''China's Policy in
the Gulf Region: From Neglect to Necessity''
China is a relatively new player in the Middle East and in the
Persian Gulf in particular. Whereas Egypt was the first Arab country
to establish diplomatic relations with China, it was not until 1990
that Beijing had established ties with all of the littoral states of
the Gulf Cooperation Council (G.C.C.).
The G.C.C. consists of Saudi Arabia, Kuwait, the United Arab
Emirates, Oman, Bahrain and Qatar. Throughout the Cold War, China
regarded the Persian Gulf states as geographically remote since this
was a time when Beijing was focused on consolidating its position in
Northeast and Southeast Asia. Partly explaining China's neglect,
Beijing did not pay serious attention to energy security in general
and oil security in particular until 1993 when it became a net oil
Equally, the conservative Gulf monarchies had concentrated their
efforts on the United States, fearing the threat of both global
communism and Arab nationalism that China paid homage to. Saudi
Arabia was the last G.C.C. country to establish ties with China in
July 1990. All of its smaller neighbors had exchanged diplomats with
China by then, some much earlier: Kuwait on March 22, 1971; Oman on
May 25, 1978; the United Arab Emirates on November 1, 1984; Qatar on
July 9, 1988; and Bahrain on April 18, 1989.
Sino-G.C.C. relations until recently could be characterized as being
generally lackluster and uneventful. This has changed, however, and
in the past few years relations have flourished. 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, China-G.C.C. 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 that in the previous year. Total
region wide Sino-Arab trade stands at $36.7 billion, underscoring
the G.C.C.'s dominance in Arab trade with China. At the same time,
China has signed deals with the G.C.C.'s large neighbor Iran worth
more than $100 billion. [See: "China and Iran Strengthen their
China's Resource Offensive in the Gulf
Whereas Chinese policies are clearly aimed at securing access to oil
that is so vital to China's power hungry and rapidly growing
economy, energy is not the only agent that is driving China's
diplomatic offensive. China is also seeking to gain a foothold in a
region that increasingly resents the U.S. presence. In doing so,
China hopes to gently challenge American control by having greater
influence in the region, which would complement and project China's
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 G.C.C.
is one element in Beijing's overall goal of addressing this.
Nevertheless, whereas oil is not the only factor behind Beijing's
thinking, the importance of energy cannot be underestimated when
examining Sino-Arab relations. China is the world's second-biggest
consumer of oil and third-biggest importer. China's 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 United States.
Chinese oil demand has been rising at an astonishing rate --
increasing on average per annum by more than one million barrels per
day, about 40 percent of the world's increased demand and a major
influence on the record high international prices for oil. The
International Energy Agency (I.E.A.) predicts that by 2030, Chinese
imports will equal U.S. imports, impressing upon China the need to
ensure a stable supply of oil.
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 between 51.4 percent and 52.6
percent of China's energy needs, up from 29.1 percent in 2000.
According to the I.E.A., China currently imports 32 percent of its
oil, but this is likely to double between now and the end of the
decade. China's gas consumption is rising at an even faster pace,
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 G.C.C. states. China has adopted a strategy of
geographical diversification by investing in foreign oil/gas fields
in more than 20 countries including Venezuela, Nigeria and
Diversification away from the Middle East, however, 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. Summing up
China's (and the West's) concern, the chief economist of the I.E.A.
warned that "we are ending up with 95 percent of the world relying
for its economic well-being on decisions made by five or six
countries in the Middle East."
The lion's share of G.C.C. trade lies in Chinese imports of oil and
exports of cheap textiles. In 2004, China and the G.C.C. states
started negotiations on a Free Trade Agreement (F.T.A.). These talks
coincided with the new China Arab Forum, a biannual dialogue of
leaders from China and the 22 states of the Arab League (which
includes the G.C.C. states). 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
talks to reach a free trade agreement bear fruit. The third round of
negotiations took place in January 2006, and agreement on the F.T.A.
is expected to be completed in 2007.
Of the G.C.C. states, it is unsurprising that China has the closest
relations with Saudi Arabia, the world's largest oil producing
country. Today, China is Saudi Arabia's fourth largest importer and
fifth largest exporter. Saudi Arabia is China's tenth largest
importer and biggest oil supplier. The Saudis now account for almost
17 percent of China's oil imports. Trade between the two exceeded
$15 billion in 2005, having 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 with Saudi oil giant Aramco agreeing to
provide the China Petroleum and Chemical Corporation (Sinopec) with
one million barrels per day by 2010. Abdallah Jum'ah, president of
Aramco, described China and Saudi Arabia "as among the most
important energy relationships on the planet."
Saudi-China relations reached their zenith in April this year when
King Abdullah became the first king since the establishment of ties
to visit China. This was King 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 trip, 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 in Beijing saw the signing of five agreements, including
a landmark pact for expanding cooperation in oil, natural gas and
minerals, as well as in the economic, trade and technical areas.
