The Gulf blog

China and the Middle East – made for each other 27, January 2008

Everyone wants a piece of the Middle East at the moment. Israel, unfortunately, takes this quite literally and seems intent on forever expanding its borders with uncomfortable overtones of lebensraum. American companies have, for the most part, been falling over themselves to find GCC cash to bail themselves out of their various woes. The list of those seeking investment is a veritable who’s-who’s of the American blue chip elite: Citigroup, General Electric, Dow Chemicals, and Merrill Lynch to name a few. The French seem to have placed, in a rather un-Gallic, highly capitalistic way, a price tag on their cultural heritage. For about $1 billion, you can now purchase priceless French art, plucked from the bosom of the most famous museum in the world, the Louvre. Furthermore, the French have also taken the name of their most prestigious university in vain by building ‘the Sorbonne Abu Dhabi’ with infinitely easier entry requirements. However, not only have the French been handsomely rewarded for the loan of their culture, but they now have a military base overlooking the straits of Hormuz, so maybe they knew what they were doing all along. Britain were predictably slow on the uptake and are now desperately searching for Middle Eastern cash to bail out the collapsing Northern Rock bank and moving further east, Dubai holdings have invested heavily in the Indian bank ICICI, as well as taking an estimated billion dollar stake in Sony of Japan.

Among those doing their utmost to make friends and influence states in the region are the Chinese. However, they are doing this in a less brash manner. Indeed, to some degree, they have been doing the opposite way by investing in the Middle East. For example, two Chinese state-owned companies are investing some $4 billion in Saudi aluminium production. This is but one half of an example of reciprocal investment between various Middle Eastern countries and China, and, more to the point, you’re going to be seeing a lot more of it.

China are the most natural trading partner for countries in this region. This may seem like something of a bizarre statement, but it stands up to scrutiny. As any good (or even only mediocre) economics student will tell you, two crucial factors when discussing trade are supply and demand.

In terms of supply, the Middle East has oil and money. According to the US Energy Information Administration, as of 1^st January last year, the Middle East as a whole had 739 billion barrels of proven oil reserves, more than the rest of the world combined which amounts to 578 billion proven barrels. As for money, thanks to the bumper oil prices of recent years, the region is awash with cash. In total, Morgan Stanley estimate that in 2007 alone, Persian Gulf countries invested around $75 billion overseas. This, therefore, excludes the $500 billion that is being investing domestically in creating new super-cities, trying to look ahead to the paradigm changing day when oil runs out. The crucial point here is that this inflated oil price appears to be with us for the medium term, and, therefore, so do these record profits for Middle Eastern government and thus their ability to generously invest abroad.

As for demand, the same economics student would no doubt tell you that demand is infinite. This is meant in a theoretical way, but when discussing China, the theory becomes a lot more practical. China has a population of 1.3 billion people. By the year 2050, however, the UN population division estimates that (depending on which report you read) the population will rise to between 1.5 – 2 billion people. So not only do these people need their energy needs taken care of, but thanks to China’s phenomenal growth, many people have ever growing energy needs. With greater affluence comes greater demand for bigger and better houses and apartments and, of course, bigger and better cars, to name but two energy consuming factors. In 2007 alone, the Chinese car market grew 20% and overtook Japan as the world’s second largest automobile market, and with tens of millions of people waiting to dump their bicycles, this market is only going to grow faster in the coming years. The staggering conclusion of these factors is that, according to Commentary magazine, China’s demand for imported oil will grow by 960% over the next two decades.

Issues of demand and supply, therefore, are clearly suitably poised for a long and prosperous relationship. Yet there are many more factors to consider. After all, the rest of the world demands oil and will continue to do so for a long time yet. So what makes China so special?

For one thing, China do not have any historical or colonial baggage in the region. This could be construed as a good or a bad thing. For example, France’s long standing relationships with the Emirates clearly made it possible for Abu Dhabi to cede some land for a French military base, and America’s long history in Saudi Arabia made it possible for similar arrangements there in the past. I would suggest that the latter example is more instructive, especially considering the eventual outcome of the US bases in the land of the two holy places. China, however, has a clean slate; indeed, it was as late as 1990 when they officially recognised all GCC countries. There are no old policies to appease, apologise for or defend.

Another aspect that appeals to many governments worldwide is that China are very good partners to have in terms of demands exogenous to the deal itself: there aren’t any. For example, China will never lecture, pressure, castigate or otherwise try to impose their ideals on another state. This is a fundamental pillar of Chinese policy: the absolute and utter respect of sovereignty from criticism or interference. Thus, if a state is not appreciative of America’s lectures regarding full democracy or the rule of law (especially regarding the egregious hypocrisy of Guantanamo Bay) then they will certainly know that they would receive no such criticism from China.

Along the same lines, China make it easier for Middle Eastern companies to invest there. Whilst, as it was shown above, many countries have invested heavily in the West, there is still an element of quasi-racism. This was clearly shown in the Dubai Ports World controversy, where a furore erupted when it was revealed that a Middle Eastern company would be involved with security arrangements at American ports. This would, according to some woefully misguided segments of the American media, lead to security concerns. It is difficult to imagine such security concerns from the Chinese.

Lastly, with significant anti-Americanism in the Middle East, and significant anti-Arab sentiment in America and the West generally, China could offer themselves as a neutral alternative to the Middle East-American/Western axis. It is no great secret that parts of the Middle East have security concerns, which are answered in one way or another by the West generally or America specifically. For example, answered in terms of arms sales ($20 billion only last week) as well as physical protection, as in the Gulf War. However, it must not be forgotten that China has been supplying various countries in the region for a long time now. More to the point, China are more willing to sell certain weapons that the West are – generally – not willing to, such as ballistic missiles and related technology, which were sold to both sides during the Iran-Iraq war, to take but one example. Furthermore, with the amount of industrial espionage that Beijing currently engages in, certain aspects of their armaments technology may not be that far behind the US itself.

However, there are a few caveats. Firstly, America is currently the only power capable of offering a meaningful security blanket, such as the one that freed Kuwait and protected Saudi Arabia. Theoretically, were the Chinese to sell an Atomic bomb ‘off the shelf’ to Saudi, that might negate that particular US role, but such a reckless policy is highly unlikely for the cautious and long-term thinking Chinese. Secondly, the prevalence of American goods, ideas, motifs, restaurants, books, films, TV channels, and music throughout the Middle East, compared to the utter lack of Chinese equivalents, shows that America, or at least, its manifestations are not going anywhere. It does not seem at all likely that McDonald’s will turn into Jowza (dumpling) restaurants any time soon. American culture, therefore, may well be here for the next 100 years, even if the manifestations of American power and trade are not.