China Makes Friends in the Gulf

As the United States has stumbled from crisis to crisis in the Middle East earning a reputation for war mongering and callousness, China has quietly but rapidly been widening and extending its links, becoming a new player and substantially upgrading economic ties, especially in the Persian Gulf.

For a country relatively new to the nuances of global diplomacy, China has adroitly sought to avoid antagonizing the United States while using diplomacy and trade ties to create interdependence. In effect China has presented itself as an alternative, benign power with global reach.

Yet its late arrival in the Gulf, especially given the United States' entrenched presence and unparalleled military power, will prevent China from emerging as a definitive player for the time being. Instead, it will have to be content for the time being as a secondary power such as Britain and France. But time is on China’s side as it seeks both to secure resources for it feverishly expanding energy needs and diplomatic influence.

Certainly, China has some advantages. As a relatively new player in the Middle East, China doesn’t carry the historical baggage of being a colonial power nor has it laid out an aggressive policy to transform the region as the US has with disastrous consequences. China also has a huge market that is very attractive to Gulf investors.

Similarly, China has been willing to engage those whom the United States has sought to isolate including Sudan, Iran and Iraq (under Saddam Hussein). The September 11, 2001 attacks and the subsequent difficulties Arabs face getting into the United States has caused a sharp decline in Arab visitors, especially from the Gulf, entering the US, further tarnishing America's image and presenting opportunities for China.

Whereas Egypt was the first Arab country to establish diplomatic relations with Maoist China, it was not until 1990 that Beijing had established ties with all the states of the Gulf Cooperation Council. Throughout the Cold War, China regarded the Persian Gulf as geographically during a time when Beijing was consolidating its position in Northeast and Southeast Asia. Beijing also did not pay serious attention to energy security until 1993 when it became a net oil importing country.

Equally, the conservative Gulf monarchies have concentrated their efforts on the United States, fearing both global communism and Arab nationalism. Saudi Arabia was the last of the council countries to establish ties with China in July 1990. All of its smaller neighbors had exchanged diplomats by then, some much earlier: Kuwait in 1971, Oman in 1978, the United Arab Emirates in 1984, Qatar in 1988; and Bahrain in 1989.

Until recently relations with the Gulf have been lackluster and uneventful but that has changed in the past few years. Most noticeably, Beijing has rapidly widened and extended its links with the region, substantially upgrading economic ties. Arab countries are currently China's eighth largest trading partner; the Gulf States represent the backbone of the Arab trade bloc.

Since 1991, trade has surged from US$1.5 billion to $20 billion in 2004. In 2005, trade skyrocketed again, climbing to $33.8 billion, 36 percent more than in the previous year. Total region wide Sino-Arab trade stands at $36.7 billion, underscoring the council’s dominance in Arab trade with China. At the same time, China has signed deals with Iran worth more than $100 billion.

China's Resource Offensive in the Gulf

Whereas Chinese policies are clearly aimed at securing access to oil, energy is not the only agent driving the diplomatic offensive. China also wants a foothold in a region that increasingly resents the US presence. In doing so, China hopes to gently challenge American control to complement and project its global ambitions.

Beijing has been for a long time what historian John Gittings calls a "status-quo power that often punches below its weight in international politics." China's policy toward the Middle East is just one element in Beijing's overall goal of addressing this.

Nevertheless, the importance of energy cannot be underestimated when examining Sino-Arab relations. China is the world's second-biggest energy consumer and third-biggest importer. Its oil consumption surpassed Japan's in 2003 and now stands at 6.5 million barrels per day, compared to 20 million barrels per day for the US.

Chinese oil demand has been rising at an astonishing rate – increasing by more than one million bpd annually – representing about 40 percent of increased demand worldwide and helping to drive prices upward. The International Energy Agency (I.E.A.) predicts that by 2030, Chinese imports will equal those of the US.

The director of energy economics and development strategy at China's National Development and Reform Commission, Gao Shixian, estimates that by 2010 oil will account for more than half of China's energy needs, up from about 30 percent in 2000. According to the I.E.A., China currently imports 32 percent of its oil, but this is likely to double by the end of the decade. Gas consumption is rising even faster, with imports projected to increase from zero in 2000 to 20-25 million cubic meters by 2010.

Today, 58 percent of China's oil imports come from the Middle East, mostly from the Gulf. China has adopted a strategy of geographical diversification by investing in foreign oil and gas fields in more than 20 countries including Venezuela, Nigeria and Australia. But diversification away from the Middle East has its limits. Two-thirds of proven oil reserves are located in the region, mostly in the Persian Gulf. Similarly, many of the oil reserves in non-Middle Eastern countries are rapidly being depleted. The I.E.A. predicts that Chinese oil imports from the Middle East will rise to at least 70 percent by 2015, underpinning that the future of the Chinese economy is inextricably tied to the Middle East.

