China's and Saudi Arabia's central banks signed a local currency swap agreement worth up to 50 billion yuan ($6.93 billion), or 26 billion Saudi riyals, the banks said in separate statements Monday, as Riyadh continues to deepen trade with Beijing.
The Saudi Central Bank (SAMA) said in a statement that the pact it had signed with the People’s Bank of China (PBOC) would be valid for three years and could be extended by mutual agreement.
The swap agreement means that currency risk is lower for both countries to use the other countries' currency. As a result, the financing costs for using the riyal and yuan will be lower for both China and Saudi Arabia and both countries will have easier access to the other's currency. This means that a Saudi company, for example, may be more likely to choose to finance in yuan instead of US dollars than before the swap agreement was made. This in turn will increase the Chinese foothold in the Saudi economy and vice versa.
Why it matters: Saudi Arabia is the world’s biggest crude oil producer and China is its biggest customer, importing around $65 billion worth last year, according to Reuters data. China is also the world’s largest energy user, and the kingdom’s richness in energy is one of the reasons why the two countries have been looking to deepen ties.