China and Middle East: Bountiful Partnership

China and Middle East have had long historical trade linkages that have only grown closer and more prominent with time. At present, the relationship has gone beyond just transfer of goods and services, to transfer of knowledge and expertise. With the Middle East facing the brunt of low oil price and attempting to diversify their revenues, and China undergoing an economic transition, we shine a light at this symbiotic relationship, as the countries attempt to help each other achieve their long term goals. 

Trends
Trade links between China and the Middle East has been growing in double digits over the past decade, with nearly three-quarters of its oil imports to China coming from the Middle East. Chinese trade with Saudi Arabia, the region’s biggest economy, has risen 10-fold since 2003, so much so that Saudi has now replaced the US as China’s single most important trading partner. Import value of goods from Middle East has risen at over 20% per year, with crude and refined petroleum forming the major part. MENA-China trade has increased to nearly USD 300bn in 2013, 50-fold in the past 20 years. For most Middle East countries China is topmost trading partner.

On the other hand, Chinese exports to the Middle East primarily comprise of low-cost household goods, such as affordable cars in Egypt, and cheap Chinese goods sold in strife affected regions in the Middle East. Overall Gulf demand for Chinese manufactured goods is comparatively weak. Presently, China’s growth story is witnessing a minor slowdown, but trade with Middle East remains a priority for the world’s largest energy consumer, as the country has an insatiable appetite for commodities. China accounts for almost 20% of the world’s total energy consumption, the largest in the world, and according to IEA, China’s crude oil imports from the Middle East will reach 70% (from the present 51%) by 2020, and continue to grow until 2035.

Capital flows
Although China’s focus in the region is in the hydrocarbon sector, it has moved beyond energy and commodities into other sectors such as urban and transport infrastructure. Chinese investments in Saudi Arabia focus on metals, energy, real estate, and transportation. New business registrations by Chinese companies have grown rapidly in the UAE, and Chinese banks are setting up in Dubai and Abu Dhabi to administer capital flows associated with that trade. Trade between China-UAE is expected to rise to nearly USD 100bn by 2015, and renminbi would soon trade officially in the region.

Following the success of the Mecca monorail project, China and Iran entered an agreement to build a railway line from Tehran to the Iraqi border, as a part of an overall plan to link the Middle East to China through Central Asia. Governments in the Middle East have brought Chinese contractors to work on major infrastructure projects in the region, such as the Egypt-China partnership to develop the Suez SEZ.

Middle East interests in China
Gulf investment in China is witnessed mostly in financial, hospitality, textile, agriculture, logistics and aviation sectors, with three noticeable trends: diversified investment, concentration in the service sector and movement to second-tier cities. While it is difficult to obtain official statistics on Gulf investment in China, media reports show that these activities are growing.

Prominent Gulf Sovereign Wealth Funds (ADIA, KIA and QH) have obtained approval from the Chinese authorities to enter China’s bonds and securities market, and have bought large stakes in major Chinese IPOs, especially in the banking sector. Dubai-based luxury hotel group, Jumeirah, plans to construct luxury hotels in Guangzhou, Hainan, Zhejiang provinces and Macau, while Saudi private investment firm, Ajlan and Brothers Co., has invested USD 632mn in 20 textile factories, in synthetic fabrics, cotton textiles, shoes and accessories. Al Futtaim, the Dubai-based supermarket operator, has tie-ups with a Singapore company to invest in China’s agricultural sector. Emirates, Etihad and Qatar Airways have launched routes to second-tier cities, such as Chengdu.

China has also courted Saudi investment for expanding its refining capacity, with the possible partnership of China Petroleum and Chemical Corporation’s (SINOPEC) with Saudi Aramco in the USD 1.2bn Qingdao refinery, added to their existing USD 3.5bn joint venture in Fujian province. Dubai International Financial Centre (DIFC) signed MoUs with Chengdu Financial City Investment and Development, an emerging financial center in the southwest of China, in addition to its MoU with Shanghai’s Pudong Financial Services Bureau. Dubai-based sports (horseracing, golf and tennis) and leisure developer, Meydan Group, announced a strategic partnership with Chengdu in 2013, following which the first Chengdu-Dubai International Cup was held in April 2014.
This shows that Gulf investors have begun to shift from simple investment to management skills transfer in their areas of expertise.

China’s transition
The low oil price has only accelerated the trade between China and the Middle East, as the volume of oil and petrochemical trade has increased since the decline. China eagerly shored up its stocks of the commodity, which works well for the OPEC nations, as they are keen on increasing their market share, rather than control supply to regulate prices. But low oil price has played a role in reducing inflation across the globe, which has made the costs of goods and services cheaper, thereby impacting competitiveness of Chinese products in global markets. As for China’s attempts to move to a domestic consumption led model, it remains to be seen on how this structural change affects trade flow. While the imports are expected to grow at current pace, Chinese exports may either remain the same or drop depending on how fast domestic consumption increases.

Internationalization of the RMB
Chinese currency, renminbi, enjoys a rising acceptance in banks and enterprises in the Gulf region, and there is a growing demand for conducting trade with the currency. The UAE is the biggest export market for Chinese goods in the region, and leading local and foreign banks, such as Emirates NBD and HSBC, have recently started to expand their product portfolio to provide accounts or trade financing in the Chinese currency. Many believe that cross-border renminbi settlement is expected to account for 20% to 30% in the next five years. China's ambitious trans-Eurasia and across-ocean trade strategy, launched in 2014, will also push the internationalization of the global renminbi trade.

Dubai has expressed interest in establishing an offshore RMB center in the Gulf region, with talks held in the last quarter of 2014 between DIFC and the People’s Bank of China to set up a renminbi offshore market to tap into enhanced trade and investments flows. Aside the high level interest to use China’s renminbi as a currency for trade, investments and reserve currency, it would leverage on the presence of four large Chinese banks, and provide an option for businesses.

It is clear that despite the current economic environment, China and Middle East have forged a lasting relationship that will serve both parties well. Leveraging on Chinese expertise in infrastructure development, Middle East countries seek to develop their non-oil economies rapidly, while selling more oil to the world’s biggest consumer. On the other hand China wishes to improve sectors, such as hydrocarbon and tourism, and has sought assistance from its trading partners. With increase in trade and cross border capital flows, this may develop into a defining and mutually beneficial relationship, bridging east and west Asia.

References

• The National, UAE
• Atlas, MIT
• World Financial Review
• Middle East Institute
• China.org.cn
• Zawya