China and GCC steadily grow economic ties amid challenges

Both China and the Gulf have much to offer one another, especially with the Gulf's thirst for big infrastructure projects and China's thirst for carbon.

Saudi Foreign Minister Faisal bin Farhan al-Saud (R) and Vice Chairman of the Chinese People's Political Consultative Conference (CPPCC) Hu Chunhua attend the 10th Arab-China Business Conference in Riyadh on June 11, 2023.
AFP
Saudi Foreign Minister Faisal bin Farhan al-Saud (R) and Vice Chairman of the Chinese People's Political Consultative Conference (CPPCC) Hu Chunhua attend the 10th Arab-China Business Conference in Riyadh on June 11, 2023.

China and GCC steadily grow economic ties amid challenges

Late last month, China’s ambassador to Saudi Arabia, Chen Weiqing, noted that nearly 90% of the free trade negotiations between Beijing and the Gulf Cooperation Council (GCC) have been completed. Indeed, bilateral trade is ticking along nicely.

Oil and gas were the most prominent exports from the Gulf countries to China, which is just as well because China is the world’s largest oil importer.

Meanwhile, China’s exports to the Gulf, including consumer goods, were characterised by the region’s growing consumer needs.

Chen stressed that communication continues between the two parties, but analysts wonder what other areas free trade agreements between the Gulf and China could include.

Gulf exports to China reached $131bn in 2021, while its imports amounted to $98.3bn. Oil and oil-related products accounted for 83% of Gulf exports to China.

In October 2023, GCC and Chinese economy and trade ministers met for the first time in an inaugural forum held in Guangzhou.

On the agenda was expanding the Joint Plan of Action for Strategic Cooperation in the Economic and Trade Fields. The most important issues raised relate to trade, investment, industry, and technology, in which China is now a world leader.

It is an incredible leap in just over a generation.

AFP
China has become the world's most important producer of consumer goods, many of which incorporate advanced technology.

China’s seismic shift

China’s economic reforms began in the late 1970s. This monumental transformation, which addressed the distortions left by Mao Zedong’s socialist regime, gave the country huge export capabilities.

It flung its doors open to foreign investment and provided an attractive environment for US and European commercial giants.

They, in turn, brought modern technology and management system to their factories in China, from which the Chinese learned, but it was a win-win, with the big Western companies benefitting from China's lower labour costs.

In the early years, China's middle-class was much smaller, meaning that domestic consumer demand was far less than its manufacturing output. This quickly enabled China to become the world's leading exporter of products.

Europe, the United States, Asia, and the Gulf all welcomed these affordable exports, and trade relations between China and the Gulf countries only got stronger. China's economy got stronger, too. From 2006-22, it grew by more than 550%.

The Gulf has other trading partners around the world, including the European Union, the US, Britain, Japan, and in subsequent years, South Korea, but China is expanding into areas that other partners once dominated.

Gulf exports to China were $131bn in 2021, while its imports were $98.3bn. Oil and related products accounted for 83% of the Gulf exports.

For decades, the Gulf has imported its cars from Germany, Japan, the US, and, lately, South Korea, since the best products often come from these countries.

Yet in recent years, Chinese cars have established a leading position in the Gulf market, particularly its electric cars, which use the latest technology.

Trade in black gold

China is one of the Gulf's most important export markets for oil and gas. For Oman, for example, it accounts for 42% of exports, while 27% of Kuwait's exports also head east.

Saudi Arabia, one of the world's biggest oil exporters, sends a fifth of its carbons to China.

Second only to Russia in terms of oil exports to China, Saudi Arabia exported 85.96 million metric tons of crude oil to Beijing last year, accounting for 15% of China's total oil imports, while Russia met 19% of its demand.

That demand is still growing. From 2006 to 2022, China's oil imports rose from 145 million tonnes to 508 million tonnes. In 2022, the GCC exported 210 million tons of oil to China. This was more than double the amount it sent Beijing in 2014.

