China in Gulf

China builds up role in Gulf
By Chris Zambelis

China’s diplomatic, economic, and security interests in the Middle East continue to expand commensurate with its energy interests and growing international clout. With the country the world’s second-largest consumer and the third-largest net importer of oil overall, Beijing’s energy security rests on the steady flow of oil from the Middle East.

The multifaceted bilateral relationships that are being forged between China and the leading oil producers in the Middle East and, in particular, the Persian Gulf, such as Saudi Arabia – China’s largest oil supplier – and Iran – China’s third-largest supplier of oil – reflect Beijing’s myriad stakes in the region. China today enjoys close ties with the individual member states that comprise the Gulf Cooperation Council (GCC), namely Saudi Arabia, the United Arab Emirates (UAE), Kuwait, Bahrain, Oman and Qatar.

While China’s bilateral relations with key players in the MiddleEast continue to receive ample coverage in Western analyses, its burgeoning engagement with multilateral bodies in the region such as the energy-rich GCC has lagged by comparison.

China’s engagement with the GCC is, in essence, analogous to its dealings with multilateral bodies such as the European Union (EU), the Association of Southeast Asian Nations (ASEAN) and the African Union (AU). As GCC members increasingly pool their diplomatic and economic resources to maximize their influence in the region and beyond, the nature of China’s relationship with the bloc warrants a closer look.

GCC China Business Forum
The first GCC China Business Forum (GCBF), which took place from March 23-24 in Manama, Bahrain, represents the efforts of GCC members to engage China as a unified bloc. The GCBF was the product of a joint effort by the Federation of GCC Chambers of Commerce and Industry, the China Council for the Promotion of International Trade, and the Bahrain Chamber of Commerce and Industry to strengthen the already robust economic bond betweenChina and the GCC.

The event featured, among other things, presentations on economic trends and opportunities in China and the GCC as well as networking sessions meant to facilitate contacts between Chinese and GCC business leaders. The majority of China’s oil imports from the Middle East originate in the GCC and Iran.

While oil wealth drives the economies of the GCC – member states boast 45% of the world’s recoverable sources of crude oil – the bloc is also a major aluminum and phosphates producer. Some predict that the GCC will account for 18% of the world’s output of aluminum by 2015. GCC members are collectively working to diversify their economies away from oil exports. Considering that the smelting process required to produce aluminum is oil intensive, the GCC is well-positioned to broaden its capacity to produce aluminum to meet rising demand in China and other parts of Asia. In addition, the GCC is also keen to expand its stake in another oil-intensive sector: the global plastics conversion market.

With an eye on tapping markets in China and elsewhere in Asia, the GCC is expected to account for up to 11% of the total plastics conversion market in the coming years, an increase from its current market share of 2%. China is the world’s largest importer of converted plastics. The Aluminum Corporation of China Ltd (Chalco), a subsidiary of Aluminum Corporation of China (Chinalco), is also interested in developing an aluminum production plant in Saudi Arabia.

Bilateral trade between China and the GCC topped US$70 billion in 2008; according to some estimates, the Sino-GCC trade volume will reach between $350 billion and $500 billion by 2020.

In another first in Sino-GCC relations, both sides held their inaugural Strategic Dialogue gathering in Beijing on June 4 to discuss a range of topics. Co-chaired by Chinese Foreign Minister Yang Jiechi and Kuwaiti Deputy Prime Minister and Foreign Minister Sheikh Muhammed Sabah al-Salem al-Sabah [1], GCC secretary general Abdul Rahman al-Attiyah, and Minister of State for Foreign Affairs of the UAE Anwar Muhammed Qarqash, the ministerial-level meetings in Beijing showcased the growing significance of Sino-GCC ties.

Both sides used the occasion to highlight the rapid development of mutually beneficial economic, diplomatic and cultural relations between China and the GCC. The meeting also prompted a statement denouncing Israel’s May 31 attack against the Gaza Freedom Flotilla and a call for the lifting of Israel’s blockade against Gaza. A second ministerial-level Strategic Dialogue meeting is planned for 2011 in the UAE.

