Enter the Dragon

Massoud A. Derhally reveals why after decades of ignorance, China is now targeting the Middle East for investment.

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By  Massoud A. Derhally Published  April 30, 2006

|~|dragon-200.jpg|~|BRIGHT AND COLOURFUL: A lantern dragon on display to mark the Chinese mid-autumn lantern festival. China see their economy growing to US$4 trillion by 2020|~|Massoud A. Derhally reveals why after decades of ignorance, China is now targeting the Middle East for investment. The Chinese are the coming, the Chinese are coming! Much like the buzz about Japanese multinationals changing the dynamics of business in the 1970s and 1980s, unparalleled growth of 10% year on year for the past ten years in China has caused Beijing to look overseas. It is searching for investment as it transforms from a centrally planned economy to a market system. For the Arab world, globalisation and the evolutionary changes of the communist superpower have essentially meant a deepening of the relationship. For China, which became a net oil importer in 1993 and by some estimates may be importing up to half of its oil needs by 2010, this invariably denotes a need for an uninterrupted supply of fuel. Enter Saudi Arabia and the oil rich Gulf States. These states are growing exponentially and have tremendous infrastructure needs that China can help with as well as India, Malaysia and other fast growing countries in the east. In 2005, Saudi Arabia contributed about 20 million tons, or 15.3% of the 130 million tons of crude oil that China imported. Saudi Arabia and the Gulf will export a sizeable amount of oil to China in the future, especially because most of the incremental demand for oil today is coming China, according to Said Al Shaikh, chief economist of National Commercial Bank, the largest bank in Saudi Arabia. In 2004 and 2005 the increase in demand for oil in China was 25-30%. That, according to Shaikh means if global demand for oil increases by 1 million barrels then about 30% of that increase will be coming from China. “China is more likely to maintain strong economic growth for a long period of time about 8%. Annual demand for oil by China is about 6.5-7% and this is average at a modest level,” explains Shaikh. That amount is very likely to increase given the warming of relations between the two countries that illustrate the relationship is about synergy as much as it is about mutual interests and forging strategic alliances. When King Abdullah of Saudi Arabia went for a tour of Asia last January that included China, India, Pakistan and Malaysia, it was his first international trip since ascending the throne testifying to the paradigm shift in Saudi foreign policy as the country vies to anchor its economic and political relationships with Asia. Such a development was anathema to Riyadh in the heyday of communism. But times have changed. “The move that King Abdullah did a few months ago where he visited China and India, was a long awaited connection that we have been waiting for in the private sector for quite some time,” says Abdulla Al Zamil, Chief Operating Officer, Zamil Industrial Investment Group, a multi-billion dollar Saudi conglomerate. “We at Al Zamil Group believe that there needs to be a strong connection between West Asia and East Asia. Both of us have been looking at the West as a source of either technology or investment, but once we connect these two continents, that will bring about a huge value added to both of us. We [benefit] from a natural resources standpoint, a capital infrastructure and they [benefit] from technology, competitive labour and big markets.” The visit last week by Chinese president HU Jintao to Saudi Arabia which saw the signing of energy, security, defence and health agreements marks another new juncture in Arab-Sino relations. Given that the Chinese see their economy growing to US$4 trillion with an average per capita of US$3000 by 2020, the relationship with Saudi Arabia plays an integral role to the future of the country allowing for Beijing’s economic expansion. “One of the few countries that can provide for the economic expansion of China is Saudi Arabia. It has the largest oil reserves and the strategy of Saudi Arabia when it comes to oil is based on stability,” says Ihsan Bu-Hulaiga, a prominent Saudi economist. China has been increasingly exporting to the Gulf and Middle East region and its products are replacing products that were produced either in Europe, the US or Japan, making it a major trading partner. Chinese companies are keen to come and do business in Saudi Arabia by taking part in cement projects, or engaging in the oil and gas sector. That President Hu visited the headquarters of SABIC, Saudi Basic Industries Corporation, the petrochemical giant that is about to enter into a US$5.33 billion joint venture in China and discussing plans to set up US$9.3 billion refinery and petrochemical project in north-eastern China exemplifies a deepening of the relationship between the two countries beyond just trade. Hussein Rashid Al Sabbagh, Bahrain’s former Ambassador to Beijing says Arabs have elicited little interest in the communist superpower historically but that the dynamics of the relationship have changed as a result of the Chinese taking the initiative over the years. The relationship between Kuwait and China was the first relationship of any country in the Gulf and China. It started before any other country in 1950 when trade relations between the two countries were established. “The Chinese have been more concerned than some of the concerned Gulf States. They have been more forward and enthusiastic to open channels. The Gulf States were the last to formalize relations with China,” he says in reference to the halcyon days of communism and the perceived threat of that system on the region. However, today “From the Saudi perspective the relationship is important and they value the development of the relationship because it means an alternative, one more option to provide the technology, know how and the human resources. Especially because until 2020 the challenges of Saudi Arabia are to build up capacity and to make up for the years of the 1990s when GDP growth went down to as low 1.5% GDP growth per annum,” explains Bu Hulaiga. “Right now the challenge is to build up the capacity and that means the