Investment strengthens ties between China and the GCC

Amid economic diversification plans under way across the region, GCC states are seeking to both bolster trade relations with countries across the world and draw in foreign investment. Regional governments have found a willing partner in China, which is forging ahead with its bold Belt and Road Initiative (BRI). In 2014 President Xi Jinping of China laid out a blueprint for the development of Sino-Arab cooperation, referred to as the 1+2+3 framework. Energy was identified as the first pillar of that cooperation, reinforced by infrastructure development and trade and finance facilitation, and supported by cooperation in the technical fields of nuclear energy, renewable energy and space.

Capitalising on Arab nations’ geostrategic location between Europe, Africa and the Far East, China’s longterm plans align well with those of GCC governments, as they also sustain higher demand for their oil. Although the recent slowdown of China’s economy may be a source of some concern to Gulf nations, the intensification of commercial transactions and political engagement between the parties demonstrate the deepening relationship between China and the region.

Oil & Gas

As indicated by the 1+2+3 strategy, China’s primary interest in the GCC remains its vast energy reserves, with the bloc accounting for some 27% of oil imports to the country in 2017. With China replacing the US as the world’s largest oil importer in 2017, its consumption, along with that of India, has been driving demand growth. As a result, expanding energy trade and Chinese investment in the GCC’s energy infrastructure are likely to become more pronounced.

Growing cooperation between Saudi Arabia’s national oil company, Saudi Aramco, and Chinese state-owned oil and gas companies exemplifies the concerted effort both sides are making to expand ties. In early 2016 President Xi, Saudi Arabia’s King Salman bin Abdulaziz Al Saud, and representatives of Saudi Aramco and the Chinese state-owned Sinopec inaugurated a giant $10bn refinery at the Saudi port city of Yanbu, which is strategically located along the so-called Maritime Silk Road connecting China to Europe. The 400,000-barrel-per-day (bpd) refinery is the second joint venture between the partners, following the 2009 launch of a 240,000-bpd refinery in China that Saudi Aramco supplies with crude. In late 2018 Saudi Aramco signed a string of agreements that could see it become China’s single-largest oil supplier in the near future, potentially accounting for 1.67m bpd in 2019, or almost 20% of total imports at 2017 rates.

In the UAE 2017 and 2018 saw a flurry of agreements between the country’s largest oil company, Abu Dhabi National Oil Company (ADNOC), and the state-owned China National Petroleum Corporation. In those years the Chinese firm acquired $3bn in stakes of Abu Dhabi oilfields, and received the largest onshore-offshore seismic survey contract from ADNOC, worth $1.6bn.

Infrastructure

Alongside its interests in the region’s energy resources, another notable trend is been the surge in Chinese investment in infrastructure mega-projects across the GCC. Drawn by the Gulf’s growing consumer markets, investment-friendly environment and geostrategic location, Chinese firms have committed hundreds of millions of dollars to such projects. For their hosts, Chinese investment can act as the catalyst that kick-starts diversification at a time when government budgets are being re-evaluated, while also being a boon for local construction.

Perhaps the most prominent example of this is the Chinese consortium investing in the Duqm Free Zone, which is central to Oman’s diversification plans and the focal point of Chinese investment in the country. In May 2016 a group of six Chinese firms called Wanfang Oman signed an agreement with the Duqm Special Economic Zone Authority to develop an industrial park in the zone. The consortium will invest $10bn in the park, including for a $2.3bn methanol plant, a $138m building materials storage complex and an $84m vehicle assembly plant. Wanfang broke ground on the park in April 2018. Chinese investment in the project will be a contributing factor in the growth rate of Oman’s construction sector, which doubled between 2016 and 2019.

Trade & Finance

Accompanying this growth in commercial relations are efforts to remove obstacles to investment and trade. Chinese financial institutions have extended their presence in the region, facilitating the exchange of currency and opening up yuan financing options. The UAE has been at the centre of this trend. The two countries signed an MoU to establish a yuan clearing centre in the UAE during a December 2015 visit to China by the crown prince of Abu Dhabi Sheikh Mohamed bin Zayed Al Nahyan, giving UAE borrowers access to yuan-denominated loans. During the same visit the People’s Bank of China, the nation’s central bank, and the Central Bank of the UAE renewed a three-year CNY35bn ($5.2bn) agreement to reduce the cost of currency exchange by bypassing the need to convert local currency into dollars. With adoption of the yuan growing in MENA, such deals could help position the UAE as a regional centre for yuan financial flows.

In addition, a growing number of Chinese banks and financial companies are setting up offices in the region. For example, a July 2018 visit by President Xi to Dubai saw the state-owned conglomerate Chinese Everbright Group (CEG) sign an MoU with the Dubai International Finance Centre (DIFC) to collaborate on BRI opportunities in the Middle East, Africa and South Asia (MEASA). Speaking at the signing ceremony, Li Xiaopeng, the chairman of CEG, cited Dubai’s location and stable financial centre as strong pull factors. “Dubai in particular has proven to be the ideal location from which we can access the potential of the fast-growing emerging markets in the MEASA region,” he stated. Four Chinese banks and other major Chinese companies have also opened offices in the DIFC in recent years.

Tech Cooperation

In their bid to evolve into knowledge-based economies, GCC states’ long-term plans put a high premium on developing local technical and scientific capabilities. China has sought to sow the seeds of future partnerships in these fields by investing early. This is particularly true in the realm of unconventional energy, in which China is a global leader. Chinese authorities signed nuclear energy cooperation deals with both the UAE and Saudi Arabia in 2017 and 2018. The former, signed by China’s Nuclear Safety Administration, covers information exchange and training for the UAE’s Federal Authority for Nuclear Regulation, while the latter includes MoUs for nuclear fuel exploration and the development of nuclear reactor-fed desalination plants by the China National Nuclear Corporation.

In terms of renewables, China and the UAE named green energy as one of 10 focus points in a the strategic partnership announced in July 2018. A month earlier, China’s state-owned investment fund, the Silk Road Fund, revealed its investment in the $3.9bn Mohammed Bin Rashid Al Maktoum Solar Park in Seih Al Dahal, south of Dubai, the world’s largest concentrated solar project.