The lion's share of the Arab region’s trade lies in Chinese imports of oil and exports of cheap textiles. In 2004, China and the Arab states started negotiations on a free trade agreement, coinciding with the new China Arab Forum, a biannual dialogue of leaders from China and the 22 states of the Arab League. The Chinese Ministry of Commerce expects Sino-Arab trade to reach $100 billion by 2010. At the end of 2005, Chinese investment in Arab countries stood at $5 billion, while Arab investment in China was $700 million, according to the Chinese Ministry of Commerce. Trade ties are set to grow further if free trade talks bear fruit, as expected, by 2007.

Saudi-China Ties

China has the closest relations with Saudi Arabia, the world's largest oil producer. China is now Saudi Arabia's fourth-largest importer and fifth-largest exporter. Saudi Arabia is China's biggest oil supplier, accounting for almost 17 percent of China's oil imports. Trade between the two has grown an average of 41 percent a year since 1999, according to the Chinese Ministry of Commerce.

Saudi Arabia's oil exports to China increased to some 500,000 barrels per day in 2005, up from 440,000 barrels in 2004. This is set to increase further after Saudi oil giant Aramco agreed to provide the China Petroleum and Chemical Corporation (Sinopec) with 1 million bpd by 2010. Abdallah Jum'ah, president of Aramco, described China and Saudi Arabia "as among the most important energy relationships on the planet."

In April of this year King Abdullah became the first Saudi king to visit China. This was Abdullah's first trip outside the Middle East since ascending to the throne in 2005, potentially signaling a new strategic alignment. During the three day visit, King Abdullah told Chinese legislative chief Wu Bangguo that Saudi Arabia considered China a "truly friendly country" and hoped that their relations would become "better and better."

The summit saw the signing of five agreements, including a landmark pact for expanding cooperation in oil, natural gas and minerals. Saudi Arabia also granted China a loan to improve infrastructure in China's oil-rich Xinjiang region and offered Chinese companies investment opportunities in Saudi’s enormous infrastructure sector.

Prior to that, China ratcheted up a series of lucrative deals in the region. In March 2005, Sinopec signed an agreement with Aramco to develop natural gas resources near the Ghawar field in the country's east, the largest conventional oil field in the world.

Also in 2005, Aramco signed a $3.5 billion deal with Exxon Mobil and Sinopec for a joint oil refining and chemicals venture in Fujian. The deal involves the expansion of the existing refinery, a petrochemical plant and a joint marketing venture to operate 600 service stations in the province. Also in Fujian, Aramco said that the two sides agreed on the establishment of two joint ventures for an ethylene plant and marketing efforts in Fujian in 2006, as well as the operation of the joint project of the integrated refining and ethylene production by 2009. Talks are continuing with Sinopec regarding investing in a plant in Qingdao, a northern Chinese port.

Sinopec, China's largest oil refiner, is involved in about 120 projects in the Middle East, most of which are in the Gulf, and is seeking more opportunities, according to Chen Tonghai, the company's president. In December 2005, China and O.P.E.C. launched an energy dialogue. China has also sought the assistance of Saudi Arabia and Kuwait to invest in downstream infrastructure, including oil refineries and petrochemical plants to boost domestic capacity. This includes a recent $5 billion agreement between Sinopec and Kuwait Petroleum Corp. to develop China's southern Guangdong Province. The deal will become the biggest Sino-foreign joint venture in the petrochemicals industry.

The Other Gulf Council States

The remaining states have lower trade volumes than Saudi Arabia and trade has tended to focus on the export of crude to China whereas joint projects and sharing of technical expertise has been more limited. Nevertheless, economic ties have increased substantially and Chinese goods are increasingly replacing Western ones throughout the region. This trend looks to continue as China cements its relationships.

In 2002, the total volume of trade between China and Oman came to $1.5 billion. By 2004, according to the International Monetary Fund, it had jumped to $4.4 billion. Oman is now China's third-largest supplier of oil after Saudi Arabia and Iran. The trade volume between China and the United Arab Emirates amounted to $3.9 billion, with imports from the United Arab Emirates consisting of oil and petroleum based products.

Bilateral trade between China and Kuwait in 2002 was $727 million and has expanded rapidly since then. The country with the longest relations with China, Kuwait has been the largest supplier of preferential official loans to China among Arab countries. In September, as the Industrial and Commercial Bank of China announced its massive IPO in Shanghai and Hong Kong, the Kuwait Investment Authority said it would buy $720 million worth of shares, with the Qatar Investment Authority planning to spend $206 million.

China has also been busy strengthening its military capacity along its Middle East oil supply routes from Central Asia through to Iran. This is a direct response to the Chinese fear that the United States, as the pre-eminent power in the Middle East, could check Chinese oil imports and, in doing so, severely damage its economy. As such, the Chinese government wishes to reduce the vulnerability of its Middle Eastern oil supply to U.S. power.

This coincides with Chinese moves to modernize its navy. To date, Beijing has expressed no desire to police the Persian Gulf. Nevertheless, it has clear intentions to boost its presence in the South China Sea and Indian Ocean, and in line with China's emerging power status may someday seek a naval presence in the Middle East.

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