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Drawn towards the dragon

Drawn towards the dragon

Booming China-Gulf trade ties are threatening to change the region’s energy-security equation.

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September 25, 2008 10:52 by



Ehtesham Shahid

The writing is on China’s Great Wall. Galloping business ties between the People’s Republic and the Gulf are creating an unprecedented energy security- trade equation that may just upend a similar arrangement the region has had with the West for ages.

China’s surging demand for oil and burgeoning manufacturing base suits the Gulf’s booming industries – prompting Beijing to target $100bn in trade with the Middle East by 2010. From commercial airlines and shipping companies to financial service providers and petrochemical manufacturers, hordes of GCC firms have registered fast-track growth in recent years and increasingly look to China as a market to help them sustain and further their growth. They’re paving the way for a new Silk Road between China and the Gulf.

Excess liquidity in the Gulf and a decline in the economic prosperity of the West are pushing things along. Hassan Jarrar, the head of origination and client coverage for wholesale banking at Standard Chartered Bank, says the fundamental reason behind the new Sino-Gulf business relations has to do with how the Chinese see their influence on the world, which is much different from the West – especially the US – and that’s a pleasant change.

“The Americans typically say “We will help you but what you are going to do for us?” he says. “What concessions you are going to give politically or otherwise?” The Chinese, on the other hand, go to a country, finance projects, build to create goodwill and then expect concessions, he says. “They have a much more long-term and softer approach than the Americans do.”

The transformation began in 2000 when Chinese construction firms started making forays into the Gulf that was deemed undesirable by Western firms.

“Initially there was a perception that they are good only for certain types of projects,” Jarrar says. “They were not looked upon as Bechtel-style companies that could handle sensitive and highly technical and specialized projects.”

That’s changing, with companies from China working on infrastructure projects in the region. “The Chinese have done them well, and a lot more inexpensively than many Western companies,” he says, adding that the reason is Chinese firms tend to be self-sufficient. “They bring their own camps, they have a way of amalgamating laborers and engineers and their staff need a lot less materialistic indulgence. These factors are becoming attractive to Arab countries.”

Emilie Rutledge, who teaches economics at UAE University, says China has overtaken the US as the number one supplier of goods to the GCC – 11.3 percent of the Gulf’s imports compared to 10.6 percent. “While bureaucrats in the EU and the US fret over the growing trade imbalances they have with China, the GCC has something that China wants in order to sustain its meteoric economic growth,” says Rutledge. That “something” is oil. Hence China’s interest in doing business.

Indeed, trade between China and the Middle East has doubled since 2000 to $240bn and is estimated to grow by several times that over the next decade. The UAE alone predicts that its trade with China will grow seven-fold by 2015, from $14.2bn in 2006 to $100bn. Growth in China-GCC trade is outstripping that of the region’s traditional trading partners, the EU and the US. Between 2000 and 2007, trade with China grew by 28.4 percent, compared to 15 and 16.4 percent with the US and EU respectively.

“China’s importance in global trade has risen as manufacturing has shifted there,” says Giyas Gokkent, head of research at National Bank of Abu Dhabi. “Fast growth in the [Gulf] region has definitely sucked in more imports, but the growing share of China in Middle East trade represents a global shift.”

Energy equation. Oil is without a doubt China’s most important and strategic commodity import. To no small degree, the country’s plans for economic growth hinge on securing the stuff. While this arrangement fits in well at both ends, it may also have a long-term strategic impact. “China has and is increasingly opening up strategic sectors to GCC investors,” Rutledge explains. “Several Gulf states are investing in Chinese refineries specifically tailored to crack their own oil blends. While this makes economic sense for the GCC, it may not sit well with the region’s current security providers – the US.” It’s an in interesting aspect of the emerging China-GCC trade dynamic, she adds. To what extent will the Chinese step in to “protect” the GCC and support its political interests, especially at international bodies such as the United Nations?

Saudi Arabia’s petrochemical giant Saudi Aramco and China Petrochemical and Chemical Corporation (also known as Sinopec) recently signed a memorandum of understanding to further, “their current joint ventures and the strategic cooperation that binds them together.”

Abdallah S. Jum’ah, the president and CEO of Saudi Aramco described this as, “a reflection of China’s view of the crucial role of Saudi oil in the world, as well as the Kingdom’s view of China’s crucial role in the global economy.” Sinopec imported almost 460,000 barrels per day (bpd) of crude from Saudi Arabia last year, on average. In 2008, it’s looking to import 650,000 bpd, or 40 percent more. The company has agreed to increase this average to no less than one million bpd by 2010 and then to 1.5 million bpd by 2015.

And there are 57 more Saudi-Chinese joint projects, backed by total capital of two billion Saudi riyals ($853.4m), in the works. Massive Chinese investment brings up the billion-dollar question of whether this new partnership will weaken the well-grounded energy-security-trade ties the region has cultivated with the West.

“You don’t know whether the age old ties will change, but with globalization everything is subject to change,” says Hasan Jarrar of Standard Chartered Bank. “One of the largest pipelines in the history of the UAE – the Abu Dhabi-Fujairah pipeline – is being done by a major Chinese oil field construction company. The Chinese National Petroleum
Construction Company has a multi-billion contract awarded by IPIC [International Petroleum Investment Company] the petroleum investment arm of the Abu Dhabi government. If that is not the legitimization of what the Chinese capabilities are, then I don’t know what is.”

