China’s OBOR Developments with Iran & the Arab States

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By Dezan Shira & Associates

China has long courted and enjoyed a healthy relationship with Iran, and hand in hand with this relationship is its diplomatic and trade links with the Gulf and Arab states. Balancing the region’s differing religious beliefs and other regional tensions with the concerns of the United States has thus far been a high wire act that China has managed to pull off remarkably well.

China looks to both Iran and the MENA27 (Middle East & North Africa) nations as suppliers of energy, which is a major driver of Chinese commerce in the region. With Iran having sanctions against it lifted following its nuclear deal with the United States, and with its membership of the strategic Eurasian grouping of the Shanghai Cooperation Organization pending, China’s efforts to strengthen relations with the country have become much easier. International companies can now start to bid for projects involved with the Iran-China pipeline, taking some of the financial heat away from Beijing.

Meanwhile, China’s own energy consumption has been increasing at such a rate that China’s energy dependency has continued to rise. China was dependent on 60 percent of its total energy needs from imports in 2014. Beneficiaries of this are the MENA nations and prominent amongst them are the Gulf Cooperation Council (GCC) states. MENA, although not a trade bloc, is generally considered to include Algeria, Bahrain, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Syria, Tunisia, United Arab Emirates, and Yemen. China’s pursuit of each of these nations in both trade and security issues has been increasing through its diplomatic efforts.

It is important to realize that China values security and sustainability, and especially so when it comes to energy supplies; potential conflicts in the Mideast region can disrupt this. The rise of ISIS, for example, will be of concern to Beijing.

The GCC, however, is a more tangible body, existing as a Middle Eastern regional intergovernmental, political and economic union. It includes all the Arab states of the Persian Gulf, with the exception of Iraq, Iran, and Yemen, and includes the member states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. China has been in prolonged discussions with the GCC concerning a Free Trade Agreement, which includes services. Securing this while at the same time upgrading China’s SOE capabilities in the competitive international market for oil and gas remains a cornerstone of China’s diplomacy in the region.

China’s involvement in the region is not expected to be quite as exotic as the development of huge high speed rail networks, although Saudi Arabia has announced plans to fund a US$22 billion rail network among GCC members. No doubt that that will be of interest to China, as it may seek to link future spurs to this. Meanwhile, Iran also has plans to develop high speed rail across its own territory. The country has a relatively good regular network, but the capability to link routes from Turkey and through to Pakistan and India are of immense strategic importance to China. Iranian plans are for three high speed lines; from Tehran-Mashad near the border with Turkmenistan, Tehran-Tabriz, close to the borders with both Azerbaijan and Turkey, and from Tehran to Isfahan in the Iranian interior. It can be expected that China will seek to link routes financed by it or by friendly states to provide service that will ultimately link to China’s own networks.

Otherwise, China’s involvement with Iran, the GCC, and MENA nations will be through infrastructure development, mainly associated with the oil and gas industry. Refineries, pipelines, and transportation conduits, with all the supporting infrastructure that that entails, can be expected in time to both defeat the rise of ISIS radicalization as well as spur a development boom across the Middle Eastern region.

We can examine some of the recent developments in Chinese investment in the Middle East as follows:

Egypt

China and Egypt elevated their political and trade ties to that of a “comprehensive partnership” status in 2014, signaling improving trade relations. Total trade breached the US$10 billion barrier for the first time in 2013, with about 80 percent of that being Chinese exports. However, that is just part of the story. Chinese investment in Egypt has been increasing by significant amounts, reaching US$80 billion in 2011. China also provided loans of US$200 million to the Egyptian government in 2012.

Sino-Egyptian economic relations are expected to boom under the new leadership of Egyptian President Abdel Fattah al-Sisi, who visited China in December 2014, making China the first state he had set foot on outside of the Middle East and Africa. A few days before leaving Cairo, Sisi told China’s Xinhua News Agency that Egypt supports Chinese President Xi’s initiative on building the Silk Road Economic Belt and the 21st Century Maritime Silk Road. Sisi said Egypt can be a key player in implementing this initiative due to its strategic location as portal for Africa and the Arab world.

