin Salman’s impulsive governance style could restrict the scope of the Beijing-Riyadh partnership. Unless these underlying factors drastically change, Saudi Arabia’s significance as a Chinese trade partner could reduce considerably, as China redirects some of its capital investments to other Middle East emerging markets in the years to come.

Samuel Ramani is a DPhil candidate in International Relations at St. Antony’s College, University of Oxford. He is also a journalist who contributes regularly to the Washington Post and The National Interest. He can be followed on Twitter at samramani2 and on Facebook at Samuel Ramani.