Cheeky Hong Kong keeps its U.S. dollar peg while quietly making yuan deals with Saudi Arabia and the UAE, with implications for the future of both currencies. The growing teamwork between China and the middle eastern nations will have profound effects, causing a shift in global power, says Sanjeev Aaron Williams.
AND HONG KONG FIGHTS BACK! It’s not just resilience. It could be called aggression. The city’s Chief Executive John Lee’s visit to Saudi Arabia and the United Arab Emirates are the ripple effects of Chinese President Xi Jinping’s state visit to Saudi Arabia in December 2022.
Before looking at Hong Kong’s achievements, let’s look at the visit by the President of China. While in Riyadh, Xi Jinping attended three summits:
- China-Saudi Summit
- China-Gulf States Summit
- China-Arab States Summit
China is recognizing Saudi Arabia as a major player in the Gulf region, thereby giving legitimacy to its application to join BRICS, now often known as BRICS+, as it is in expansion mode.
The Global South’s growing annoyance with US/ EU/ NATO virtue signalling and belligerence provided the perfect backdrop. From the records of speeches given, it clear that Hong Kong’s success as a Special Administrative Region under One Country Two Systems was highlighted—and rightly so.
With the exception of the 2019 U.S.-instigated riots, the transfer of sovereignty was peaceful and Hong Kong’s economic development and its integration into mainland China’s economy continues.
In other words, President Xi laid the groundwork for John Lee’s trip, and the latter would not have gone to the Gulf unless there were clear prior indications that Hong Kong would benefit.
And it did. The Hong Kong Monetary Authority stepped in to lure investment from cash-rich Saudi Arabia and the UAE to issue bonds in the city and invest in the Mainland through a variety of financial vehicles.
Consider the implications of what can be described as PetroYuan recycling:
1. The Saudis and UAE will accept yuan currency for oil shipments. That means the yuan will form part of their foreign exchange reserves.
2. Those yuan foreign exchange reserves not being allocated for trade settlement can be exchanged for physical gold on the Shanghai Gold Exchange, thereby supporting their native currencies, the riyal and dirham.
3. The Saudis and Emiratis can issue yuan-denominated bonds via Hong Kong, rather than via the US.
4. Hong Kong will act as the conduit for Gulf investment in its hinterland, the Megalopolis of 11 cities that constitutes the Greater Bay Area, population about 90 million.
5. Saudi and Emirati Sovereign Wealth Funds can directly invest in Hong Kong.
6. Hong Kong has just indirectly pointed out that investing on the New York Stock Exchange and NASDAQ, or investing in the U.S., is no longer what it used to be. A weaponized USD and threats of sanctions cannot be ignored.
7. What has Hong Kong actually done with the roadshow to the Gulf? It has just started the incremental draining of the U.S. investment liquidity pool: the depth of which has hitherto been the U.S.’s strongest point in attracting foreign money.
Think of it as Hong Kong’s revenge against those responsible for the 2019 riots. You have to love this city. There’s the Lion Rock spirit, right there.