Chasing the dragon

Are the deepening trade ties between China & Gulf states just a marriage of convenience?
Chasing the dragon
By Joanne Bladd
Sat 03 Oct 2009 04:00 AM

Trade ties are deepening between China and the Gulf states, with Beijing edging out the US as the biggest single country exporter to the Middle East. But is this new pairing a love match or just a marriage of convenience?

Yiwu is a small city. Tucked away in China’s coastal Zhejiang province, it is home to fewer than a million people, a speck by Chinese standards. It is also home to more than 1,000 Arabic translators, a dozen Arabic restaurants and what is described as the largest wholesale market in the world. More than 200,000 Arabs visit its bustling streets each year. All have come to trade.

A new Silk Road is on the rise, weaving from China’s bustling ports and market towns through the Gulf’s oilfields and back. The merchants on this route are Gulf states, looking East for long-term oil contracts and cheap consumer goods, and China, searching to plug its energy deficit and find growing markets for its factories.

In the past eight years, trade between the two regions has rocketed. In 2000, Chinese exports into Saudi Arabia stood at SR4.48bn ($1.19bn). According to a research note by SABB , trade volume last year had leapt to SR40.13bn ($10.7bn). Saudi, for its part, tussles with Angola and Iran to be China’s largest oil dealer (China’s energy demands outstrip its domestic supply) last year exporting SR116.25bn ($31bn) worth of oil — the equivalent of 720,000 barrels per day. Not bad for a country that only established diplomatic relations with China in 1990.

“It’s clear relations are strengthening rapidly,” says Ben Simpfendorfer, chief China economist at Royal Bank of Scotland and author of ‘The New Silk Road’. “For all the talk of China’s imports of oil from the Middle East, its exports of consumer goods to the Middle East almost match that amount.”

China earlier this year overtook the US as the largest single country exporter to the Middle East. Trade with Qatar alone, the smallest Gulf state, topped $2bn.

“Chinese exporters now cite the region as a focus area for them because of growing demand,” says Simpfendorfer. “It’s not enough to replace the US [market] but it’s another source of demand.”

Historically, China and the Gulf are both ardent suitors of the West, each counting the US as their prime ally. So why the change? Put simply, China needs a vast amount of oil and the Gulf has it to sell. The Middle East wants consumer goods, and China can supply them. It is largely a marriage of convenience, says academic Christopher Davidson, who has studied trade ties between the two regions.

“On the one hand, you have Islamic states and on the other, a socialist and increasingly capitalist state in China. They are not comfortable bedfellows,” says Davidson, author of ‘Abu Dhabi, Oil and Beyond’. “I don’t think they really like each other. There is a certain cultural incompatibility in inviting secular people from a communist background — that is against everything the Gulf economies stand for. But this unusual marriage makes good business sense at the moment.”

From a slow start, relations have warmed; largely through necessity. The backlash against Middle Easterners in the wake of the September 11 terror attacks forced Gulf businesses to search for new places to park their petrodollars, as America shut its doors. At the same time, China relaxed its previously ironclad visa restrictions, opening up a new market for Arab traders. While it took two weeks to get a visa for America — if it arrived at all — China delivered in one day.

It was a timely move. As China emerged as a major exporter of consumer goods, rising crude prices — partly fuelled by Saudi’s third oil boom in 2003 — created a new breed of cash-rich Arab buyers. It was, says Simpfendorfer, a “fairly explosive combination”.

“US companies were really left behind in Saudi’s last boom; in part because of security concerns, in part because there were better opportunities elsewhere,” he says. “That opened up the doors to China to some extent, not because it pushed the US out but because the US to some extent stepped back.”

The events of 9/11 also convinced the Gulf of the need to dig out new oil markets, in order to hedge its dependency on the West. Diplomatic relations between the US and Saudi specifically nosedived after the attacks, making China’s ‘no-strings-attached’ approach to economic deals even more alluring.

The message was spelt out in 2006, during the first state visit of China’s former president, Hu Jintao, to Saudi Arabia.

“We are opening new channels, we are heading East,” Prince Alwaleed Bin Talal, a billionaire investor and member of the royal family, told reporters. "China is a big consumer of oil. Saudi Arabia needs to open new channels beyond the West. So this is good for both of us.”

When Saudi’s King Abdullah took the throne in 2005, his first trip outside the Middle East was to China.

