China still easing into Middle Eastern investments

Trade flow between MENA and China yet to reach their potential

Chinese firms have been investing in blue chip companies, snapping up high-end real estate and logistics firms around the world.  Shanghai International bought American meat company Smithfield for $4.7 billion in May, and China Merchants Holdings (International) Company acquired a 49 percent equity stake in port operator giant CMA CGM’s Terminal Link in June.

But there have been hardly any such acquisitions, manufacturing deals or the like in the Middle East and North Africa over the past few years.

Between 2005 and 2012, there were just 16 Chinese investments of more than $100 million in the MENA region out of 404 investments worldwide, or 3.63 percent, according to data compiled by the Heritage Foundation. So far in 2013, there have been none. 

Out of the $688.1 billion that Chinese firms have invested globally since 2005, MENA accounts for $82.15 billion, or 11.9 percent of the total, a few points ahead of Chinese investment in Australia alone, at $58.2 billion, or 8.4 percent. Exclude firms’ investments in Iran, Israel and Turkey, and the Arab world accounts for $55.45 billion, or 8 percent of Chinese firms’ investment flows.

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“Much of the trade is still limited to small traders and companies. Direct investment is rare,” says Ben Simpfendorfer, managing director of Hong Kong-based consultancy firm Silk Road Associates, which has been involved in the Dubai International Financial Center’s “New Silk Road” conferences. “What will drive the relationship forward will be private investment.”

China-MENA trade is not strictly limited to MENA energy flowing to China with Chinese goods and contractors heading the other way, yet  the “New Silk Road” that is frequently touted has not materialized to the same degree as many expected. “It is a bit of a mystery, as the relationship should be much closer,” says David Roberts, director of Royal United Services Institutes (RUSI) in Qatar, a British think tank with an office in Doha. “It is an issue of how to do it, to make it stronger, but there is no panacea.”

Nonetheless, the Arab world and China are keen to bolster ties further, certainly at the trade level, setting a target in 2012 at the Fifth Session of the Ministerial Meeting of the Forum on China-Arab Cooperation of a projected $222 billion in bilateral trade this year to reach $300 billion in 2014. 

“The relationship has definitely gone beyond energy. It is not just Arabs wanting to expand economic relations, but also the Chinese trying to reach out to the Arab world,” said Ghanem Nuseibeh, founder of London and Dubai-based political risk analyst group Cornerstone Global Associates.

Yet such figures compared to the European Union and the US are far from stellar — China-EU trade in 2011 was $567.2 billion, and bilateral trade with the US was $536 billion in 2012. From the Gulf Cooperation Council (GCC) countries, far more heads in China’s direction — primarily hydrocarbons — than the other way, with exports of $92 billion in 2012, compared to imports from China of $59 billion. Excluding Bahrain and the UAE, the other GCC countries run sizable trade surpluses with China.

Public over Private Investment

China is attempting to cozy up to MENA countries, but this is complicated by not being able to bring much to the table. Capital rich GCC countries have no real need for the Chinese to build roads, railway networks or the like; the GCC countries themselves can pay for these networks. Indeed, Chinese contractors are winning government contracts, not Beijing-funded overseas development projects. Away from energy and construction projects, China wants to invest in technology and valued added goods, and to acquire stakes, or outright own companies, not just build-operate-transfer (BOT) style deals. 

“A lot of MENA countries don’t want to sell their oil assets, even though the Chinese would love to buy — and overpay for — them, as they do all over world. So if not buying, then something else is needed. That is where energy and construction comes up, and the Chinese are very good at power plants, which a lot of MENA needs. It is about building stuff to improve overall diplomatic ties and strengthen [the] energy relationship,” said Derek Scissors, an Asia economist in charge of the China Global Investment Tracker at the Heritage Foundation in Washington, D.C.

Looking at China’s investments in the MENA overall, there is a clear bias toward energy producing countries. Those that are less significant energy exporters but could do with financial and infrastructure aid — take Yemen or Lebanon — do not attract the same levels of investment from China; they cannot compete with resource-rich Algeria, Libya, Iran or the sub-Saharan African countries. 