Bloc power and politics
The Cooperation Council for the Arab States of the Gulf (commonly referred to as the GCC) was established in 1981 amid the backdrop of the Iran-Iraq War and the Iranian Revolution of 1979 as a trade and security bloc to foster closer economic cooperation and political and security integration among its six constituent members. [2] The GCC has since evolved into an organization keen to maximize the respective influence of its individual members as a collective body on a range of issues.

GCC members share a great deal in common. The group is composed of monarchical Arab dynasties, each of which is ensconced in a strategic alliance with the United States. The United States, in essence, guarantees the sovereignty and security of individual GCC members. The network of US military bases and naval assets positioned in and around GCC member countries reflects the strategic importance of the Persian Gulf. Bahrain, for instance, is home to the US Navy’s Fifth Fleet.

The regional headquarters of US Central Command (USCENTCOM) is in Qatar. Fixed US military installations and forward operating bases (FOBs) are also located in Kuwait, Oman and the UAE. While the United States has removed its troop presence from Saudi Arabia, close military and security cooperation between US and Saudi forces continues; Saudi Arabian military bases are also available to US forces in the event of a crisis.

Patrols by US Carrier Strike Groups are a fixture of the Gulf’s waters. GCC countries also spend billions of dollars on purchases of advanced US weapons platforms and technology; the United States just concluded its largest arms deal ever: a $60 billion deal to supply advanced weapons platforms to Saudi Arabia.

Due to their role as logistical hubs for US forces, GCC countries have also proved indispensable to launching and sustaining the US-led wars in Iraq and Afghanistan. The GCC states, along with Israel, Egypt and Jordan, are also critical to US efforts to contain Iran and project US power in the greater Middle East.

In spite of China’s growing interests in the Persian Gulf, the region remains firmly entrenched in the US security orbit. Even with the United States engaged in two wars in Iraq and Afghanistan, there are no indications that Beijing is willing to challenge Washington’s position as the preeminent force in the region.

Oil and natural gas
The collective oil and natural gas wealth of individual members underlies the power and influence of the GCC and their importance to China, the United States and the global economy; four GCC members are part of the Organization of the Petroleum Exporting Countries (OPEC). [3]

In spite of their modest populations – the combined population of GCC member states is around 37 million – the group wields a tremendous amount of leverage internationally. GCC members with the exception of Bahrain [4] are among the world’s leading energy producers. Saudi Arabia is the world’s largest oil producer and home to approximately one-fifth of the world’s proven oil reserves. Saudi Arabia is also a major source of natural gas. The UAE is the world’s eighth-largest oil producer, and boasts the world’s seventh-largest oil reserves and sixth-largest natural gas reserves. Kuwait is the world’s ninth-largest oil producer and has the world’s fifth-largest oil reserves. Qatar boasts the world’s third-largest natural gas reserves and is the world’s top exporter of liquefied natural gas (LNG). Qatar is also a major oil exporter and Oman is an important producer of oil and a potential exporter of LNG.

As the United States and other major energy consumers in the West seek to reduce their dependence on foreign oil, the GCC eyes rising demand for oil from China (and Asia overall) as crucial to sustaining its members’ economies.

In 2009, Saudi oil exports to the United States – for the first time in over 20 years – dropped below the 1 million barrels per day (bpd) mark. In contrast, Saudi oil exports to China during the same time frame surpassed 1 million bpd, almost twice the amount of oil exported by Saudi Arabia to China in 2008.

In June 2008, China surpassed Japan as Kuwait’s top destination for oil exports. The UAE is another important source of oil for China, which has been the top importer of Omani oil for six years running. With around 10% of its LNG exports heading to China, Qatar has also emerged as an important source of Beijing’s growing LNG needs amid stagnant demand in the United States.