The Silk Road used to be a well-known historical trade route and if revived it will increase the trade volume passing through it, according to Egyptian economic expert Hamdy Abdel-Azim. He adds that Egypt needs to develop its basic infrastructure and services to attract foreign investors in general and Chinese ones in particular. Moreover, the intended Silk Road symbolizes a key of future common trade between Egypt and China and a communication bridge between Asian and African countries.

Contracts were also signed by Chinese companies, which will build a power station, a water desalination plant, and a high-speed train line between Cairo and Alexandria. Egypt is China’s biggest weapons market in Africa. In addition, Chinese companies are expected to be primary bidders for tenders currently being prepared to upgrade the Suez Canal – an important artery for Chinese and global trade and very much a part of the Maritime Silk Road Route.

Iraq

In February 2010, Beijing cancelled 80 percent of Iraq’s US$8.5 billion debt to China, a move designed to further Chinese business interests in the country. This waiver came on the heels of a two-year period (2009-2010) in which China and Iraq signed trade deals worth approximately US$3.8 billion. Since then, bilateral trade has soared to about US$20 billion, with oil flowing to China, and cheap consumer and white goods to Iraq.

Chinese firms have been willing to tolerate high levels of risk in order to gain access to Iraq’s lucrative oil contracts, and have made China the biggest investor in Iraq’s oil and gas industry. China has won stakes in 3 out of the 11 oil contracts offered by the Iraqi government, in addition to renegotiating a Saddam Hussein-era deal worth around US$3 billion. However, issues of instability raise serious concerns in Beijing. Iraq is a major provider of oil to China, and price rises per barrel caused by Iraqi instability can impact significantly upon the Chinese economy. It has been estimated that a US$10 increase in oil prices could lower China’s GDP by 0.2 per cent. This represents a risk for a Chinese government already struggling to keep economic growth at its 7 percent target range. Iraq represents a major pillar in China’s policy in diversifying its strategic energy supply chain and its willingness to develop and secure multiple channels globally. 

Iran

Driven by economic interests, China is one of the only major players consistently active in the Iranian oil market during the US sanctions era. Those did have an impact even on China’s diplomatic resourcefulness, seeing Chinese investments, which had totaled US$3 billion in 2011- 2012, sharply decrease to US$400 million in 2012. Meanwhile, bilateral trade between China and Iran was US$45 billion in 2011, rising to US$51.8 billion in 2014, much of this being in the oil and gas arena.

However, the recent bringing back of Iran into the international community is likely to have significant impact on Sino-Iranian relations. Free from US sanctions and global restrictions covering everything from banking arrangements to the provision of spare parts, the two countries can be expected to rush forward investment and development plans, most of which are energy driven from the Chinese perspective, and product and parts driven by the Iranians. The China-Iran trade space will be one of the fastest growing globally over the next three years, and this will also have a knock-on effect in other countries, including Pakistan and India. Oil supply pipelines are expected to cross both these nations’ territories, and introduce perhaps more stability to hard pressed Pakistan, which sits on both Chinese and Iranian borders.

Iran is also expected to shortly become a full member of the Shanghai Cooperation Organization (SCO), giving it an additional platform to converse with neighboring countries in security, infrastructure development, and trade. As long as the US-led Iran deal holds, the future seems rather brighter for Iran, China, and Pakistan.

Kuwait

As a developed country, Kuwait is not known to receive any aid from the Chinese government, but China is increasingly involved as an investor and infrastructure builder in the country. The China Communications Construction Company Ltd., the largest state-owned transportation infrastructure group in China, won a US$408 million contract from the Kuwaiti government to construct the Boubyan Port’s entrance. This project has subsequently commenced. The Kuwaiti government has been consulting with the China Great Wall Industry Corporation (CGWIC) regarding investment opportunities in Kuwait and discussing the Kuwaiti government’s plans to launch satellites (CGWIC is the sole Chinese company allowed by the Chinese government to provide space-related commercial services). Kuwait is, however, a major supplier of oil to China, and recently agreed a ten year deal at the end of 2014 to export to China 300,000 barrels a day: some 15 percent of Kuwait’s total output. Bilateral trade currently stands at US$15 billion, with Kuwait largely exporting petrochemicals and oil, and receiving Chinese consumer products in return. These include household items, which are then commonly re-exported by Kuwaiti traders throughout the rest of the Middle East. Additionally, as Kuwait seeks to diversify its economy, it has also been making inroads into becoming an Arab financial hub. In this regard, it became the largest single state investor in the Chinese RMB market in 2014.

