Dancing With The Dragon

It doesn’t seem that long ago since Dubai announced it was going to build a city that was going to be twice the size of Hong Kong. Such headlines were synonymous with newspapers across the Gulf before the financial crisis put a dampener on the plans. But nowadays it is China, rapidly becoming one of the Gulf’s most important trading partners, that is spreading the word about its lofty ambitions with an announcement at the end of January that it was going to build “the largest city in the world”.

The Gulf is already China’s largest oil provider, with Saudi Arabia selling one billion barrels a day to the Asian giant.
Kuwait, the UAE and Qatar also supply oil and gas to the superpower, with the International Energy Agency (IEA) forecasting that China will account for 43 per cent of the increase in global oil demand by 2030.

The country also buys a significant amount of petrochemicals from Saudi Arabia as it strives to maintain the quality of packaging of the vast range of goods the country sells, according to Jean-Francois Seznec, a progressor for contemporary Arab studies at Georgetown University in Washington D.C.

The country is an important long-term hydrocarbon customer for the Gulf, while “it (China) also has vast labour and farmland which the Gulf needs”, according to Christopher Davidson, a professor on Middle East politics at Durham University in the UK.

Meanwhile, China has surpassed the US as the biggest exporter to the GCC, with yearly exports of goods, mainly clothing and home electronics, growing more than 10-fold to about $60 billion in the past decade, according to McKinsey, the US consultancy.

Furious growth

Trade between the Gulf and China is growing so fast that McKinsey forecasts it will more than triple to at least $350 billion in the next decade.

“Flush with capital and increasingly wary of the West, the Arab Gulf states view the Chinese market as immense, growing and hungry, not just for oil but also for petrochemical and metallic products – two industries that the Chinese and Arab Gulf states are heavily developing and investing in as part of their economic diversification strategy,” said Emile Hokayem, the senior fellow for regional security at the Institute for International Security Studies (IISS) in the Middle East.

But relations between the two are not restricted to oil, gas and petrochemicals, with projects such as the one to build a city that will dwarf Shanghai spelling investment opportunities for Gulf states, making China difficult to ignore.
Mr Hokayem added that “an ascendant China is at the centre of a charm campaign by Gulf states” as they “scout for investment opportunities in rapidly growing Asia.”

As the Gulf courts Asia, most of the region’s rulers have led major delegations there over the past few years, including His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, who led a delegation to China and South Korea in 2008.

Meanwhile, Chinese products are gaining a stronger foothold across the Gulf. Mr Hokayem points to the success of DragonMart, a shopping centre in Dubai in which 4,000 Chinese businesses are housed, as an indicator that low-tech Chinese products may soon dominate in other markets in the region, despite the Arab population’s penchant for high-end Western products.

People power

There has also been a greater flow of people between the regions. Encouraged by employment and investment opportunities, there are about 180,000 Chinese expats in the UAE alone, mostly living in Dubai, making it the largest Chinese community abroad, according to reports in the Chinese press.

“There are fewer found in the rest of the region owing to the restrictions on the ability of foreigners to sell retail in the Middle East,” said Ben Simpfendorfer, the chief China economist at Royal Bank of Scotland and author of “The New Silk Road: How A Rising Arab World Is Turning Away From The West And Rediscovering China” , in an article posted on Foreign Policy website.

“But they are present nonetheless, from Algiers to Sana’a, and are contributing to the rise in trade flows.”
Property speculators from China have also been scouting the UAE for distressed assets since property prices fell by as much as 60 per cent.

Meanwhile, the small city of Yiwu, a four-hour drive from Shanghai, attracts 200,000 Arab visitors a year in their search of cheap electronic goods, Mr Simpfendorfer said.

Although in the early stages, Mr Hokayem said that Gulf companies are also showing greater interest in partnering with their Chinese counterparts in areas such as property, infrastructure and tourism.

Chinese construction

At the onset of the Gulf’s building boom, Chinese contractors fought hard against local firms and international heavyweights to win contracts due to a perception of low-quality work.

But strengthening economic ties has boosted the presence of Chinese construction firms, particularly in the UAE, with Chinese contractors working on 18 projects worth $1.3 billion by 2009, according to figures from Proleads, an industry data provider in Dubai.

In March last year, Dubai’s Meydan Development signed a deal for an undisclosed sum with Chinese construction firm Guangsha Middle East for the construction of 16 office blocks at the Metropolis Business Park, part of the racecourse-themed Meydan City.

Saudi Arabia is also a significant market for Chinese businesses. In 2009, the China Railway Construction Corporation, in partnership with a French firm, won a $1.8bn contract to build a high-speed rail link between Mecca and Medina in Saudi Arabia.

