The consequences of China’s economic interests in the Middle East and North Africa involve a layer of investments on political and security levels. One such cost is in securing the safety of energy transports and another is in the provision of defense forces around the region with military hardware. An assessment of these investments reinforces the view that China is not yet playing a large role in the Middle East as either a naval policing force or supplier of arms, especially not when compared to the United States. 

There is a lot of talk as to whether this is an Asian century: that China is destined to knock the US off its pedestal at the top of the global order. When it comes to the Middle East and North Africa, will Beijing’s involvement in the region move beyond ensuring energy security? 

Greater Chinese involvement in the region beyond economics is in MENA interest, but politically it is more to Beijing’s advantage to have stronger economic ties as a booster for political connections. With political pundits suggesting the US is rolling back its MENA presence as it “pivots toward Asia,” this, some opine, has cracked open the door for China to get a foot in.  

“Until recently the Chinese thought MENA was the Americans’ [turf], who would use force and protect energy supplies; [the Chinese government is] a practical government that could live with the US’ effective leverage over oil supplies as long as it was getting the oil,” said Derek Scissors, an Asia Economist at the Heritage Foundation. “But if the US cannot ensure oil gets to the rest of the world, it is a problem for China.”

Straits and horizons

Currently, MENA accounts for around 50 percent of China’s energy imports, and the region is only set to become more crucial to Asian economies, with the International Energy Agency predicting that over the next decade more than 90 percent of the MENA region’s oil and gas trade will be heading to Asia. This requires stability in MENA, and that the Strait of Hormuz remains open for oil tankers. The US has been the dominant player in ensuring that this oil continues to flow, and has paid a lot to do so, with the costs of projecting military force in the Gulf estimated at $6.8 trillion between 1976 and 2007, according to research by Princeton University’s energy policy department.

“What if the US is only willing to spend $1 trillion and not $2 trillion; is that enough? Who will step in? If there is long-term partial US disengagement from the region, China needs to do something to offset that risk, and they are not making decisions for now, but for a world that will be radically different in 2020 than in 2013,” said Scissors.

China’s People’s Liberation Army Navy (PLAN) still has only limited military capacity. China is not yet up to the task, with two aircraft carriers yet to be seaworthy, and its long-range naval capabilities limited. 

More importantly, any attempt by China to assume a greater role in policing the international sea lanes could be met with suspicion and international resistance. Indeed, China has only recently been involved navally in the region, with the PLAN over the last four years deploying nearly 10,000 personnel on warships off the East African coast as part of multinational anti-piracy operations. Unilateral moves would likely not be so welcome, but if China were to seek expansion of its naval presence, it would be a different story. “An increased PLAN presence in MENA could be seen as a military intrusion in what is seen as Western territory. I don’t think many Western countries would like them roaming the Gulf, the Mediterranean and the Red Sea,” said Ghanem Nuseibeh, founder of Cornerstone Global Associates.

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In the regional defense markets, China is a minor player and does not measure up to the arms-for-oil alliances that have cemented ties between the West and MENA countries. In terms of arms sales, China had a 4 percent stake between 2004-2007, dropping to 1 percent between 2008-2011, according to statistics released by the US Congressional Research Service. The US on the other hand accounted for 78.9 percent of all arms agreements with the Middle East between 2008-2011, at almost $92 billion.

A changing world

Yet in a fluctuating global order, anything is possible down the line. “If you asked people 15 years ago if China would be building power plants around the world, people would’ve said no. In 10 years time China may be selling drones. So you don’t extrapolate from the past. Maybe there will be a Chinese presence in MENA that is not currently anticipated,” said Scissors.

The drop in Arab willingness to sign weapons contracts with China shows that Beijing’s credibility is dwindling as a result of attempts to stay neutral in MENA politics “It is hard for Beijing to stay neutral. In Syria, they’re trying to do nothing, but in the MENA region people feel China is pro-Assad, which is hurting China’s image among the majority of Arabs that support the rebels. If Beijing doesn’t veto US sanctions on Syria, then Iran and Russia are mad at China. This is what happens when you become a global economic power — it is hard to stay in the middle,” said Jacob Zenn, an analyst of African and Eurasian affairs at the Jamestown Foundation.

This resonates with the view that China faces fundamental limits with regard to ascending to top dog in the geopolitical order. As US elder diplomat Henry Kissinger said in a debate two years ago, “I have enormous difficulty imagining a world dominated by China and I indeed believe that the concept that some country will dominate the world is in itself a misunderstanding of the world in which we now live.”

An indicator of the current state of play in how Arab governments see the Chinese question was given in a recent speech by Yahya bin Abdul-Kareem al-Zaid, Saudi Arabia’s ambassador to China: “To understand China’s relations with Gulf states, one must understand Sino-American relations.” 

