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Fuelling the dragon
China's growing oil dependence on the Middle East is driving the pursuit for stronger economic and cultural relations.
- By Roula Khalaf, Richard McGregor and Sundeep Tucker, Financial Times
- Published: 00:00 February 15, 2007
On the road leading from Dubai to Oman, deep in the desert, a kilometre-long dragon-shaped building has become a symbol of China's growing ties with the Middle East.
With 4,000 Chinese businesses selling everything from machinery to security systems, plastic toys to massage chairs, the Dragon Mart is hoping to become the largest trading hub abroad for Chinese products.
"Many people said the Middle East is very rich but when you are in the market it's quite different," says Alec Soe, sales and marketing manager of Qingdao Sunsunny Trading Company. "But you know why most Chinese are here: one thing is the potential of this market, the other thing is that maybe the competition is too fierce in China. The government encourages us to go out."
Over the past year, the spotlight has come to fall on China's aggressive economic foray into Africa, where it secures energy stakes while doling out cheap credit. More cautiously, however, China also has been building new bridges to the Middle East, carving a place in a strategic region that is home to two-thirds of the world's proven oil reserves.
The advance into the Middle East creates another front in Beijing's growing global rivalry with Washington and other western countries. "China's strategy in the Middle East puts us in a competition for influence," says Flynt Leverett, director of the Geopolitics of Energy Initiative at the New America Foundation in Washington. "But the answer is not a confrontational approach over energy interests - it is to develop a more co-operative relationship with the Chinese on energy security."
While China's strategic interest in the Middle East is driven primarily by oil, other commercial interests are well represented as well. Chinese trade with the region is soaring and not just with respect to energy: McKinsey & Co, the management consultancy, says trade between east Asia and the six members of the Gulf Co-operation Council (GCC) - Saudi Arabia, Kuwait, Qatar, the UAE, Oman and Bahrain - quadrupled in volume between 1995 and 2005. Bilateral trade between China and Saudi Arabia, the region's biggest economy, increased 30 per cent between 2005 and 2006 alone.
This activity shows no signs of stopping. Total cross-border capital flows between the GCC and the rest of Asia are predicted to climb from $15 billion today to $300 billion by 2020.
Cultural ties are also strengthening, with the establishment of a China-Arab forum and the launch of a dialogue between China and the Arab League. According to Chinese news reports, the government has provided scholarships for students from more than 10 Middle East countries and China is planning to train hundreds of Arab professionals in fields including agriculture and biochemistry.
Reconnecting
"In the last 100 years, they [China and the Middle East] have passed each other by. But politically and economically now they are reconnecting," says Victor Chu, chairman and chief executive at First Eastern, a Hong Kong-based investment group. Jon Alterman, Middle East programme director at Washington's Centre for Strategic and International Studies, says western governments have to recognise that China will be a rising power in the Middle East and that it should be brought into discussions on regional security. "As China gains more experience in the Middle East and finds itself more dependent on the region for energy, it will seek to understand how it can best use its military and diplomatic tools to safeguard its interests," he says.
In its 2006 International Energy Outlook report, the US Department of Energy warned that the rising dependence of China on Middle Eastern oil supplies had geopolitical implications both for relations between the two regions and for the oil-consuming world as a whole.
According to the department's figures, the Middle East accounts for about 46 per cent of China's oil supplies. But petroleum imports are expected to grow fourfold from 2003 to 2030, with much of the increase coming from Gulf suppliers.
"To a certain extent, China's sub-Saharan Africa strategy is designed to reduce dependence on Middle East oil but even the most optimistic assessment of diversification is that it will continue to get at least half its oil from the Middle East," says Leverett. "So China is interested in more strategic relations with Gulf oil producers, to carve a privileged place for itself and become a high-priority customer."