Meydan is also helping to build the $4bn Tianjin Equine Culture City as part of a joint venture formed last year with Tianjin State Farms Agribusiness Group Company, a firm owned by the Chinese government.

But although China trades with each of the Gulf states, it’s most important partner is Saudi Arabia, according to Mr Seznec.

This was underscored by China’s President Hu Jintao’s second visit to the Kingdom early last year.
During the visit, both sides also discussed their increasing cooperation in the areas of health, science and education.

“The relationship is going to grow much bigger,” said Mr Seznec.

“Saudi supplies one billion barrels a day to China – that is a lot of oil – and China will want to preserve it; they find Saudi to be a reliable partner.”

Mega deals

Saudi Arabian firms including Saudi Basic Industries Corporation (SABIC) have also made huge investments in China, such as in the development of petrochemical plants, while Saudi Aramco is training a number of its engineers in the country, Mr Seznec said.

Meanwhile, over half of Sabic’s basic petrochemicals output is exported to Asia, with China and India accounting for the largest portion.

There have also been significant deals between China and Qatar. Last year, the Qatar Investment Authority invested $2.8 billion on the initial public offering of the Agricultural Bank of China. Qatar Petroleum also signed a new exploration and production sharing agreement with Shell and China National Petroleum Corporation for Qatar’s most prolific oil and gas basin, ‘Block D’.

A number of Chinese firms, including Kinglong Company, China Harbour Engineering and Sino Hydra, are involved in projects in Qatar.

A further sign that the Gulf states take China seriously is the attention and investment that Saudi Arabia and the UAE dedicated to their pavilions at the Expo 2010 in Shanghai, Mr Hokayem said.

Another is the rapid financial assistance that the UAE and Saudi provided in the aftermath of the Sichuan earthquake in 2008. Both countries each gave $50 million.

“The official media in the Gulf is full of praises for China and its economic achievements and Arab officials visiting China never miss any opportunity to speak in generous and admiring terms about its progress,” said Mr Hokayem.

“Saudi Arabia, Kuwait and the UAE are also encouraging their citizens to learn Mandarin and study in China.”

The Chinese model of “balancing economic development, state modernisation and political control has an unmistakable and reassuring appeal for the Arab Gulf states that aim to carefully manage their economic and political transformation”, he added.

Still, despite flourishing relations, the Gulf states and China are yet to sign a free-trade agreement (FTA).
During a visit to the UAE last year, Professor Zhao Zhongxiu, the deputy secretary general of the China Association of International Trade, stressed that a free trade pact with the GCC was a “top priority for China” as demand for energy and the import of industrial goods rose in the country.

China already has trade agreements in place with eight countries including Peru and Chile, while it is negotiating similar deals with its neighbours South Korea and Japan.

But even though negotiations between the GCC and China over lowering trade barriers began in 2004, progress has been hampered by red-tape, according to Mr Davidson.

“That said, many officials on both sides say that an FTA is unnecessary as the trade is already taking place anyway,” he added.

Despite Professor Zhongxiu’s pledge, many Chinese now view the negotiations as a “waste of time”, according to Mr
Seznec, especially since the country’s exports to the region are “going through the roof”.

Moving beyond the export of clothing, consumer and electrical goods, China’s banks are also heavily funding infrastructure and energy expansion projects in developing countries, according to a recent report in The Financial Times.
The access to cash also mean Chinese firms have deeper pockets, enabling them to expand, as seen with their growing presence in the Gulf.

Political ease

Mr Hokayem said that China’s less than demanding labour, environmental and human rights standards make it an even more attractive as a partner to leaders in the Gulf, “who can be assured that Beijing, unlike the United States, will not raise these issues in negotiations.”

Mr Davidson agrees.
“As an authoritarian state it is a good, easy partner for countries that are sensitive about their lack of political reform and human rights records,” he said.

Still, a key challenge for the Gulf over the coming years will be to find ways of adding texture to the relationship and developing cultural relations with China, according to Mr Hokayem.

“China is still a mystery to many Gulf Arabs who are increasingly buying Chinese products yet remain estranged from Chinese culture,” he said.

“It has still yet to make inroads in the Gulf.”

He added that the presence of a big Chinese population in Dubai has not yet translated into significant local outreach.

“Chinese cultural centres and activities in the Gulf are still few,” he said.

Meanwhile, according to the Arab Public Opinion Poll of 2009, only nine per cent of Arabs said they would want to live in China, well behind France, Germany and the UK, but ahead of the US and Russia.