China and GCC increase investment and cooperation across multiple sectors

With both economic diversification plans under way across the region, GCC states are seeking to bolster international trade relations 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, to be reinforced by infrastructure development and trade and finance facilitation between the parties.

Capitalising on Arab states’ geostrategic location between Europe, Africa and East Asia, 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 27.7% of oil imports to the country in 2018. 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 and maintaining that position in 2018, its consumption has driven overall demand. As a result, expanding energy trade and enhancing Chinese investment in the GCC’s energy infrastructure is likely to become more pronounced in the coming 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 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 largest oil supplier. Additionally, in September 2019 the company signed a memorandum of understanding (MoU) with the Zhejiang Free Trade Zone that facilitated its acquisition of a 9% stake in the zone’s integrated refinery and petrochemicals complex.

In the UAE in 2017 and 2018 there were a series 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 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. More recently, in July 2019 ADNOC signed an agreement with the China National Offshore Oil Company (CNOOC) to partner on upstream exploration and development, oil refining, and liquefied natural gas. The agreement also opened the door to CNOOC’s engineering units providing contracting and oilfield services to ADNOC.

Infrastructure

Alongside China’s interest 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 well as being a boon for local construction, Chinese investment can act as the catalyst that kick-starts diversification in the GCC at a time when government budgets are being re-evaluated.

A prominent example of this is the Chinese consortium investing in the free zone in Oman’s 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 Duqm. 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. As of December 2018 total of 10 Chinese firms signed agreements to operate in the facility.

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 and combined investment is estimated to total $1bn. The announcement came after China’s Cosco Shipping Ports acquired 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 MoU to form a partnership for the initiative and the development of Kuwait’s five islands in November 2018. Kuwaiti authorities hope Silk City – which will be home to a major seaport, airport and economic free zone – could become a BRI hub.

Trade & Finance

Accompanying the growth in commercial relations have been efforts to facilitate 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 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 Sheikh Mohammed bin Zayed Al Nahyan, the Crown Prince of Abu Dhabi, 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 use of the yuan growing in the region, such deals could help position the UAE as a hub for yuan financial flows.

In addition, a growing number of Chinese banks and financial firms are setting up regional offices. 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, chairman of CEG, cited Dubai’s location and stable financial centre as strong 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 financial institutions and a host of other major Chinese firms have also established facilities in the DIFC.

In July 2018 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

GCC states’ longterm plans put a high premium on developing local technical and scientific capabilities, both in terms of human resources and technology. 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 signed nuclear energy cooperation deals with both the UAE and Saudi Arabia in 2017 and 2018, respectively. 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 Corporation.

China and the UAE have named green and renewable energy as one of 10 key focus points in a 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, 77-sqkm Mohammed Bin Rashid Al Maktoum Solar Park in Seih Al Dahal, which is the world’s largest combined photovoltaic and 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 deal 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 boosting their economic relationship with China.