''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 importing country.

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 Bilateral Relationship"]

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 Australia.

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.

Saudi-China Ties
 

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.

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 Middle East.

Conclusion
 

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