Commentary: China’s Ties with Middle East Goes Beyond Oil into Technology

A commentary I have written for IPP Review, a website that offers discussions and analyses of political, economic, social issues concerning the countries of Asia and elsewhere around the world.

A generous “oil and gas plus” package comprising USD 20 billion in loans, USD 106 million in financial aid, broader and deeper industrial cooperation, and the establishment of a new strategic partnership between China and the Arab states. This was China’s latest economic and diplomatic charm offensive to the Arab states, announced by Chinese President Xi Jinping at the eighth ministerial meeting of the China-Arab States Cooperation Forum (CASCF) on July 10, 2018 that was held in Beijing.

Although the new strategic partnership was also hailed by Xi as a new historic chapter in China-Arab relations, a closer look at “oil and gas plus” shows a continuation from the Chinese approach since 2014. In other words, the new historic chapter is not a radical break from the existing Chinese strategy in the region. The “oil and gas plus” model retains the spirit of China’s “1+2+3” strategy to the Arab states since 2014, when Beijing began engaging the Middle East on a much deeper level at the sixth ministerial conference of CASCF, promoting the Belt and Road Initiative (BRI) which was launched in 2013.

The “1+2+3” approach of 2014 places energy cooperation at the core, followed by infrastructure and trade development as the two wings, and lastly the three high-tech fields of nuclear energy, space satellites, and new energy. Similarly, the “oil and gas plus” of 2018 still takes energy cooperation as a foundation, followed by the two wings of cooperation in finance and the high-tech industries. The underlying concept behind the 2014 and the 2018 plans remains the use of development as means to bring peace and stability. Wary of getting involved militarily in the quagmires of the restive Middle East, China is still banking on the sheer power of economic development to end cycles of violence in the oil-rich region.

Without the ability to replace the United States as a guarantor of security in the region, the Chinese government need to rely on strong regional governments to secure their supply lines. Thus, a stable political environment in the Middle East is essential to Beijing and the Chinese strive to become the keepers of peace and stability in the Middle East through cooperation with the Arab league. How successful the Chinese will be in this endeavor in the long term, without a significant military power projection in the region, is worthy of discussion.

What has Changed since 2014?

Although similar in spirit, the “oil and gas plus” model reflects some new changes from 2014. In Xi’s speech to Arab representatives at the 2018 CASCF, the Chinese leader listed several industries that are aimed at raising Chinese manufacturing up the value chain, the goal of the “Made in China 2025” strategic plan. For example, China wants Chinese-Arab cooperation over long-term strategic planning in the areas of digital economy, artificial intelligence, New Materials technology, pharmaceutical medicine, and smart cities. New Materials technology and pharmaceutical medicine are part of the 10 priority sectors highlighted by the State Council in its strategic plan. The new focus on artificial intelligence in Chinese-Arab cooperation is also in line with the push for intelligent manufacturing in “Made in China 2025.”

Apart from the additional focus on high-value industries, the “oil and gas plus” model contained slightly more concrete details of China-Arab cooperation across the board. For example, a new consortium of banks from China and the Arab nations with a dedicated fund of USD 3 billion was set up, although few details were announced about what the consortium will be involved in. The Chinese government is also inviting 100 youth innovators, 200 youth scientists, 300 information technology personnel, 100 clerics and 600 government officials from the Arab nations to visit China. Separately, the Chinese will also provide 10,000 training places and 500 medical personnel for the Arab nations. China is also offering higher aid amounts to selected nations this time round. About USD 15 million was given to Palestine to support economic development. Another USD 91 million was provided to Jordan, Lebanon, Syria and Yemen.

What is significant are Chinese signals in the diplomatic arena. At the 2018 CASCF, Xi announced the formation of a China-Arab strategic partnership for comprehensive development and common development. Such a partnership signals that China is further engaging the entire Arab world as a whole, instead of relying solely on bilateral diplomacy.

China-UAE Industrial Cooperation

A good example of how China can deepen economic engagement in a Middle Eastern country would be the China-United Arab Emirates (UAE) industrial cooperation. Located in the heart of the Middle East, the UAE has prospered through its oil wealth and strategic position along global trade routes. At the same time, the UAE is also embroiled in regional disputes such as the Qatar diplomatic crisis, and has been accused of links to terrorism in the region. Like many oil-rich Arab states, the UAE is also trying to diversify its oil-dependent economy. Thus, China-UAE industrial cooperation is a good springboard for China in the region, and if such cooperation becomes successful, the China-UAE model can be applied to many other Arab states or even to Iran.

China can now take advantage of a “window of aligned economic interests” to diversify some of its overseas investments into new markets in the Middle East.

