Saudi Aramco’s initial public offering is a nice-to-have, easily mistaken for a must-have. The state oil producer is discussing selling a stake to a Chinese investor, sources have told Reuters, as its international listing hangs in the balance. The benefits for Saudi Arabia of an Aramco IPO, though, are not to be found in Beijing.
Companies usually list their shares on a public exchange to get cash, growth, influence or discipline. Selling 5 percent of Aramco at its owner’s preferred valuation of $2 trillion would certainly bring in cash; selling a slice to a sovereign investor would bring in somewhat less. That said, Saudi doesn’t urgently need the money. Though its foreign exchange reserves have been falling – the $488 billion war chest at the end of August is one-third smaller than three years ago – that’s still nearly five times what the International Monetary Fund considers the “adequate” level. If the goal were to raise money quickly, Saudi could simply sell some of its vast oil reserves.
As for influence, China offers some. But it will want something in return, like help getting more oil priced in its own currency, the yuan. A global stock offering would do more to open up financial channels that Crown Prince Mohammed bin-Salman can tap to finance his grand diversification of Saudi’s economy away from the black stuff. At $100 billion, it would also divert liquidity from regional rivals like Iran that also hope to attract global capital.
Perhaps the best case for listing Aramco internationally is to improve discipline at the company itself. China shows that can work. The country’s state-owned enterprises, from Sinopec to Agricultural Bank of China, put their affairs in better order than they would otherwise have been to court global capitalists. But a Chinese investor is unlikely to demand as much transparency as a global pension fund or a Western private equity investor.
So why even consider selling a stake to China? The answer might be momentum. Carving off a slice of Aramco – however small – at a theoretical valuation of $2 trillion would help to keep that doubtful number alive, and give the impression of movement towards the Crown Prince’s ultimate goal. But compared with a full listing at a more realistic valuation, or simply bringing in a wider raft of institutional investors, it sounds like a third-best option.