Master Developers: The New Sino-Arab Gulf Visions of Economic Development

Editor’s Note: As the United States withdraws both from the Middle East and from its traditional global leadership role under President Trump, rising powers like China and regional players like Saudi Arabia and the United Arab Emirates are moving to take its place. Trade, investment, and reconstruction aid are all in flux. Karen Young of the American Enterprise Institute assesses these new dynamics and finds that the Gulf states and China are moving closer in ways that will shift regional dynamics.

Daniel Byman

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The synergy now created by both Chinese economic statecraft and Gulf states’ increasing orientation eastward is a powerful force that will affect patterns of investment in emerging markets, but also practices of development finance, of post-conflict reconstruction, and ideas about appropriate governance of markets of the Middle East. Much of this relationship involves Gulf supply of China’s seemingly insatiable demand for energy, but China is also eying the Gulf for its own industries and investment. China and Arab Gulf states are likely to use their capacities as financiers, contractors, and developers to increase ties and exert regional influence at a time the United States is withdrawing from the Middle East.

The future of growth for the Gulf states will rely on the control of ports and transit waterways (of the Red Sea corridor, Arabian Sea, and Indian Ocean), of export markets for energy products in Asia, and favorable access to the largest economies in the Middle East and Africa. Trends in urbanization and energy demand map closely to where the Gulf is now investing its political and economic resources. Chinese investment is symbiotic to Gulf security and economic objectives; though they are competing for many of the same projects, they are at times cooperative rivals. China is a source of finance, a competitor in infrastructure projects, and a constant reminder of the power of alternative economic organization to the West. The growth in financial flows is compelling, but it requires constant feeding from its state-backed forces. Both China and the Gulf states use state-owned firms, including financial entities and banks, such that constant expansion of projects and financing serves a domestic objective on balance sheets as well. Some scholars have called the expansion of Chinese state-backed lending “debtbook diplomacy,” as the expansion serves the political goal of the Belt Road Initiative while also giving commercial purpose to a growing financial sector.

China Looks to the Gulf

The opening of two new ports in Oman, Sohar and Duqm, along with the new Hamad port in Qatar, are adding shipping capacity and new mechanisms of regional integration, in spite of a difficult period within the Gulf Cooperation Council (GCC) because of the tension between Qatar and its Gulf neighbors. China financed the development of the Duqm port, as well as a new expansion of Khalifa Port in Abu Dhabi, and has an interest in their growth. Abu Dhabi’s new Cosco Shipping Ports (CSP) container terminal at Khalifa Port serves to boost trade with China, but also competes directly with its sister port, Jebel Ali, in Dubai, which is currently the world’s busiest port outside of Asia. Khalifa is set to be the largest container freight station in the Middle East, the result of a 35-year agreement between Abu Dhabi Ports and Cosco Shipping Ports Ltd, a subsidiary of Cosco Shipping Corporation Limited of China. The port agreement comes on the heels of President Xi Jinping’s official three-day visit to the United Arab Emirates earlier this year, the first by a Chinese leader to the Emirates in nearly 30 years. The UAE is China’s second-largest trading partner and its largest export/re-export market within the MENA region. In fact, the UAE and China have agreed to a “Comprehensive Strategic Partnership,” focused not only on shared investment and trade ties, but also increasing cooperation on security and counterterrorism issues.

China clearly articulated its policy towards the Arab world and its economic interests in its 2016 Arab Policy Paper, which detailed its interests in trade agreements and technology. Energy supply is a key, but not exclusive, concern; increasing bilateral trade and tourism from China to the Arab world is also a policy objective. The value of commercial activity between China and the GCC states accelerated from just under $10 billion in 2000 to nearly $115 billion in 2016.

This growth in bilateral trade flows has continued in the two years since, according to research by First Abu Dhabi Bank, with the Gulf states now China’s largest source of oil and the second largest provider of its gas needs. China is likely to become the GCC’s largest export market within the next two years. The increase in trade ties are not unilateral; by 2020, GCC imports from China are expected to double in value to around $135 billion. Flows of people are increasing as well, as a recent report forecasts Chinese tourist arrivals to reach 2.5 million within the next three years.

Both Saudi Arabia and the UAE are courting Chinese investment in shared energy projects, encompassing traditional oil production to renewable capacity and energy storage. State-owned enterprises Aramco and SABIC aim to partner with China's Sinopec and China North Industries Corp, creating a synergy of government firms. In the UAE, these projects include a contract worth $1.6 billion between ADNOC and the China National Petroleum Corporation (following an earlier $1.17 billion investment in Abu Dhabi’s offshore fields) and a partnership and investment agreement between Dubai’s Electricity and Water Authority (DEWA) and China’s Silk Road Fund to create the world’s largest solar energy plant. In November 2018, ADNOC signed a new agreement for the sale of liquified petroleum gas (LPG) to Wanhua Chemical Group of China, owner of the world's largest underground LPG storage facility. According to research by Qamar Energy, there are at least ten current energy projects planned or active in the GCC with Chinese investment, from traditional and solar electricity generation, to pipeline development in the UAE, methanol production in Oman, and uranium exploration in Saudi Arabia.