The UAE was the first Gulf state to establish a strategic partnership with China. Since China and the UAE established diplomatic ties in 1984, bilateral trade has grown from USD 63 million to more than USD 50 billion. Currently, the UAE is China’s largest export market and the second largest trading partner in the Arab states.

On July 18, Xi visited the UAE on a three-day tour. He revealed in an op-ed that both countries are increasingly cooperating in a number of sectors, including energy, industry and finance, and are making “historic progress” in industrial cooperation. According to Xi, China-UAE upstream energy cooperation is “off to a good start,” with Chinese firms acquiring a 12 percent stake in Abu Dhabi’s onshore oil concession last year, the first such Chinese acquisition in the Middle East. In March, another Chinese entity was awarded a 10 percent stake in each of the two offshore Abu Dhabi concessions.

One of the UAE’s key ports along the Maritime Silk Road is the Khalifa Port, and Chinese and UAE companies are currently jointly working on the Khalifa Port Container Terminal Two, which will be up in first quarter of 2019, said Xi. Another joint-project is the China-UAE Industrial Capacity Demonstration Zone located in the Khalifa Industrial Zone. Some 16 enterprises have signed letters of intent with a committed investment USD 953 million. In the financial sector, Xi noted that in December 2015 the central banks of the two countries renewed a currency swap agreement, while the China-UAE Joint Investment Fund finalized plans for investment in 12 projects valued at USD 1.08 billion.

Importance of the Middle East to China

China-Middle East trade dates back to the Han dynasty (206 BC–220 AD) when the Silk Road emerged between continental Asia and Europe. The Middle East occupies the most strategic position between the East and West, for both the land and sea routes from China to Europe converge at countries such as Iran, Syria, and Egypt. Home to several trading chokepoints such as the Strait of Hormuz, the Strait of Bab-el-Mandeb, and the Suez Canal, stability in the Middle East is essential for the success of the Maritime Silk Road. Several energy lifelines to China pass through the region through overland and sea routes.

Geopolitical realities will keep China engaged in the Middle East, especially with a globalized China that increasingly dependent on the reliability of supply routes for continued domestic prosperity and stability. At the same time, however, China has been wary of getting dragged into the political instability and deadly conflicts in the region. China’s stance of non-interference in the Middle East has led some analysts to call it as a “wary dragon.” But as the Chinese economy rises up the value chain and becomes increasingly dependent on global logistical supply chains, China cannot afford to stay at its current level of engagement in the Middle East. Even though the region is still adjusting to the aftermath of the Arab Spring, China cannot wait for the region to fully stabilize before engaging with it.

Window of Peace

At the 2014 CASCF when China announced its “1+2+3” strategy to the Middle East, the security situation in the region was still quite grave. The Islamic State (IS) was expanding rapidly in Syria and Iraq, was spreading religious extremism online, and was setting up militant cells around the region. Although the IS did not overwhelm the entire Middle East and all the BRI routes running through it, their rapidly spreading extremist ideology and swift territorial gains in 2015 were very threatening to regional stability. Protracted urban battles devastated Iraqi and Syrian infrastructure along some routes, delaying development in those areas. The cities of Mosul and Aleppo, for example, were thriving metropolises dating back to the days of the ancient Silk Road. Following intensive urban warfare, both cities were extensively damaged and depopulated.

The IS was mostly defeated by an international coalition by the end of 2017. There are some lingering problems in the region, such as regional Iran-Saudi and Saudi-Qatar rivalry, and recent protests over bread and butter issues. China, like many great powers dealing with the region, has to walk diplomatic tightropes between the bitter foes Saudi Arabia and Iran, as well as Israel and Palestine.1 Nonetheless, this window of relative peace can allow China to revive the momentum of the BRI in many Middle East countries. This window is important because unlike the United States and Russia, China — even with the new Chinese naval base in Djibouti — has a very limited military presence in the region.

Within this window of peace, China can now take advantage of a “window of aligned economic interests” to diversify some of its overseas investments into new markets in the Middle East and find new collaborative opportunities for its emerging value-added industries such as artificial intelligence and big data. For Arab countries urgently trying to fix their overdependence on oil, an influx of Chinese investments and technologies could help generate new momentum for economic diversification.

Arab governments disillusioned with American and Russian involvement will also be looking for alternate models of development, and the Chinese model can be one option on their table. For Iraq and Syria, Chinese firms are already actively seeking opportunities to take part in post-war reconstruction efforts.

Overall, the Middle East will remain a volatile region for some time to come. The window of peace may not last for long, but any conflict will not last forever either. Through a combination of economic and diplomatic engagement, and a slowly increasing military presence, China will have to constantly refine its own ways to unlock the region’s potential.

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