Checkpoint Asia

Saudis Desperate to Drum Up Interest in Aramco IPO, Get China on Board

State-owned banks recruited to help inflate the price, Xi's help sought

One week ago, when we reported that Saudi Banks may lend to Saudi investors so they can invest in Saudi Aramco, we summarized the circularity of this fund flow as follows:

Today, Andy Critchlow, the head of EMEA at Platts, echoed what we said, summarizing the Saudi “plan” as follows: “So majority state-owned Saudi banks will be lending to Saudis so they can buy shares in Saudi state-owned oil company on margin. I fail to see how this helps the economy?”

Meanwhile, Bloomberg’s chief commodity correspondent, Javier Blas, demonstrated to what lengths Saudi Arabia would go to convince the local population to invest in the Aramco IPO, which will first go public on the local, Tadawul, stock market:

Yet despite this relentless propaganda aimed at locals to invest in Aramco, one thing was missing in the initial public offering of what will likely be the world’s most valuable company (unless AAPL rises another 100% in the next few weeks): a key, anchor investor for the IPO (which values Aramco anywhere between $1.1 and $2.5 trillion).

In other words: the greatest fool of all.

And in a world where one country has traditionally stepped up when fiduciary idiots are desperately needed, it is not really a surprise that this morning Bloomberg reports that Chinese state-owned entities are in talks about investing a combined $5 billion to $10 billion in Aramco’s IPO,as Saudi Arabia desperately needs commitments from “friendly” governments to indicate that at least someone has an interest in the record share sale at a nosebleed valuation.

According to the report, the Beijing-based Silk Road Fund is among parties that have been in discussions to buy stock in the offering, while several other Chinese funds or state-owned enterprises may also join.

What is behind China’s determination to blow even more money on foreign investments? Simple: President Xi has been seeking to increase China’s political clout at all costs and revive ancient trading routes under his “One Belt, One Road” initiative. As such, an investment in Aramco would “cement ties with Saudi Arabia as well as provide China a way to profit from rising oil prices.” Of course, it would also provide China with a way to lose from dropping oil prices, which in an age when US shale is outpumping everyone, is virtually assured, at least until the next shale crisis takes the bulk of output offline.

Bloomberg also notes that both state-owned oil producer Sinopec Group and sovereign wealth fund China Investment Corp also held talks in recent months about investing in the Aramco IPO, even though the commitments haven’t been finalized, as the amounts each firm puts in will ultimately depend on the Chinese government.

Of course, any investment in Aramco would give Beijing tremendous leverage when it comes to the future of Sino-Saudi relations: an anchor commitments from China would help Aramco make the share sale a success after Western money managers pushed back earlier on the company’s valuation. Saudi Crown Prince Mohammed Bin Salman has long insisted the state oil company is worth $2 trillion, although he’s prepared to scale back his expectations to between $1.6 trillion and $1.8 trillion; according to US banks the valuation could be as low as $1.1 trillion (if not less, depending on the price of oil).

In short, China’s support of state-owned Aramco, and thus Saudi Arabia, is nothing more than a political decision, and a show of “expanding political influence.” How Trump will respond to such interference with his favorite middle-eastern partner remains to be seen.

Source: Zero Hedge