While there are clear foreign policy objectives in Beijing’s overseas business dealings, opinion is split over the degree that foreign investment and projects are a state-orientated means of expansion. “As far as China is concerned, a lot of state-backed ventures are not necessarily looking for returns. It is not unusual to come across a Chinese state fund expecting a return on investment of zero. The reason for that is purely political, and much of that is being reciprocated from the Arab side,” said Nuseibeh.

Simpfendorfer believes that while there is a degree of state interest in gaining new markets, and a “quirk of the contemporary period,” it is not all about bolstering relations to the detriment of the bottom line. “The government sets general policy and guidance, and if, say, a company wants to get into the resource sector, it may find it easier to get preferential financing, or approval for direct investments, but more in the sense of guidance,” he said. “It is not the [Chinese] government saying ‘we want you in this sector by buying this asset.’ Ultimately these companies are driven by profit. It is a bit like a horse race, with 10 all competing, and all going in the same direction. It does give the appearance that state companies are responding to direct state intervention, but [they] are typically behaving in a way the state approves of.”  

Arab investment in China, however, is more overtly foreign policy driven, being primarily sovereign wealth funds (SWFs) and energy companies seeking to consolidate the relationship. And Scissors points out that MENA investors missed out on opportunities in the 1990s when China really started to become an economic behemoth, and the opportunities have been drying up since then. “MENA came late to the game and is very energy focused, and now [China] is not a really great place to invest,” he said. 

One of the obstacles to developing the MENA-Sino relationship is that it has not really moved beyond state-to-state level deals: these include a $2 billion deal with the Industrial and Commercial Bank of China (ICBC) and the China State Construction Engineering Company in 2012 to fund and develop 30 projects for the Abu Dhabi government-owned Aabar in the emirate, and GCC SWFs investing in China’s Qualified Foreign Institutional Investor program (see box, “MENA sovereign wealth funds eye China”, next page). 

As RUSI’s Roberts noted, “Look at Qatar, for example. It wants to invest in China, and the Qatar Investment Authority, the country’s SWF, opened an office in Beijing, but the biggest investment was an [initial public offering] for the Agricultural Bank of China — $2.8 billion in 2010 — and not much else. These things have to be offered on a silver platter, with a great big IPO, and [then Qataris] are happy to invest. Otherwise I don’t think they have the capability, and the Qataris are not alone. They won the right to invest in China’s Qualified Foreign Institutional Investor scheme. So they have that ability, but the question is, now what?”

Bolstering the Relationship

For the relationship to go beyond oil and mercantile trade, private investment in both regions needs to be bolstered. China’s financial market is largely insular and has had a mixed track record, and its currency, the Renminbi, is not traded on international markets. MENA, on the other hand, is more Western orientated, particularly when it comes to finance and large scale investments. In that sense, Chinese-Arab relations are very minor compared to Arab-Western banking and financial relations. “I don’t expect Chinese banks to replace or take a big chunk of MENA finance. It will take a long time for the Chinese to creep into that sector ­— probably the last one [China is] able to effectively penetrate,” said Nuseibeh.

For such relations to change, there needs to be better connections at the top levels. “Gulf investors and politicians don’t know their Chinese counterparts but know people who matter in all the capitals in Europe; they’ve been to their houses and have their phone numbers and will get a call if there is an opportunity, but that is not the case with China. And why make acquisitions in a place they’ve never heard of in China, when they could buy Harrods [of London]? A flippant point, but worth making, that the GCC is more comfortable with the EU,” said Roberts.

Change is afoot however at the cultural-linguistics level. Some 3,500 Gulf students are studying in China, while Chinese Muslims are being encouraged by Beijing to go and work in the Arab world. Furthermore, some 1,200 Chinese diplomats are studying Arabic. “That will obviously lead to stronger relations with people. The Chinese are taking their time, but on a firm road to strengthen relations,”  said Nuseibeh.

It appears that it will be some time before the “New Silk Road” will be about more than just energy.

Paul Cochrane

Paul Cochrane is the Middle East Correspondent for International News Services. He has lived in Beirut since 2002, and has written for some 70 publications worldwide, covering business, media, politics and culture in the Middle East, East Africa and the Indian subcontinent.

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