Saudi Arabia

Saudi Arabia is increasingly important as an investment location for China (with Saudi Arabia reciprocating the interest by increasing their presence in China as part of King Abdullah’s “Look East” strategy). Chinese firms have begun to invest in infrastructure and industry in Saudi Arabia, including in an aluminium smelter in the southern province of Jizan, at a cost of US$3 billion. Total Chinese investment in Saudi Arabia has reached US$5.6 billion in 2014, involving some 150 Chinese companies. Energy and trade remain at the heart of the bilateral relationship, which has seen Saudi Arabia claim the top spot in MENA trade (Middle-East and North-Africa) with China for each of the past 12 years. Bilateral trade is now US$71 billion, again mostly in oil and petrochemicals. Saudi Arabia supplies China with about 20 percent of its total daily oil output, about 1.1 million barrels a day. China meanwhile is Saudi Arabia’s largest trade partner in goods and services. However, this relationship too is diversifying. China is involved with supplying telecommunications equipment via Huawei and is also expected to take up a larger share of the Saudi auto industry market, where SUV’s and Luxury models are commonplace. That has significance for foreign auto component and vehicle manufacturers in JV’s with China as plans to introduce more sophisticated and even personalized models into ranges currently produced in China begin to filter through.

Libya

Despite opposing the NATO-led intervention supporting the rebels which overthrew Muammar Gaddafi’s regime in 2011, China embraced the National Transitional Council in August 2011. This was seen by some analysts as a move to protect economic interests in the country, including the potential for post-war contracts. In all, Beijing had outstanding contracts worth about US$20 billion before the war, employing 36,000 Chinese before the revolution. Most have subsequently been evacuated.

The Libya problem remains a headache for China; the country had been providing 3 percent of China’s daily oil consumption prior to the unrest. China also had maintained significant investments in Libya, some US$14.2 billion having been pumped into the country by 2013. The security of these assets is now in serious doubt, and is subsequently impacting upon a strategic move China has thus far been reluctant to take on the world stage – the deployment of troops, even in peace-keeping missions.

Should the opportunity for peace arrive in Libya, estimates indicate that the country will require at least US$100 billion in infrastructure investment to get it back on its feet. That will also be of interest to the Chinese, who have shown previous willingness to invest in order to secure future energy needs. Whether and when China will have the stomach to do so remains to be seen.

Lebanon

China’s relationship with Lebanon is more strategic than energy-based. However, it remains a healthy relationship based upon trade and tourism. Joint efforts to promote tourist facilities have seen 10,000 Lebanese nations visit China every year, a huge number for a nation with a population of just 4.5 million. Chinese tourists have also been flocking the other way – drawn by a combination of the Mediterranean Sea, ancient history, and good cuisine. As a result, Lebanon’s Fransabank Group launched the country’s first China UnionPay credit card outlets, and is eying cooperation with other smaller Mediterranean nations to provide similar services in the region.

China is Lebanon’s largest supplier of goods, with a large proportion being steel that is then used in the construction industry around the Eastern Mediterranean coast. It imports electrical equipment from the country. China’s auto makers have also been eying the Lebanese markets, with Geely making inroads, while Huawei have built part of the national telecommunications system.

Bilateral trade is US$3.2 billion, with China taking up the majority of this. Lebanese Prime Minister Tammam Salam told a session of the Arab-Chinese business conference in Beirut that China’s Silk Road Economic Belt initiative is built on “the principle of peaceful co-existence, mutual benefit and win-win”, and that it was beneficial for Lebanon to participate as a gateway for China into the Middle East. That fits in with China’s relationship with Lebanon being on a different level than much of the rest of the Middle East, demonstrating that the country is also considered important as a strategic viewpoint and window into the Arab world.

 

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Silk Road Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, India, Indonesia, Russia & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Asian and Eurasian region. We maintain offices throughout China, South-East Asia, India and Russia. For assistance with OBOR issues or investments into any of the featured countries, please contact us at silkroad@dezshira.com or visit us at www.dezshira.com

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