infrastructure. We are talking about mega projects. The Saudi private sector tried to extend the message that Saudi Arabia is witnessing and will be witnessing more expansion and growth especially in infrastructure; we are talking about mega projects…What wee need is the highest number of participants in these projects and this will enable us in Saudi Arabia to shorten the time. We are going through a crash-like period of development and we want to improve our competitive position in the shortest number of years. Right now we have the financial means and the country has improved its investment climate on a number of fronts by joining the WTO and opening up to investors. China, Japan and India can take part in the development of the country.” Over the coming 14 years, Saudi Arabia needs to expand its sewage system, power generation, water desalination, and the electricity sector in addition to the power sector. Other important services include education and health. This means the construction of schools and primary care centres notwithstanding hospitals. “The government will take care of this but still we need the capacity to construct this and China can provide and endless supply for construction,” says Bu Hulaiga. Though only about 3% of all foreign direct investment (FDI) goes to the Arab world, and the region’s percentage of overall world trade has declined by almost 35% since 1980 to just 3%, Saudi Arabia has the highest annual FDI inflows in the Middle East, according to the most recent figures from the United Nations Conference on Trade and Development (UNCTAD). According to Bu Hulaiga, trade between China and the Kingdom has increased 59% in the last year to $15 billion and while Saudi Arabia is Beijing’s 5 th largest trading partner, China is the fourth largest trading partner of the kingdom. For people like Al Zamil and his rapidly growing conglomerate China is an added value as are other Asia countries like India and Vietnam. “We have an operation in China…We see China as being quite challenging and competitive from a foreign investment standpoint,” explains Zamil. But he goes on to draw out why he thinks the Arab world should carry forward with its charm offensive in Asia. “People talk about BRIC: Brazil, Russia, India and China. Our understanding of Brazil and Russia is quite limited so I think we are taking the second half of that formula, which is India and China. There is huge growth there…and there are mutual interests. Both China and India represent huge consumer markets for our products, be they hydrocarbon or manufacturing. Two years ago I sat down with Ratan Tata chairman of the Tata Group [a respected conglomerate of India that comprises 93 companies and has the largest market capitalisation in the Indian Share Market] at the Taj Hotel overlooking the sea and he said to me, ‘fifty years ago there were Arab dhows here trading day and night. Today you look out there aren’t any, what’s going on? Why do we both look at the West, while we both can connect and create a real economic power?’” Al Zamil explains. “I totally agree with that view. If Asia connects not Europe or the US can stand in its way. That’s what I am personally pursuing today. I am looking at the East a lot more today when we look at source of supply. We no longer look at Europe or the US as a major source of component supply,” he adds. Aside from economic fundamentals there is also a political dimension to the growing Arab-Asian relationship, one that is rooted in the aftermath of the 9/11 attacks and the perceived or actual animosity to doing business with the Arab world by the West, as illustrated by the controversy surrounding the purchase of the Dubai Ports Authority (DPA) of the Peninsular and Oriental Steam Navigation Company (P&O) of the United Kingdom, the fourth largest ports operator in the world. The falling through of the deal because of objections raised by American politicians under the guise of national security was very damaging. “This had a psychological effect because Dubai considered or the UAE that there is discrimination against its investment. No doubt there is a psychological effect on the Arab side that our investments are not welcome in the US as they are in other countries and that when a company carries an Arab identity or has large amounts of Arab money in it, it is discriminated against from other companies owned by say European states,” explains Ghazi Al Rayes, the former Kuwaiti ambassador to Beijing. And so when viewing the present state of relations with China there is an inclination in the Gulf States to balance the relationship with the world by forging or solidifying existing ties with allies. “By strengthening the relationship with China, now a major political player in the world and whatever it says influences world politics, you rely on China in the future in case of political disputes in the region that would require a major political power in the world to side with you,” explains Shaikh of NCB. “The example that we see now with Iran, with the Chinese and Russians not willing to go for sanctions that should be an interesting lesson for the Gulf countries to look at.” Bu Hulaiga agrees and pulls no punches as he highlights what he and others in the region see as an inherently deteriorating relationship with the West marred by discrimination and fabricated recriminations when it comes to dealing with the Arab world. “This is a relationship that comes with no liability or luggage,” he says in reference to Saudi Arabia’s ties with China. But he adds: “When you talk about the United States and the EU, they are getting into the habit of politicising the economic and business scene. You cannot just have an economic and business relationship with them, as they always want to bundle that with a number of political issues, and to us this is a liability.” Making his case, he continues: “When you sit with the Chinese businessman they talk business and their government is keen to talk business because they are busy developing their country and the same thing with India and Japan. It would not be wise at all on our part in the GCC not to pay attention to these growing economies. We will have a number of important changes and it will be to the advantage of our neighbours to the East so why should we ignore them?”||**||

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