How the Gulf can win the US-China geopolitics game

As the interest between China and the Gulf countries continues to grow at an exponential rate, experts predict the 35-year-relationship will continue to strengthen in the years to come.

Following Abu Dhabi Crown Prince and Deputy Supreme Commander of the UAE Armed Forces Sheikh Mohammed bin Zayed’s visit to China this summer, a number of agreements were signed between both countries. The visit comes after Sheikh Mohammed bin Rashid Al Maktoum, Vice President and Prime Minister of the UAE and Ruler of Dubai, met with Chinese president Xi Jinping in Beijing in April. The visits come as trade between the UAE and China deepens. Trade between the two nations is set to hit $70bn next year.

According to Dr Albadr Al Shateri, a politics professor at the National Defence College, the relationship between China and the UAE is quite significant.

“The word from Beijing is that the UAE and China are strategic allies, which goes beyond the obvious economic benefits that both countries will definitely reap. The size of the delegation led by the Crown Prince and his official entourage speaks volumes of the breadth and depth of the relationship. It touches all facets of relations between [the] two states.”

Relations between the UAE and China have witnessed a sea of change since the times of the late UAE founder Sheikh Zayed, as he laid the foundation for such a relationship that has only grown since.

“Sheikh Zayed did not miss the opportunity, and was far-sighted to see the significance and potential of China on the world stage,” Dr Al Shateri said. “The driver of the relationship includes China surpassing the US economy as measured by GDP purchasing power parity.”

According to Harvard scholar Graham Allison, China had just 10 per cent of America’s GDP as measured by purchasing power parity, seven per cent of its GDP (at the current US dollar exchange rates) and six per cent of its exports in 1980. The foreign currency held by China, meanwhile, was just one-sixth the size of America’s reserves.

But, “By 2014, those figures were 101 per cent of GDP, 60 per cent at the US dollar exchange rates, and 106 per cent of exports,” Dr Al Shateri adds. “China’s reserves today are 28 times larger than America’s.”

Dr Al Shateri says security is the second driver of the UAE-China relationship, as the Gulf and the Middle East are areas of regional contention and external interventions.

“It is rich in resources and fraught with its history,” he notes. “Geographically, it’s the crossroad of many continents, civilisations and geopolitical backdrops. All these make the region pulsating and belligerent, and China, as a rising power and energy hungry, can play a stabilising role in the region.”

Further deepening the ties between both parties, Saudi Arabia and China also signed $65bn worth of deals during Crown Prince Mohammed bin Salman’s visit to Beijing, as China expanded its influence in the Middle East and rallied support for its One Belt, One Road initiative.

For Jonathan Fulton, assistant professor at Zayed University’s College of Humanities and Social Sciences in Abu Dhabi, such deals represent a substantial set of bilateral relationships.

“China and the Gulf states increasingly view each other strategically, both in terms of domestic and international agendas,” he says. “The Gulf states perceive China as an important long-term energy customer, a rising global power with interests in the region and a partner in their ‘Vision’ development programmes. China sees the Gulf as an energy partner, an export destination, a source of important construction and infrastructure contracts, and a key region in the One Belt, One Road initiative.”

Both sides have developed relations largely through trade and, as the trade deepened, other economic aspects, such as finance and investment.

“From that point, deeper political and diplomatic engagement followed naturally, and now we’re starting to see strategic and security relations grow,” Fulton explains. “It appears like a deliberate and thoughtful response to the political and security environment of the Gulf region.”

Fulton speaks of a series of construction and infrastructure contracts in the 2000s, which contributed to a rethink of China in the Gulf from an exporter of relatively cheap consumer goods to a provider of fast, high-quality projects.

“The Mecca-Medina railway is a good example, as is the Yanbu refinery,” he says. “With the advent of the One Belt, One Road initiative, there was already a good deal of success to build upon.”

According to John Calabrese, a scholar-in-residence at the Middle East Institute, where he directs its project on the Middle East and Asia, China’s relationship with Saudi Arabia is evolving within a context marked by global and regional geopolitical power transitions and realignments, as well as major changes in international energy markets – circumstances to which both Xi Jinping and Mohammed bin Salman have adjusted and sought to exploit through more assertive and expansive foreign policies.

