Enhanced cooperation and investment across a range of sectors in Saudi Arabia strengthens ties between China and the GCC

With both economic diversification plans under way across the region, GCC states are seeking to bolster trade relations with countries across the world and draw in foreign investment. Regional governments have found a willing partner in China, which is seeking to expand its trade and investment presence on the Eurasian continent, as demonstrated by its 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 states’ geostrategic location between Europe, Africa and the Far East, China’s long-term 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 both commercial transactions and political engagement between the parties in recent years demonstrate the deepening relationship between China and the region. Indeed, the February 2019 visit to Beijing by Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud of Saudi Arabia was the latest in a string of such visits by GCC leaders.

Oil & Gas Relationship

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. Although economic diversification plans recognise the need to move away from a dependency on oil, hydrocarbons revenue and related activities will continue to be a dominant driver of growth for GCC states in the medium term. 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 in recent times. As a result, expanding energy trade and enhancing Chinese investment in the GCC’s energy infrastructure is likely to become more pronounced in the years ahead.

Growing cooperation between Saudi Arabia’s national oil company, Saudi Aramco, and various Chinese state-owned oil and gas companies is a prominent example of the concerted effort both sides are making to expand the relationship. In January 2016 President Xi, Saudi Arabia’s King Salman, and representatives of Saudi Aramco and the Chinese stateowned 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. More recently, 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 have seen a flurry of agreements between the country’s largest oil company, Abu Dhabi National Oil Company, and the stateowned China National Petroleum Corporation. In those years the Chinese company acquired stakes totalling $3bn in Abu Dhabi oilfields, while also receiving the largest onshore-offshore seismic survey contract from ADNOC in March 2018, worth $1.6bn.

Infrastructure

Alongside its interests in the region’s energy resources, another notable trend has 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 been committing hundreds of millions of dollars to such projects. As for their hosts, Chinese investment can act as the catalyst that kick-starts diversification works at a time when government budgets are being re-evaluated, while also being a boon for local construction industries.

Perhaps the most prominent example of this is the Chinese consortium investing in the free zone at the Omani port of Duqm. Envisaged in 2011 and boasting a prime location on the south coast of the Arabian Peninsula, the Duqm Free Zone 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 plans to invest over $10bn in the park, including for a $2.3bn methanol plant, a $138m building material storage complex and an $84m vehicle assembly plant, with Wanfang breaking ground on the park in April 2018. According to a 2016 report by international analyst BMI Research, 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.

A similar development has been under way since mid-2017 in Abu Dhabi, where Abu Dhabi Ports (ADP) signed an agreement with the Jiangsu Provincial Overseas Cooperation and Investment Company for the lease of 2.2 sq km of land in the free trade zone at Khalifa Port. The China-UAE Industrial Capacity Cooperation Industrial Park will be home to some 15 Chinese companies whose investment could total $1bn. The announcement came on the back of China’s Cosco Shipping Ports acquiring a 35-year lease from ADP to build and operate a container terminal at Khalifa Port.

Of potentially even larger scope is China’s involvement in Kuwait’s $100bn Silk City mega-project, with the two countries signing a memorandum of understanding (MoU) to form a partnership for the initiative and the development of Kuwait’s five islands in November 2018. Kuwaiti decision makers hope Silk City – which will be home to a major seaport, airport and economic free zone – could become a BRI hub.

Trade & Finance

Accompanying this growth in commercial relations have been efforts to remove obstacles to investment and trade. Chinese financial institutions have extended their presence in the region in recent years, facilitating the exchange of currency and opening up yuan financing options.

The UAE has been the main 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 Mohammed bin Zayed Al Nahyan, giving UAE borrowers access to yuan 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 swaps 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 hub for yuan financial flows in the future.

In addition, a growing number of Chinese banks and financial firms are setting up offices in the region. A July 2018 visit by President Xi to Dubai saw the stateowned 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 … and we are confident that the centre’s credible and enabling infrastructure will help us to build our business,” he stated. Four Chinese banks and a host of other major Chinese companies have also opened offices in the DIFC in recent years.

In the same month the Chinese state-owned Industrial Capacity Cooperation Financial Group announced it would open an office in the Abu Dhabi Global Markets financial centre. The stated aim of the office is to provide financial services to Chinese investors in the UAE-China cooperation park at Khalifa Port and to support the internationalisation of the yuan.

Technological 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. Accordingly, 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. For example, Chinese authorities have 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 opportunities 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 Corp.

In the renewable energy sector, China and the UAE named green energy as one of 10 key focus points in a new strategic partnership announced in July 2018. Just a month earlier China’s state-owned investment fund, the Silk Road Fund, revealed it was investing in the $3.9bn Mohammed Bin Rashid Al Maktoum Solar Park in Seih Al Dahal, south of Dubai, which is the world’s largest concentrated solar project.

China has also shown an interest in Saudi Arabia’s aerospace sector, signing a cooperation agreement with the Kingdom in March 2017. The agreement has subsequently seen Saudi Arabia’s King Abdullah University of Science and Technology develop cameras for a relay satellite mission ahead of the Chang’e-4 lunar probe and China develop a rocket that launched two Saudi satellites from a launchpad in Gansu Province in December 2018. Such agreements provide Gulf states with opportunities to develop and test their technical skills at a global level, while adding another level to their growing economic relationship with China.