But not everyone believes there will be an immediate impact on the strategic front. “When it comes to the sensitive oil drilling … the Americans followed by the Europeans still have the market cornered,” says Jarrar.

Parag Khanna, the fellow and director at the Global Governance Initiative of the New America Foundation, says for the US, security arrangements and energy supplies are a bigger concern than trade between China and the oil producing Gulf. “Middle Eastern countries are trying to balance trade ties with China and Europe and the US,” says Khanna. “But basically, who has the money makes the rules.”

Action zones. And there’s a lot of money to be made. Logistics services provider
DHL, which started operating in the China-UAE sector in 1977, saw more than 25 percent growth last year and expects another 20 percent rise over the next three years. A spokesperson for the company says that due to increasing economic growth in China over the last decade, it’s only natural that countries with increasing personal consumption, such as the UAE, would increase trade with the Chinese. “The growth of China as an important economic power has coincided with the increase in the UAE China trade lane,” says Janet Jweihan, the DHL Express Country Manager for UAE. DHL’s shipments from China to the region include high-value technology goods, electronics and general merchandise. To cope with this growing traffic DHL has opened outlets in 400 Chinese cities, connected by more than 1,800 vehicles.

Bahrain-based investment bank Arcapita also recently announced a joint venture with Colossus Holdings, a Singapore- based holding company, which will invest $2bn to develop a 1,650 megawatt portfolio of wind farms in China’s Inner Mongolia region. This is Arcapita’s first investment in China and Asim Zafar, the head of asset-based investments at Arcapita, says the company’s interest there is due to the focus the country places on clean energy initiatives. “China possesses one of the largest wind resources in Asia,” he says.

“The environment governing and encouraging wind power development in China continues to evolve at a rapid pace,” says Zafar. “We continue to look at China for further investment opportunities, which we believe offers potential for infrastructure and infrastructure like investments.”

Stories of growth and partnership extend to other sectors such as telecom and aviation. Etisalat, the UAE’s telecom service provider, says voice traffic between the UAE and China went up 17 percent during 2007. “The growth in telecommunication traffic and roaming reflects the growth in trade and tourism between our two countries,” says Ahmad Abdulkarim Julfar, the chief operating officer of Etisalat. The UAE’s leading telecoms service provider has ties with major Chinese counterparts including
China Netcom, China Telecom and China Unicom.

However, it has been a different story for Bahrain’s telecom behemoth, Batelco, which still has very limited revenue flows to China. Peter Kaliaropoulos, the company’s chief executive, says the Asia-Pacific region is of interest to Batelco but not China itself, at the moment. “We also use some network equipment from Chinese network vendors,” Kaliaropoulos explains. “All in all the current level of business and interest in China is rather limited at this stage for Batelco.”

Buying cheap. The Gulf’s inflation problems are also driving trade between the GCC and China’s burgeoning manufacturing base. About 95 percent of respondents indicated in a recent survey that they would increase their volume of purchases from China by some degree over the next 12 months. A third said they plan to increase the volume by at least 50 percent. According to the survey conducted by Global Sources, a Hong Kong-based business-to-business publisher and trade show organizer – a little more than half of buyers indicated they have already started purchasing more goods from China in order to combat inflation. Thirty-seven percent specifically cited inflation as the reason behind the trade boost.

Industry observers say consumers are already buying 80 percent to 90 percent of products from China. “If you walk into Debenhams a high percentage of products are coming from China or elsewhere in Asia. The end user doesn’t really realize that because it has some label or brand on it,” says Bill Janeri, the general manager at the Middle East Global Sources.

The quality of products coming from Chinese factories remain in question, however. According to one survey, international companies lose an estimated $60 billion a year because of copyright violation and counterfeit goods from China.

However, Janeri says the size of China’s manufacturing base is such that one can have anything made at any quality. “The scale is often determined by the buying organization,” Rutledge explains. Like most if not all other economic blocs, the Gulf is not immune to cheap Chinese products. “Look no further than the UAE’s Dragonmart complex, reputed to be the largest trading hub for Chinese products outside of China,” she says.

Variously called a “huge aircraft hangar in Dubai” as well as “an example of how China takes a long-term approach to penetrating a market,” Dragonmart sells everything from picture frames to farm equipment. And they are legitimate, says Standard Chartered Bank’s Jarrar.

“The perceptions are changing. They are entering the light pickup truck market and have made a good headway in the region,” he says. “China now has cars, which are aimed at competing with middle-sized Nissans, the C-class Mercedes and the 3 series BMW at [a] third of the price. They are slowly gaining legitimacy. Don’t forget that’s how the
Japanese started.”

If the US continues to slow down, China will only double its efforts to enter the Middle East. A consensus appears to be growing that China’s economy will overtake the US by 2035. Judging by the strides Gulf companies have been making towards this prospective superpower, they may be heading in the right direction at the right time.

First seen on www.trendsmagazine.net



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