The Great Game #5 - China and the Anti-Western Axis

China's recent deals with both Iran and Saudi Arabia should be a wake-up call for the West. Xi wants to position China as both the political and economical centre of gravity for the Global South.

The deglobalization trend has picked up during 2022. Europe has stopped buying cheap gas from Russia, seemingly for good and the US are looking to reshore their micro chip manufacturing, just to name a few. In the midst of all this a new global partnership might be on the rise as manifested at last week’s China-Arab Summit in Riyadh, where President Xi invited the Arab nations to trade oil and gas in yuan on the Shanghai Exchange. 2022 showed that traditional energy sources such as oil still play a major role in global macro and geopolitics, which only strengthens the position of the OPEC countries, who now include Russia. Even though China has been weakened by their own zero-covid lockdowns, it still remains ambitious with its Road and Belt initiative going forward with full steam ahead. This massive industrial expansion would most certainly be helped by cheap Arab oil. Meanwhile, China  can offer the Arabs political backing and their technologies. It seems like a match made in heaven, right?

It gets even better, though. Last week, Crown Prince Mohammed Bin Salman and Xi signed a 30-year Strategic Partnership Agreement on a wide range of forward economic plans: energy, telecoms, investment, trade, infrastructure, regional development, Belt & Road Initiative, etc. Significantly, the Agreement bars interference in domestic affairs by either nation - something which China has always stood firm on in international disputes. Buy our goods and don’t question our genocide, basically. This is a much more convenient partnership for the Saudis and could spell the end of the historic Saudi-US axis. In the past, Saudi has almost exclusively relied on the US for weapons imports - could China step in and replace that role? We have already seen Saudi decrease their weapons imports from the US and we would expect that to continue with the new Xi-Salman deal.

The Chinese do not only get better access to oil through the agreement with the Arab countries. It is clearly also a step towards creating a market where the USD is no longer the king. The macroeconomic orientation of China is clearly tilted towards creating a market where transactions between non-chinese entities are made using the Yuan as the main currency. China, just like Russia, has spent the last decade bulking up on their gold reserves and the West cutting of Russia from SWIFT will likely incentivize China to make itself even more dollar independent going forward.   

Death of the USD you might ask? Well not so fast… It is clear that China aims to make the USD more redundant as the global base currency, but this process will take years, if not decades. Not only do you need trade to be conducted in Yuan. You also need to find a substitute for the most liquid market in the world, the US treasury market, where financial institutes can safely store their cash and use the notes as collateral. I have seen people pointing to US Treasury TIC data on foreign holdings, where China is down USD -113.9 Bn on a y/y basis (Latest data is from September) and using this as an argument for a flight away from the USD. I would just remind people that selling your US treasury might just be a consequence of dollar necessity due to its appreciation, hence an increase in financing costs.     

We are likely to see more of these mutually helpful alliances in the coming years as China seeks to become dollar independent. This is however not a story for tomorrow or next year but one that will develop over the next decade. China is however betting on betting on all numbers in roulette to position itself in the best possible way. Recently, China signed a comprehensive cooperation agreement with Iran, the mortal enemies of Saudi Arabia. Clearly Xi has no problem betting on all the horses in the game. Just like Erdogan, who gladly takes part in NATO meetings one day and buys Russian commodities the next. The two-faced leadership is here to stay!     

The Anti-Western Axis

In the West, we like to think of our network and axis as the prime “club of nations” in the World. Nations like Russia and Iran, who refuse the Western order, are outsiders and “rogue”. This line of thinking needs an update. China is slowly building a mega-axis of billions of people, who reject the American world order and the superiority of liberal democracy.

Let’s look at an example: In March, the UN General Assembly voted to condemn the Russian invasion of Ukraine. All countries in the world had a vote, and the motion passed with 141 for, 5 against and 35 abstaining. A very clear majority. But if you look at the countries, who abstained or voted against, they counted a number of very significant Southern Hemisphere countries (China, India, South Africa, Iran etc.) and constitute around half of Earths population. This club of nations is firmly in China’s camp now, and form what we might call an Anti-Western Axis based out of the Southern Hemisphere, but led from Beijing.