The crisis over Iran's nuclear programme has given China entry into that country's oil and gas sector and is an example of the priority China places on its energy interests. As Iran's relations with Europe have deteriorated and the nuclear dispute has escalated, Tehran has shifted its diplomatic focus to the east, hoping to leverage commercial deals with China into political support at the United Nations Security Council.
China National Offshore Oil Corp, the parent company of New York- and Hong Kong-listed CNOOC, is reportedly in discussions on a contract to develop Iran's Northern Pars natural gas field.
China's two other main state-owned energy companies also have deals under negotiation with Tehran. Collectively, the contracts are worth tens of billions of dollars. Dozens of Chinese companies, meanwhile, are also involved in infrastructure projects in investment-hungry Iran, including the Tehran metro.
Biggest suppliers
Beijing has also been trying to revive oil exploration deals that had been agreed with the previous regime of Saddam Hussain in Iraq. But while it waits for opportunity in war-torn Baghdad, where hydrocarbons legislation has yet to be passed, it has largely focused on Iran and Saudi Arabia, its two biggest Middle East suppliers (Angola is now its single biggest supplier).
Saudi Arabia, a US ally, is a tougher partner for the Chinese than Iran. Its upstream oil sector remains closed to foreign investors and the kingdom is less reliant on foreign money. Since the attacks of September 11, 2001 exposed the fragility of the US-Saudi relationship, however, Riyadh has been diversifying its ties and sees in China a partner with little interest in meddling in its domestic affairs.
The most high-profile Saudi-Chinese deals include a 2005 joint venture between the state-owned Saudi Aramco, ExxonMobil of the US and China's Sinopec to develop an integrated ethylene and oil refining complex in Fujian province. Sinopec is also a partner of Saudi Aramco in a project to produce non-associated gas and condensates in Rub' Al Khali (the Empty Quarter in southern Saudi Arabia).
"With China recording a more than 30 per cent growth in trade with most of the region's countries over the past few years, the economic ties [with the Gulf] have been greatly strengthened while the political ties have become more important," says Tang Zhichao, a researcher at the China Institute of Contemporary International Relations in Beijing. "China's development model is very popular in the Middle East and our investment has helped lessen the region's dependence on the US."
During the past six months, China also opened negotiations with Egypt on $2.5 billion of joint investment. According to the Egyptian ministry of trade and investment, the two sides also agreed to boost trade from the current $2 billion to more than $5 billion.
The Gulf economic boom has added impetus to China's Middle East strategy. Gulf states have launched infrastructure projects and initiatives in agriculture, education, healthcare and information technology, providing opportunity to Chinese groups.
"In the next 10 years in Saudi Arabia, there are infrastructure projects worth $1,000 billion to be built," estimates Chu of First Eastern. "The leaders of the Middle East realise that Chinese infrastructure companies are now up to speed."
Moreover, Gulf governments' investment arms have been looking for investments in Asia. Arab money has gone into Chinese initial public offerings - the Kuwait Investment Authority bought $720 million of shares in Industrial and Commercial Bank of China last year. McKinsey reckons that up to $250 billion from the Gulf will be available for investment in Asia over the next five years, with China to be a large recipient.
In both trade and investment, however, Middle East investors and Chinese companies face a steep learning curve. The frustration of traders at Dubai's Dragon Mart, who are still discovering both the potential and the obstacles of the Arab market, is matched by laments from Arab investors about the difficulty of breaking into China.
Mutlaq Hamad Al Morished, chief financial officer at Sabic, the Saudi petrochemicals giant, has been seeking a licence for a chemical plant in China for several years - to no avail. "We go from being asked to produce one environmental report after another; we are being negotiated to death. It is not like this in other countries," he told a conference in Dubai.
Ali Shihabi, head of Dubai-based Rasmala Investments, says the big shift towards Asia is still more at the stage of 'intent' than 'deal-making'.
Still, as Chinese ties with the Middle East expand, so will Beijing's political influence in a region long dominated by the US. This presents Washington with much to contemplate.
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