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Giving the dragon its due: Sino-Arab economic ties may be one-sided

By Reem Aboul Hosn, Senior Financial Analyst, Zawya, and Hasan Shahin, Senior Market Analyst, Zawya
16 November 2011
Are Sino-Arab economic relations tilted in China's favor? China pushes its investments into the Middle East and North Africa, but reverse flow is virtually non-existent, write Zawya analysts Reem Aboul Hosn and Hasan Shahin. For centuries, the dragon in Chinese culture has represented benevolence, good fortune and power; characteristics that have come to define China's tenacious investment strategy in the Middle East and North Africa. Yet, is the region responding in kind? Some say the MENA is not taking full advantage of its relationship and investment potential in China.

The tilt in the relationship is expressed in many ways: the small number of Middle East experts on the Chinese market, the still negligible MENA investments in the country and the even fewer speakers of Chinese languages. This imbalance has left China with the opportunity to become the dominant player in the relationship.

China's interest in the MENA has amplified in the past few years, as part of its "going out" strategy, which increased values of trade between the two regions from USD 37 billion, in 2004, to USD 190 billion in 2010, a 418% increase, and USD 120 billion during the first half of 2011 (see chart).

This can be attributed to its desire to secure energy to sustain its mammoth industrial sector, as well as its large population. "The country's burgeoning demand [for oil] now accounts for 40% of global growth in demand," according to an April 2011 testimony given before the US-China Economic and Security Review Commission on China's Interests in the Middle East and North Africa.



According to China's customs statistics, during the first seven months of 2011, it imported an average of 5 million barrels of oil per day, surpassing its 2010 imports by 4.4%. According to the World Energy Outlook 2010, China's oil imports from the Middle East constituted 58% of its total oil imports.

As energy is a vital business trigger, especially as it wanes, it is expected that China and the MENA will have a long future in trade together, if the past year is any indication. As of December 2010, the Middle East held more than 55% of the world's oil reserves. Saudi Arabia held 20%, while Iran, Iraq, Kuwait and the UAE's combined oil reserves accounted for 32%. In 2010, China's oil imports from the GCC, Libya, Sudan, Iraq and Iran presented almost 49% of the country's total oil imports.

Although China's "going out" policy has not been fully implemented in the MENA, due to the unrest in Egypt, Libya, Sudan and others living through the Arab Spring, it continues to build mega projects there, drawn by the region's rich natural resources.

Investing in China

As the fourth-largest country, China holds one-seventh of the world's population and became the second-largest economy in the world in 2010, based on purchasing power parity. Expansion into China may act as a strong hedge against recession and a good alternative as the US and Europe struggle to cope with the current economic turmoil.

China's manufacturing sector, which is constantly rejuvenating and diversifying, seems to be inviting industry with open arms and deferred taxes. Aggressive capacity expansion by both local players and major international companies has driven pricing down to very competitive levels in most industry sectors.

"Investing in China is what the MENA's missing," said Wael Safieddine, Business Development Manager at Sawa International, a China-based strategy consulting firm, in an interview with Zawya. He believes that MENA countries, specifically funds, have lucrative investment opportunities in China's industrial sector, now that "the private equity domain is poised to grow between these two regions; with an excess of petrodollars on one side, and China, being the factory of the world, and its services hub on the other." He added, "This is what funds should be looking at."

Safieddine claims that while the MENA is rich in petrodollars, its foreign direct investment, funds, and private equity investment in China are minimal. He attributes this mainly to the language barrier, which he said China is fast overcoming, graduating around 2,000 Arabic studies majors each year. Meanwhile, he said, Chinese-speaking Arabs are few and far between. However, examples of Chinese study programs in Egypt are proliferating.

Safieddine warned that the "China-MENA business and economic relationships are growing in an unguided manner" and that there is a need to regulate trade flow. He added that people's perceptions of Chinese products are based on low- to medium-quality choices made by some traders, which wrongly color the perception of Chinese consumer products.