According to the Financial Times, China imported 11.4 million barrels per day (bpd) of crude oil in the first half of 2023. That is a year-on-year increase of 11.7% and up 15.3% from pre-Covid levels.

By June, China had set a new record, importing 2.13 million bpd from Russia and 1.88 million bpd from Saudi Arabia.

AFP
A Saudi Aramco rig in HSBH field north of Dhahran in the eastern province of Saudi Arabia. China accounts for almost 20% of Saudi oil exports.

Moving beyond oil

Analysts wonder whether China's currently sluggish economic growth will lead to changes in oil economies.

Although no significant decline in demand is foreseen, many Chinese businesses have become heavily indebted and are vulnerable to insolvency and bankruptcy.

The picture is complicated by the state's dominant role in the Chinese economy.

While oil drives economic relations between the Gulf states and China, there are other areas of the economy worth considering.

China has built up sufficient financial firepower from its global trade to become the world's largest investor.

Beijing has used this to promote its key strategic programme, the Belt and Road Initiative (BRI).

This core policy is based on a revival of the ancient Silk Road that stretched from China through India to Asia Minor and as far as Mesopotamia, Egypt, Africa, Greece, Italy, and Britain.

The BRI was launched in 2013 and looks to invest in more than 150 countries around the world, including in Asia, Africa, and Europe.

Saudi Arabia exported 85.96 million metric tonnes of crude oil to Beijing last year, accounting for 15% of China's total oil imports.

China and Kuwait

Kuwait, which wants to develop its northern region, has been part of the BRI for much of the past decade.

At a joint seminar in October, Kuwaiti officials said it had borne fruit in energy, housing, and transportation sectors, including a $3.6bn 36km highway connecting Kuwait's capital city to its north.

But the two countries once had far grander projects that have not yet made it off the page, Kuwait's $130bn Silk City being one. Analysts cite political obstacles in Kuwait and reassessments in China.

Kuwaiti ideas face significant competition from the Indo-European Corridor project, which plans to connect India and the Gulf with Europe via Jordan and Israel.

A memorandum of understanding was signed at the G20 Summit in India last year.

It led some to suggest that the Gulf states must harmonise their relations with projects in line with their economic and political interests since economic relations between the GCC and China remain strategically important.

Saudi Foreign Affairs Minister Prince Faisal bin Farhan (C-R) walking alongside former Chinese Foreign Minister Qin Gang (C-L) in Beijing on April 6, 2023

Wait and see

Developing oil exports and boosting imports from China can spur Chinese investment in key businesses in the Gulf, especially in facilities and infrastructure.

Likewise, Gulf sovereign wealth funds may be interested in investment in China.

Wealth managers are waiting, however. Together with the high levels of Chinese corporate debt, China is also currently experiencing a real estate crisis after Chinese property developer Evergrande went into liquidation.

The firm borrowed more than $300bn to fund its aggressive growth, with more than 1,300 projects in 280 cities across China, but it failed to repay its debt and last year filed for bankruptcy, and its shares have lost 99% of their value.

Experts ask whether Evergrande may have been "too big to fail".

Its collapse has hit hundreds of suppliers, thousands with deposits on projects the firm was yet to build, and dozens of financial lenders whose money is gone.

Both China and the Gulf have much to offer one another, especially with the Gulf's thirst for big infrastructure projects and China's thirst for carbon.

Of a more long-term nature, the role of the state in the Chinese economy remains dominant due to the nature of the political system. All this will be weighed up by investors.

Still, the prospect of increased trade relations remains wholly on the table. China is a huge country, with a huge population (more than 1.4 billion) and an eye-watering GDP of $18tn, according to World Bank data.

Both China and the Gulf have much to offer one another, especially with the Gulf's thirst for big infrastructure projects and China's thirst for carbon.

But with a few clouds forming on the horizon, the pace of trade expansion need not be supersonic.

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