The Energy Imperative

The recent growth in ties is based in China's demand for energy and the Gulf's ability to provide an important and growing market. China requires energy, especially to supply its infrastructure and construction boom as it builds new cities. Automobile sales in China quadrupled between 2008 and 2016, and transportation needs have also increased petroleum and related product demand. As China seeks to shift its own energy mix away from polluting coal-fired power plants, its demand for gas has multiplied. The most important factor driving global gas consumption in 2017 was the surge in Chinese gas demand, where consumption increased by over 15 percent, accounting for nearly a third of the global increase in gas consumption.

The Gulf states are competing with each other to secure China as an export market for their energy products beyond just oil and gas. The proliferation of downstream energy products in petrochemicals, including the construction of new refineries and chemical plants, is both a diversification strategy and a new product arena (and profit maker) for Gulf state energy companies. Despite this synergy of interests, there is already conflict, as evidenced in the recent dispute over control of shares of the Doraleh Container Terminal in Djibouti between DP World, the Dubai-based port management company, and the Djibouti Ports Authority (PDSA). Djibouti forced DP World out of the site by nationalizing the terminal; notably, the government partner of the port authority, the Hong Kong-listed China Merchants Port Holdings Company Ltd, a company overseen by Beijing’s State Assets Supervision and Administration Commission, holds a 23.5 percent ownership stake in the terminal. Effectively, the government of Djibouti made a choice of prioritizing ties to China as an investor over its commercial ties to DP World.

MENA Project Development

China is quickly becoming a major contender in large project development in the Middle East. Because Chinese contractors can often bid on awards with state-backed financing, they are able to assess and win projects with higher risks in new and less established markets. Chinese financing has played a significant role in a railway network in Iran and other projects in Iraq, Algeria, and Saudi Arabia, according to research by MEED in its “The Future of Middle East Energy” report. These four countries, along with the UAE, accounted for 75 percent of the total estimated value of projects awarded to Chinese contractors in 2000-2017. China’s total share of contracts awarded across the region was almost 13 percent, and Chinese contracting is expected to grow further. The UAE was a prime destination for Chinese policy lenders in the last two years, with $2.3 billion in loans, including financing towards the expansion of both Dubai International Airport and Al Maktoum Airport. Jordan came in second, with total lending valued at $1.7 billion, followed by Saudi Arabia with $977 million and Egypt with $890 million.

Looking towards new projects, Chinese firms are aggressively bidding on MENA infrastructure. They are bidding for a contract to build monorails in Egypt and for Egypt’s first high-speed railway. They also intend to bid to build part of a railway in the UAE, where the rail network is already linked to Huawei technology products. MENA governments have encouraged Chinese firms to compete for these and similar projects, and often award contracts to Chinese companies because their ability to rely on state banks for financing projects related to the Belt Road Initiative gives them a cost advantage. The linkages of technology to infrastructure projects have created a sensitive collaborative model, in which companies like Siemens have agreed to partner with Chinese contractors in order to win participation in these large projects.

Export-oriented growth now includes the provision of finance as service. The Chinese strategy of port development, large-scale construction services and the provision of state-backed finance instruments is gaining traction in the Gulf, but it is also inspiring Gulf states to emulate this strategy, sometimes in the same places where China is engaged. As these forces combine, their incentives to create opportunity and development in recipient countries will differ sharply from traditional multilateral sources of development finance. The Gulf states and China are not in the business of building a shared liberal economic order.

Regional Post-Conflict Reconstruction

At least some of the demands of post-conflict reconstruction in the region will fall to the Gulf states as sources of aid and finance, and as architects to rebuild parts of Yemen and likely Libya as well. China's political interests in these states is not as strong as its interests in the Gulf, but its ability to offer large-scale contracting may be a source of competition or synergy with the Gulf states in these efforts. The questions of institutional design and finance models become central to how these states with the means to build will exercise political and economic influence across the region. The use of regional development banks could also become a source of collaboration or competition, for those based in Asia and those in the Middle East.

China’s development finance machine is roaring. Loan values have soared between 2014 and 2017, from $300 million to $8.8 billion, with policy lenders China Development Bank and China Exim particularly active in helping bridge the Middle East and Africa infrastructure gap, according to research by global law firm Baker McKenzie. Chinese infrastructure finance in the region increased from $368 million to $3.5 billion in just one year, from 2015 to 2016; the UAE is a prime destination, receiving $2.3 billion in loans since 2016.

Current financial flows may shift norms and institutions of economic governance in the Middle East, creating some shared and some competitive Sino-Gulf Arab visions that could reorient both states and markets in the Middle East for years to come. What these visions have in common is a strong belief in the role of the state in economic growth, and in the ability to direct state resources for political goals and domestic economic stability (without transparency). The amount of capital and its orientation in state-controlled financial institutions is likely to create new patterns of bargaining and political relationships in shared areas of strategic interest. What is absent is a standard framework of development finance on shared international norms of multilateral institutions. And the United States? The diminished role of the United States in the Middle East, as an advocate of economic liberalism and arranger of development finance, allows regional powers and China to redirect the future of economic development in the region.