“The fact that Saudi can sign long-term oil contracts with China guarantees it a solid oil market that isn’t about to turn against it because of another terrorist attack,” explains Simpfendorfer. “China has very little focus in such politics, because it sees little reason to get involved.”

Other Gulf states have jostled to cement ties with Beijing. National Drilling Company, the drilling unit of the Abu Dhabi National Oil Co (ADNOC), last week handed over a $218m contract to a branch of the China National Petroleum Corporation to supply oil rigs for onshore drilling.

Last month, China National Offshore Oil Corporation won a 25-year contract to explore for oil and gas off the coast of Qatar. It’s the first time the Emirate has awarded a licence to an Asian company.

The GCC has also been keen to help China offload a portion of its labour surplus. The bulk of the Gulf’s migrant workforce has traditionally come from South Asia, but a number of high-profile projects have been awarded to Chinese firms in recent months — most notably the $1.8bn civil works contract for the state-funded Mecca-Medina railway, which went to a Saudi-Chinese consortium. It’s a mutually-beneficial arrangement — the Gulf, ever wary of its migrant workforce, is keen to vary its labour sources for security reasons, while China is anxious to source jobs for its booming population.

The credit crunch has added another twist to the tale. While the West has been paralysed by a liquidity freeze, as banks reel from the aftershocks of the global crisis, the Gulf and China have fewer wounds to lick. There is a certain degree of mutual congratulation at emerging from the wreckage comparatively unscathed. Both countries are likely to play a bigger role in the new world order.

“They are both great civillisations that have fallen over the last 500 years, and the fact that they are now rising — there is a symmetry that appeals,” says Simpfendorfer. “There’s no strategic push, but I think we will see an increasing number of investments as both are fast-growing emerging markets.”
“The Far East can offer a better deal to the Gulf at the moment than the West,” adds Davidson. “The Gulf is looking to China, and perhaps Japan, to be the big dynamo of activity for the next few years.”

Still, it is unlikely the Silk Road will run smooth. Both China and the Gulf have been at pains to keep their “unusual marriage” at arms-length, with investment flows lagging far behind trade ties. Foreign direct investment from the GCC has been restricted to co-owned refineries and other petrochemical projects in China, in a bid to bolster its domestic refining capacity. In turn, Chinese banks stepped in earlier this year to back projects with Qatar Gas Transport Co and Abu Dhabi’s International Petroleum Investment Co. Both parties have been wary of stepping outside the energy arena.

This small-scale investment speaks louder than words, notes Eckart Woertz, the Gulf Research Centre’s leading economist, despite the pair’s mutually declared interest.

“The Gulf mainly invests in the West. Excluding the refineries, because two-thirds of energy exports go to Asia, I’m not aware of any large-scale projects. The Gulf hasn’t invested on a large scale in China, as they have in London or New York — be it in the form of FDI or portfolio investments,” he says.

Nor, Woertz believes, is that situation likely to change.

“In terms of the portfolio investments, you can forget it, because [China’s] local stock and bond markets lack by far the capitalisation of Western markets. China could not accommodate the large sums of investment money that Gulf investors have.”

It’s also telling that while Japan and South Korea have forged ahead with free trade agreements with the GCC, talks with China have stalled, reportedly over petrochemical tariffs.

“China wants to deliver manufactured goods and receive raw materials — but it has its own petrochemicals industry that it wants to protect,” says Woertz. “The more you go down the value chain, the more there is a notion of competition rather than cooperation. The Gulf region is very competitive in petrochemicals and the Chinese have their own interests in that field.”

For its part, the West has been quick to note that Beijing’s gains in the Gulf are not necessarily its loss. It’s clear that China can’t provide the security guarantees that the US, Europe and Japan have to many of the Arab states, and neither country is willing to jeopardise its ties with the US. The GCC particularly, says Davidson, “knows which side its bread is buttered when it comes to its own protection. China is not about to replace the West when it comes to security in the Gulf states.”

“Trade is not only about quantity, it’s about quality,” says Woertz. “[It] is still a largely buy-sell relationship. The strategic sectors are in the hands of the West — arms, nuclear energy, oil; it’s rather different to exporting DVD players.

“The relationship between the GCC and the West is like an old marriage that is sometimes on the rocks, but it’s stable. Each partner knows what is expected from the other. China is like the Gulf’s mail-order bride. They don’t know each other yet, but still they’re raving about each other.”


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