China's Bilateral Initiatives in the MENA

Nearly gone are the trade protectionist days of the MENA, which now welcomes Chinese investment. Below is a listing of some of the major, current bilateral initiatives between China and some MENA countries.

China-Sudan

The July 9, 2011, independence of South Sudan created opportunities for the Chinese to undertake additional oil and infrastructure projects. Although most of the oil lies in the South, the infrastructure and pipes that support the oil industry are situated in the North. While other countries may still be reluctant to invest in South Sudan, Beijing is undeterred, showing interest to the tune of USD 31.5 million (200 million yuan), granted in October 2011 for development projects in the newly independent state.

The China National Petroleum Company (CNPC) owns around 40% each of two major Sudanese oil companies, Petrodar Operating Company and the Greater Nile Petroleum Operating Company.

China-Iraq

Through several major oil and power developments, China is assisting in the reconstruction and infrastructural development of Iraq, creating work opportunities for both local and foreign labor forces. One of CNPC's major Middle East projects is Iraq's Ahdab oil field. China secured exploration rights under a contract signed with the Iraqi government in November 2008 for a period of 23 years.

A USD 174 million oilfield contract was awarded to the China Petroleum Engineering Construction Company (CPECC), to raise the Halfaya oilfield production capacity to 20,000 bpd by 2012 from 12,000 bpd, in 2011.

Iraq's electricity shortage is being addressed by foreign companies, including French and Chinese ones. A Chinese company is planning to build a 330 megawatt power station in Southern Iraq Province in 2012.

China-Iran

In the absence of American and European companies, due to EU sanctions, Iran is undoubtedly open to Asian business. China is a solid economic partner of Iran's, as is evidenced by the USD 30 billion trade value they have reached in 2010.

Among the major projects between the two countries is a USD 4.7 billion contract, signed in 2009, to develop a phase of South Pars, the mega gas field Iran shares with Qatar.

China-Egypt

The value of trade between China and Egypt witnessed an 18% on-year increase in 2010, reaching USD 7 billion.

China's Premier, Wen Jiabao announced that the China Development Bank (CDB), along with the Egypt Commercial International Bank and CI Capital Holding, signed an MOU in 2009 to provide a USD 1 billion loan to small and medium African enterprises. The CDB vice president, Li Jiping, approved the allocation of the first tranche of the loan to an Egyptian company in 2010.

Egypt has established departments to teach Arabic in more than 20 Chinese universities. China has established Mandarin-language departments in five Egyptian universities.

China-GCC

As part of promoting Sino-Arab relations, a strategic dialogue between China and GCC member countries took place in June 2010 to strengthen cooperation, coordination and trust between both parties. In the first quarter of 2011, the second round of this dialogue was launched with a focus on fortifying trade relations between the two parties.

According to the McKinsey Consulting Group, trade flows between China and the GCC are estimated to reach between USD 350 billion and USD 500 billion by 2020.

The matrices below indicate the value and the corresponding number of projects undertaken and implemented by Chinese companies in the GCC; the majority of projects accounted for are those valued over USD 100 million.



The values of the following projects are not available:

• Gasan - Calcined Petroleum Coke Plant, Petrochemicals, Saudi Arabia
• Saudi Kayan - Jubail Petrochemicals Complex - HDPE Plant, Petrochemicals, Saudi Arabia
• KJO - Al Khafji Oil Processing Facilities Expansion - Offshore Production Facilities, Oil and Gas, Kuwait

In addition, the following two real estate projects in the UAE were shelved:

• Mayadeen - Aurora
• Mayadeen - First Abu Dhabi

The chart below presents the value and date of completion of projects undertaken by Chinese companies in the GCC.



Just as it is advantageous for China to pursue its investments in the MENA, experts like Safieddine believe that the way to maintain bilateral trade relations and resolve this tilt is for the MENA to exploit the myriad opportunities available to it in China -- especially in light of the latter's interest in welcoming international investments and projects within its territory.

© Zawya 2011