“Energy continues to be the centerpiece of the Sino- Saudi relationship,” he says. “China’s crude oil imports from Saudi Arabia have surged from January to April – an increase of 60 per cent over last year – reflecting rising Chinese demand, Saudi efforts to expand market share, and more specifically, Saudi Aramco’s signing of supply contracts with new Chinese refiners Hengli Petrochemical and Zhejiang Rongsheng.”

In February, Aramco signed a deal to develop a petrochemical refinery complex in Panjin, in northeast China. In recent years, Sino-Saudi cooperation has also expanded to non- energy sectors, as well as to the political and security spheres.

“President Xi’s state visit to Riyadh in January 2016 resulted in the elevation of the relationship to a ‘comprehensive strategic partnership,’ and to the establishment of the China-Saudi Arabia High-Level Joint Committee,” Calabrese adds.

As such, China’s relationship with the Gulf states is on a path of exponential growth. According to Dr Theodore Karasik, senior advisor at Gulf State Analytics, this is also due to Beijing’s interest in the transformation in the Gulf as well as trade and investment between both regions as part of the larger One Belt, One Road initiative.

“China’s investment pattern is typically in construction, but this of course is already focusing [on] energy and finance. And we are seeing Gulf states and China cooperating more closely in these three areas. This pulls them closer together and away from the West – over the course of decade or two, China has been able to successfully manage, maintain and grow their bilateral relationship with each GCC country to fit for purpose the Chinese foreign policy with Gulf ambitions.”

The main drivers for further Chinese investment in the Gulf region and beyond are matched with the objectives of the One Belt, One Road initiative, as well as the Chinese influence and policy objectives in the Middle East.

“The evolution of this has been over time,” Dr Karasik notes. “We first saw Chinese nationals coming to the Gulf and going through it into Africa a decade or more ago, and this process has continued to this day in a trend line that is only growing higher.”

He is speaking of the first Chinese who were flocking to the Gulf, and potentially onto Africa. As they migrated out towards the Gulf and Africa to start their own business, it was only later that the Chinese state followed them to further make investments. And such investments only grew in number, from the Abu Dhabi National Oil Company awarding the China National Petroleum Company $1.6bn worth of contracts in July last year to President Xi pledging $20bn in developmental loans to Arab states.

UAE as Middle East gateway
Today, the UAE is viewed as a gateway for around 60 per cent of Chinese exports to the Middle East – the source of most of China’s energy imports.

“Gulf countries in particular are critical for the success of the One Belt, One Road initiative since they are a crucial hub in the initiative, particularly since regional instability could have a serious disruptive effect,” Dr Al Shateri notes.

Sino-GCC relations overlap in many areas, from energy and economics – due to trade ties and their necessity – to the military and security sphere thanks to the purchase of arms over time, and to China’s cultural outreach – particularly in terms of tourism and the cross-pollination of tourism and culture. “You see many GCC states looking at China for examples of transformation in the arenas of law, economics and language,” Dr Karasik says.

“In Saudi Arabia, they are making the Chinese language compulsory in schools, while the Confucius Institute at the University in Dubai has been training officials and others to learn Mandarin.”

All indicators show an ever-growing, dynamic relationship between both parties, as Chinese firms are actively participating in several “Vision” development plans taking root in the Middle East, such as Saudi Arabia’s Vision 2030 and the New Kuwait 2035, leading to even greater synergy between both sides.

“The relationship is founded on a solid basis,” Dr Al Shateri adds. “There’s nothing like interests that tie countries together – and there are plenty of interests between Beijing and Abu Dhabi.”

When looking at the larger picture, Cyril Widdershoven, director of VEROCY, a Dutch consultancy advising on investments, energy and infrastructure risks and opportunities in the region, sees the Gulf as split in three areas for China, with the UAE and Saudi Arabia as the main economic powerhouses in the region – which are “very interesting” for Chinese investors, companies and construction operators and mainstream interests in construction, energy, and oil and gas in Iraq and Kuwait.

