Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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• Xi used the SCO summit to pitch a China-led “Global Governance Initiative,” urging a multipolar order that rejects “hegemonism”.
• Beijing is pushing de-dollarization within the SCO—floating a new SCO development bank.
• China and Russia advanced huge gas deals at the time of the summit.

Chinese President Xi Jinping concluded last week’s Tianjin Summit 2025 -- the 25^th Heads of State Council meeting of the Shanghai Cooperation Organization (SCO) with a speech stating that: “The world has found itself in a new period of turbulence and transformation… Global governance has come to a new crossroads.” The upshot of another 1,200 words or so was that a new global order should emerge through a ‘Global Governance Initiative’ (GGI), de facto led by China, with Russia’s assistance. This new order will: “Unequivocally oppose hegemonism and power politics, practice true multilateralism, and stand as a pillar in promoting a multipolar world and greater democracy in international relations.” So, what does it all mean in practice from now?

The key international mechanisms for achieving these aims highlighted by Xi are the SCO itself and China’s ‘Belt and Road Initiative’ (BRI). The SCO is currently the world’s biggest regional organisation both in terms of geographic scope and of population, covering over 60% of the Eurasian continent (by far the biggest single landmass on Earth), around 40% of the world’s population, and more than 20% of nominal global GDP. Xi and his Russian counterpart Vladimir Putin like to portray the Organisation as representative of the ‘Global South’, an arbitrarily designated collective of Asian, African, and Latin America countries characterised as having been socio-economically marginalised by other powers in the ‘Global North’. That said, despite these impressive sounding statistics, the SCO has only ten members -- China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Uzbekistan, India, Pakistan, Iran, and Belarus – although it also has two ‘observer states’ (Mongolia, and Afghanistan), and 14 ‘dialogue partners’ (Sri Lanka, Turkey, Armenia, Azerbaijan, Cambodia, Nepal, Egypt, Qatar, Saudi Arabia, Kuwait, Maldives, Myanmar, UAE, and Bahrain).

Related: China's Crude Stockpiling Set to Continue Through 2026

SCO leader China has been most active in recent years in the Organisation’s Middle Eastern countries, as it is here that it can find the oil and gas resources that it needs -- but does not itself possess -- to keep powering the economic growth that it hopes will surpass the U.S.’s as soon as possible. Economic dominance remains the key to the hegemonic geopolitical dominance that it aims to establish, once it has wrested this from the U.S. It is also here that it has been most vocal about what it sees as principal objectives in establishing its new world order, formalised now as being a product of its ongoing Global Governance Initiative. These were most clearly laid out back in January 2022 when in a series of meetings between senior Chinese government officials and foreign ministers from Saudi Arabia, Kuwait, Oman, Bahrain, and the secretary-general of the Gulf Cooperation Council (GCC).  At these meetings, the principal topics of conversation were to finally seal a China-GCC Free Trade Agreement and to forge a “deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat.” These meetings were followed at the end of that year by President Xi meeting with the leaders of the Arab League in Saudi Arabia, at which he identified a ‘priority area’ that he believed should be addressed as quickly as possible: the transition to using the Chinese currency, the renminbi, in oil and gas deals done between the Arab League countries and China.

Beijing has long regarded the position of its renminbi currency in the global league table of currencies as a reflection of its own geopolitical and economic importance on the world stage, as analysed in depth in my latest book on the new global oil market order. An early indication of China’s ambition for the RMB was evident at the G20 summit in London in April 2010, when Zhou Xiaochuan, then-governor of the People’s Bank of China (PBOC), flagged the notion that the Chinese wanted a new global reserve currency to replace the U.S. dollar at some point. He added that the RMB’s inclusion in the IMF’s Special Drawing Right (SDR) reserve asset mix would be a key stepping-stone in this context, and this occurred in October 2016. China has also long been acutely aware of the fact that, as the largest annual gross crude oil importer in the world since 2017, it is subject to the vagaries of U.S. foreign policy through the oil pricing mechanism of the U.S. dollar. This view of the U.S. dollar as a weapon has been powerfully reinforced since Russia’s invasion of Ukraine and the accompanying U.S.-led sanctions that followed. Indeed, the former executive vice-president of the Bank of China, Zhang Yanling, said in a speech in April 2022 that the sanctions against Russia would “cause the U.S. to lose its credibility and undermine the [U.S.] dollar’s hegemony in the long run.” She further suggested that China should help the world “get rid of the dollar hegemony sooner rather than later.” These ideas were again advanced last week by Putin, who said that the SCO had revived the notion of multilateralism, with national currencies being increasingly used in settlements between member countries. “This, in turn, lays the political and socio-economic groundwork for the formation of a new system of stability and security in Eurasia,” he added. For his part, Xi identified the establishment of a new SCO development bank as a future step that would be pivotal in developing an alternative payment system that circumvents the U.S. dollar and, therefore, nullifies the crippling sanction threat of exclusion from the U.S. dollar-centric global financial system. He added that Beijing will provide CNY10 billion (US$1.4 billion) of loans to an SCO banking consortium.

Establishing a seamless payments network for oil and gas withing the SCO framework, especially following the accession to full membership of its primary Middle Eastern oil and gas states – most notably, Saudi Arabia, UAE, and Qatar – would reduce the threat to China of US$-related sanctions. It would also allow it to further accelerate the expansion of its influence into the region that has been seen since the U.S. withdrew from the Joint Comprehensive Plan of Action (colloquially, ‘the nuclear deal’) in May 2018. Such threats have already increased as a result of Beijing’s continued support for Iran through the ongoing major purchases of oil and may also be set to do so through its similar support for Russian oil and gas exports. Precisely in this context, last week also saw Russia’s Gazprom sign a legally binding memorandum to build the Power of Siberia-2 gas pipeline through Mongolia, as well as the Soyuz Vostok transit pipeline. The new route is expected to supply 50 billion cubic metres of gas each year for the next 30 years. Russia also agreed to increase pumping capacity for the Power of Siberia pipeline from the current 38 billion cubic metres per year to 44 billion cubic metres per year. Moscow and Beijing additionally agreed to expand gas deliveries along the Far East route, initially set at 10 billion cubic metres per year. Aside from aligning with the idea of increased use of national currencies in oil and gas deals within the SCO and cementing the already tight relationship between Beijing and Moscow, China will secure the gas at prices much lower than Russia charges its European customers. For Russia, China has become an even more vital financial provider to keep its economy afloat as it continues its war in Ukraine. Indeed, China is now Russia's biggest trading partner, the biggest purchaser of Russian crude and Russian gas, the second-biggest purchaser of Russian coal and the third-biggest purchaser of Russian LNG, according to a statement last week from the Kremlin.

By Simon Watkins for Oilprice.com

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