Posts   |   China and the GCC States – A Turbo-Charged Trade Relationship

October 14, 2015
China and the GCC States – A Turbo-Charged Trade Relationship
compass_01

Dubai – “Hong Kong West”

Saudi-China – The Supply Heavyweight meets the Demand Heavyweight

By Afshin Molavi

In the year 1993, a quiet milestone was achieved in China that would reverberate across the oil-rich states of the Middle East over the next two decades. In that year, for the first time, China’s oil demand exceeded its domestic supply.

In effect, the lines on the chart crossed – and the demand line has never looked back. As China’s economy grew and grew and grew over the next two decades, it became the single most important growth force in crude oil demand. In 2011, as the U.S Energy Information Administration notes, China became the largest global energy consumer in world – and remains so today. It is also the world’s second-largest oil consumer behind the United States.

Over the past decade, China has accounted for nearly half of the global increase in oil consumption and, in 2014, it accounted for 43% of consumption growth. Even a slowing China is a hungry, voracious purchaser of crude. The EIA notes that China will account for more than one-fourth of the global oil consumption growth in 2015.

It was inevitable, therefore, that the geo-economic relationship between China and Persian Gulf oil suppliers would grow exponentially. Today, China’s relations with the Gulf Cooperation Council (GCC) states represents one of the fastest growing trade relationships in the world – and the trajectory is still moving upward. GCC-China trade stands at about 125 billion Euros, and China is the single largest source of imports and the second largest export destination after Japan (a voracious buyer of GCC crude).

An examination of GCC trade statistics more broadly underscores the growing ties with Asian states – 8 of the top 10 export destination are in Asia. The GCC-China relationship is among the fastest growing. As the Economist Intelligence Unit noted in a special report commissioned by Falcon, a consultancy in Dubai, “GCC trade with China grew more rapidly during 2010-13 than with any other significant trade partner, at a rate of 30% for exports and 17% for imports.”

By 2020, the EIU notes, the “largest share of GCC exports will go to China, at around US$160bn” and “China will also dominate the import market, providing about US$135bn of goods to the Gulf, nearly double the value in 2013.” This is clearly a turbo-charging trade relationship.

No doubt, the export numbers are large owing to oil exports, but the relationship has begun to expand beyond the simple formula of Gulf hydrocarbons for Chinese manufactured goods. GCC funds in Kuwait, Qatar, and Saudi Arabia have been prominent investors in major Chinese bank IPOs, including China Agriculture Bank and the Industrial and Commercial Bank of China. Chinese construction companies have been actively engaged in the trillion dollar-plus GCC construction market. And many of those barrels of oil shipped to Asia float on Chinese-made tankers.

Dubai – Hong Kong West

Dubai, the freewheeling commercial capital of the United Arab Emirates, has emerged as a China hub of sorts – Call it Hong Kong west, if you will. There are currently 3000 Chinese companies operating in Dubai – in 2005, there were only 18. There are also some 300,000 Chinese living in Dubai. During the Chinese new year, some 70% of the rooms booked at the ultra-luxe “7 star” Burj Al-Arab hotel were Chinese. In return, the Burj al-Arab emblazoned a silhouette of a red dragon on its iconic exterior sail.

Falcon Associates, a Dubai consultancy that handles strategic initiatives of the Dubai government, has been tasked with further strengthening the China relationship – a high personal priority for the Ruler of Dubai and UAE Prime Minister Sheikh Mohammed bin Rashid al-Maktoum. Each year, Falcon recruits top Chinese graduates to intern at top Dubai-based companies and invites thought leaders from China to visit Dubai. It likely doesn’t take much persuading: Dubai has become a hot vacation destination, attracting more than 300,000 Chinese tourists last year.

This year, Falcon organized a “Dubai Week in China” exhibit in the heart of Beijing, touting the city as an emerging markets hub. Among those 3000 Chinese companies, many use Dubai as a launch pad into Africa. Dubai-based Emirates Airline operates 25 direct flights to African cities and has one of the most interconnected Africa networks in the world. It is estimated that some 30% of all seats on Dubai flights to Africa are occupied by Chinese nationals.

The Supply Heavyweight and the Demand Heavyweight

The Dubai-China relationship is certainly a vital piece of the GCC-China trunk of the New Silk Road, but the more consequential piece in terms of energy remains the Saudi-China relationship.

China is Saudi Arabia’s number one oil export destination and the reverse is also true: Saudi Arabia is the number one source of foreign crude purchased by Chinese refineries. It’s about a million a barrels a day. This is not an unbalanced relationship of unequals: this is a marriage of the world’s demand heavyweight and the world’s supply heavyweight.

The relationship has gone beyond the transactional sale and purchase of crude oil. Saudi Aramco has taken a 25% stake in a refinery in Fujian and has also formed a joint venture with PetroChina for a 200,000 bpd refinery in the southwestern Chinese province of Yunnan. Saudi Arabia’s investments also include downstream assets, including a string of gas stations.

Meanwhile, China’s Sinopec took a 37.5% stake in Saudi Arabia’s USD 10 bn Red Sea Refining Company (YASREF) in the city of Yanbu.

Chinese President Hu Jintao made two visits to Riyadh while at the helm, though new President Xi Jingping cancelled a visit recently amid reports of strains over Saudi Arabia’s war with Yemen. Still, the Saudi-China relationship has always been more geo-economic than geopolitical, and that is unlikely to change.

The marriage of the world’s supply heavyweight and the world’s demand heavyweight will endure.