“They are delivering mainstream oil and gas products, while offering major outlet for Chinese products,” he says.

The Saudi Vision 2030 and the UAE 2030 Strategy have also become major attractions for Chinese companies and the Chinese government. “Possible advantages for the GCC coming from China could and will also be related to high-tech, startups, defence, aerospace and offshore maritime sectors,” Widdershoven says.

Both the UAE and China are expected to benefit from such growth, as the UAE plans to diversify its economy away from hydrocarbons, and China is viewed as able to contribute to the UAE’s transformation towards a knowledge-based economy.

“Trade and investment are other fields that could yield great benefits to both countries,” Dr Al Shateri says. “China stands to avail itself from the UAE’s regional position, and the UAE could serve as a gateway to the region and beyond – the UAE and the Arab Gulf countries are a crucial link for China’s One Road, One Belt strategy for world development.”

Moving closer
For Dr Karasik, the intersection between China and the Gulf, when it comes to the future of their economic relationship, is based on a centrifugal pole that is moving closer towards Beijing, due to dealing in non-dollar currencies for trade as well as enticing Gulf investors into joint projects.

“But, naturally, these investors are going to be weary of the China debt trap,” he adds. “But Gulf Arabs seem to understand this phenomenon quite well and will be able to contend with it.”

As the geo-economic centre of the world continues to shift towards Beijing, so are the Arabian Peninsula states.

“And as the US and the UK go through their own issues, the Gulf states will naturally be pulled to the East and towards Russia as well,” Dr Karasik says. “These countries have practised a diversification policy for the last dozen or so years, and are now seeing that the East poles seem more promising than the West, so they are focusing on that trajectory for now, which is why Sheikh Mohammed bin Zayed went to Indonesia and Crown Prince [Mohammed bin] Salman to South Korea and Tokyo for the G20.”

Ultimately, the comprehensive strategic partnerships with the UAE and Saudi Arabia indicate that the two countries are expected to feature most significantly in China’s approach to the Gulf.

“China’s strategic partnerships with the other states, minus Bahrain, for now, shows that it is building up a broad set of bilateral relationships with every state in the region,” Fulton says.

“Its port and industrial park projects in Duqm, Abu Dhabi, and Jazan show the shape of China’s future Arabian Peninsula presence, as it is developing a physical presence in key strategic ports, giving it access to the Gulf, the Red Sea, and up to the Mediterranean. As such, we are only going to see a much deeper Chinese presence in the region.”

Experts consider the current China-Gulf relationship of the utmost importance as Asia, and China in particular, have become the main trading partners for most of the Gulf-based countries.

“The latter is not totally linked to supplying Gulf-based crude oil to China anymore, but has become an intricate web of relations,” says Widdershoven. “After decades of a one-sided relationship, in which Gulf oil and gas to China were much larger than any Chinese exports to Gulf, this has now changed dramatically.”

For China, the Gulf has become a geopolitical economic arena in which it seeks a direct involvement, including energy, investment, infrastructure, construction and even military relations. For Gulf entities, there has been a slow but dramatic shift from crude oil and gas deliveries to Chinese customers, to a locking-in of the Chinese markets for Gulf-based downstream investments, including refineries, storages and retail.

“The latter has made the Gulf one of the largest growing investment entities in mainland China,” Widdershoven says. “The Gulf has also become a major operating and investment region, such as shown by the numerous new deals between ADNOC and Chinese oil and gas companies, the opening of headquarters in China by ADIA and other sovereign wealth funds.”

Although the initial inception of the relationship was purely based on oil and gas, energy and potential low-cost Chinese products or construction labour, China has changed its stance dramatically, after what Widdershoven calls the bipolar world changing into a multipolar world.

“The Chinese presence outside of China’s seas is now seen as a potential asset to influence others, especially in Africa and the Middle East.”

Yet there could be a period of reconsideration, as China’s economic interests are directly linked to its geopolitical military strategy. As ever, it appears Arab countries – and the UAE and Saudi Arabia most certainly – have choices when it comes to where they put their economic eggs.