“I think that statement is important, as the US is very cautious about remaining the number one power in the Gulf, and there is a clear goal on Iran,” said Zenn. “If China starts to upset that strategy or hegemony in the Gulf, then this will ultimately affect US-Chinese relations.” 

Scissors concurred. “I assume what the ambassador said is that the Chinese will not do anything to upset the US when it comes to Saudi Arabia, but we will see what happens, as maybe that is the old world.”

The future of China’s involvement in the region may – like in the past few decades – be decided in the halls of power in Washington as part of a greater game, as the US and Beijing vie for global supremacy.

The United Arab Emirates is positioning itself as China’s gateway to the Middle East and Africa (MEA). The action is focused on Dubai, where there are an estimated 200,000 Chinese residents. 

The Dubai International Finance Center (DIFC) has been trying to market itself as a hub for Chinese corporations — public and private alike — to base their MEA headquarters in the emirate, and it has had moderate success. “Dubai is two-thirds of the way to Africa from China, so given Dubai’s stability and that many Chinese firms’ international expansion is in its early days, it makes sense for most Chinese banks to bank for Africa out of Dubai,” said Ben Simpfendorfer, managing director of Hong Kong-based consultancy firm Silk Road Associates.

The DIFC has attracted a handful of financial institutions — ICBC, Bank of China, Agricultural Bank of China and the China Construction Bank — that essentially operate as trade facilitators. The DIFC is however working to address this shortcoming through its “New Silk Road” conferences, held since 2010, aimed at bolstering investment and financial ties between the two regions. But there is a long way to go.

“Talking to people at DIFC, that area remains weak, as it is confined to state-related entities. An area with potential growth there,” said Ghanem Nuseibeh, founder of Cornerstone Global Associates. “Chinese banks’ presence is growing, and certainly from what I hear with those dealing with the banks, the staff and operations are growing, but primarily servicing Chinese firms.”

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Away from finance, Chinese are flocking to Dubai. The year 2012 saw a 28 percent increase in tourists, and retail outlets hired Mandarin speakers to tap into demand for luxury products that are more expensive in mainland China. “The number of Chinese flying through Dubai is growing. It is a popular place for a vacation, and up to a third of the sales staff at Dubai International Airport are Chinese speakers,” said Simpfendorfer. 

China’s mercantile side is largely confined to Dragon Mart, the largest concentration of retailers of Chinese products outside of China with just under 1,200 stores. The mall, with has an exterior shaped like a Chinese dragon, is considered a model of sorts that could be replicated elsewhere as an outlet for Chinese goods and traders. However, while the management claims up to 99 percent of retail is space is Chinese, a $272 million expansion currently under way that will double the mall’s size to 335,000 square meters is to be evenly split between international and Chinese retailers. And curiously, it is not a Chinese state linked firm behind Dragon Mart but Nakheel Properties, and the contractors — Kele and United Engineering Construction — are all Emirates based.

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.

Lebanon is quite the micro-dot on the Chinese trade radar. From a global trade perspective, it is a pointless exercise to quantify how much, or rather, how little, the bilateral trade of $1.8 billion represents in China’s total foreign trade of some $3.8 trillion in 2012. 

From the Lebanese perspective, China accounted for 8 percent of Lebanese imports last year, according to customs. That makes it the  the third-largest supplier of foreign goods to the country, after the United States and Italy.

But trade is stuck in an imbalance that is almost 99 percent in favor of China. “Lebanon imports from China about $1.77 billion per year and we export to China around $20 million,” says Ali El-Masri, chairman of the Lebanese Chinese Business Council (LCBC). 

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Lebanese interest in exporting to China originates from a handful of signature manufacturers such as vineyards and olive oil producers, which have been participating in trade fairs with assistance from LCBC.

According to Masri, about 15,000 Lebanese each year obtain visas to go to China on business. Most are those looking to buy goods, but he estimates there are 500 Lebanese who do business and live in China permanently.

In the wake of growing worries over regional unrest and spillover effects since 2012, plans for bringing Chinese investors to Lebanon in collaboration with the Chinese embassy and Lebanese authorities were iced. A further impediment is sluggishness on the Lebanese side, where the government’s great verbal interest in an increase of bilateral economic relationships and Chinese investments was not followed by action. Masri emphasizes, however, that “the first problem is security. When that is solved, investments can be found.”

Masri, an entrepreneurial Lebanese who grew up between Far East and Middle East, established the LCBC in 2011 in hopes to promote stronger business and investment ties between China and Lebanon. The organization, which offers fee-based assistance and services to traders and businesses, found a good initial response. But Lebanon’s growing security risks and low business reliability in comparison with China are making Masri review his options. “In China, you live a normal life with water and electricity – everything,” he says. “You have security and can do as much business as you want and enjoy life while you see business growing day by day. If Lebanon was a normal country, I would surely love to live in my country, but if things continue to deteriorate as they are, I prefer to go back to China and live all my life there.”