Taxation agreements were also signed and Saudi Arabia granted China
a loan to improve infrastructure in the city of Aksu in China's
oil-rich Xinjiang region. Saudi Arabia has also offered Chinese
companies investment opportunities in the country's enormous
infrastructure sector that includes petrochemicals, gas,
desalination, power generation and railways and is worth an
estimated $624 billion.
Prior to that, China had also been busy ratcheting up a series of
lucrative deals in the region. In March 2005, Sinopec signed an
agreement with its Saudi counterpart, Saudi Aramco, to develop
natural gas resources near the Ghawar field in the country's east.
Ghawar is the largest conventional oil field in the world.
Again in 2005, Saudi Aramco signed a $3.5 billion deal with Exxon
Mobil and Sinopec for a joint oil refining and chemicals venture in
Fujian Province in southern China. 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.
China has sought to secure new energy sources and at the same time
deepen those existing relations. 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 the
recent agreement between Sinopec and Kuwait Petroleum Corp. to
develop China's southern Guangdong Province. The deal, which is
worth $5 billion, will become the biggest Sino-foreign joint venture
in the petrochemicals industry.
Kuwait has said that it is studying a number of other ventures.
Kuwait currently provides China with 200,000 barrels of oil per day,
which is set to double in the next few years. Similarly, China's
Sinopec has a ten percent stake in a Chevron-led international
consortium bidding for the $8.5 billion Project Kuwait.
It has been reported that during the 2006-2010 period, Guangdong
Province will invest 180 billion yuan (US$22.3 billion) to build
five petrochemical bases, namely Dayawan, Maoming-Zhanjiang,
Guangzhou, Yamenkou and Shantou-Chaozhou-Jieyang. Additionally, five
refining expansion and new refining projects, five ethylene projects
and some downstream chemical projects are to be built during the
same period, with the assistance of foreign partners.
The Other G.C.C. States
The remaining G.C.C. states have witnessed lower trade volumes
compared to Saudi Arabia. Trade has tended to focus on the export of
crude oil to China whereas joint projects and sharing of technical
expertise has been more limited. Nevertheless, economic ties have
increased substantially. Chinese goods are increasingly replacing
Western goods throughout the region. No longer considered poor or
inferior goods, this trend looks to continue in the event of the
China-G.C.C. F.T.A. coming into place.
In 2002, the total volume of trade between China and Oman came to
$1.506 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 $3.895
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, with a series of high profile
deals that were discussed above. The country with the longest
relations with China, Kuwait has been the largest supplier of
preferential official loans to China among Arab countries. From 1982
to the end of 2001, the Kuwait Fund for Arab Economic Development
had provided China with $620 million of loans on favorable terms. In
September 2006, China announced an initial public offering of the
Industrial and Commercial Bank of China. The Kuwait Investment
Authority intends to buy $720 million worth of shares, with the
Qatar Investment Authority planning to spend $206 million.
At the same time, China has sought to capitalize on rapid growth in
Qatar, especially in the country's booming construction industry.
Whilst the volume of trade has been relatively small, it shows an
upsurge; $896 million in 2005, compared to $390 million in 2004 and
a tiny $90 million in 1999.
The total volume of trade between Bahrain and China is the least of
the G.C.C. countries at just $110 million. This is, in itself,
little surprise since Bahrain is the least wealthy of the G.C.C.
states because of its lack of oil resources.
Therefore, what are the secrets to China's almost overnight success
in forging closer ties? Chinese Foreign Minister Li Zhaoxing has
described the appeal of strengthening Sino-Arab relations: "Similar
histories, common objectives and wide-ranging shared interests have
enabled the two sides to strengthen cooperation."
China has skillfully exploited its comparative advantages. It does
not carry the historical baggage of being a colonial power nor has
it laid out a vision or a policy to transform the region like the
United States. China also has a huge market that is very attractive
to rich Gulf investors. Similarly, China has been more opportunistic
and willing to engage those whom the United States has sought to
isolate including Sudan, Iran and Iraq (under Saddam Hussein). The
September 11 attacks and the subsequent difficulties Arabs face
getting into the United States has seen a sharp decline in Arab
visitors, especially from the Gulf, entering the United States,
further tarnishing America's image and presenting opportunities for
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 preeminent power in the Middle East, can act as a
"check" against 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 to present a naval presence in the
China's global strategy, including in the Middle East, has been to
avoid antagonizing the United States. Rather, China has sought --
through quiet diplomacy and by boosting trade ties and creating
interdependence -- to present itself as an alternative and benign
power with a global reach. Yet, its late arrival in the Gulf, and
given the United States' entrenched presence and unparalleled power,
will prevent China from emerging as a definitive power in the Gulf
for the time being. Instead, China will have to be content as a
power among secondary powers such as Britain and France. For as long
as China can continue to secure energy sources, expand its own
exports to the region and present itself as a responsible power,
time is on China's hands.
Report Drafted By:Julian Madsen - PINR