Chinese energy giants have also signed a number of major oil and gas exploration agreements with their counterparts in the GCC in recent years.

Investment and finance
The emergence of sovereign wealth funds (SWFs) in the GCC, essentially state-owned and -directed investment funds built on petrodollars, adds another dynamic to the GCC’s global influence. SWFs afford the GCC with a means to diversify their revenue streams away from energy exports. Eager to maximize the returns on their investments, the GCC is looking to China (and the Far East), as the new center of gravity for global economic growth.

Both China and the GCC have floated the idea of establishing a Free Trade Agreement (FTA) to cement their burgeoning economic ties. In contrast to China’s usual position as the dominant exporter in its bilateral trade dealings, the balance of Sino-GCC trade is heavily skewed in favor of the Gulf countries, a consequence of China’s dependence on imports of the region’s oil and gas. At this stage, the prospects of a Sino-GCC FTA are remote; the political context behind the calls for an FTA, however, reflects the consensus in both China and the GCC of the importance of further strengthening relations. [5]

In spite of the array of common interests that bind them, individual GCC members continue to conduct foreign relations with China and other countries on a bilateral basis. Diverging interests among members also plague the group on critical issues such as the Iranian nuclear program and the US – and European-led campaigns to sanction Tehran, as well as territorial disputes between GCC members. GCC members such as Saudi Arabia, Bahrain and the UAE perceive Iran as a threat; Qatar, in contrast, enjoys friendly ties with Iran. GCC members also tend to differ on how to engage Iran, especially when it comes to the question of economic sanctions. Diverging interests among members have also precluded the establishment of the long-awaited GCC customs union and common currency.

Conflicting interests and disputes among GCC member states will continue to affect the relative influence of the GCC as a bloc. Yet there is ample evidence indicating that when it comes to China, the collective interests of GCC members largely converge. Likewise, China has demonstrated its willingness to accommodate the interests of the GCC as a bloc to ensure friendly ties, in addition to maintaining close bilateral relationships with its constituent members.

With its growing profile as a diplomatic player in the region, the GCC is also extending its hand to China in order to shore up its own diplomatic position. Sino-GCC diplomacy with respect to the Iran question is one example. As the latest round of US- and European-inspired sanctions on Tehran takes hold, China will continue to conduct business as usual with Iran, a country it counts as a strategic partner; incidentally, sanctions against Tehran will clear the way for additional Chinese investment in Iran as the competition from European and other investors for Iranian business is removed from the equation.

There is also a growing realization in the GCC and in other regional circles that Iran is well on its way to becoming a nuclear power, in spite of US, and especially Israeli, threats against the Islamic Republic. As a result, the GCC may be looking to Beijing down the road to act as a mediator with the capacity to influence Tehran’s actions. The GCC is also intent on diversifying its alliances in light of the perceptions of declining American power in the Middle East and on the world stage.

The rapid expansion of Sino-GCC diplomatic ties overall must also be considered in their historical context. During the Cold War, China maintained friendly relations with the traditional rivals of the pro-Western monarchies in the Middle East, namely Egypt and Iraq, whose pan-Arab nationalist and socialist revolutionary ideologies resonated strongly with Beijing.

In contrast, China tended to perceive the Gulf monarchies as agents of US imperialism. Beijing did not establish full diplomatic relations with all of the members of the GCC until 1990. In this regard, the impressive evolution of Sino-GCC ties in recent years is emblematic of the dramatic shifts in China’s stance in the international arena.

The remarkable developments witnessed in Sino-GCC relations in recent years will continue to flourish. Based on the trajectory of current trends, mutual interests revolving around energy and trade will underscore the strategic ties shared by both parties. For its part, China appears eager to engage GCC members on their terms as a bloc while maintaining close bilateral relationships with each country. China’s approach to diplomacy with the GCC is also a testament to the bloc’s significance in Chinese strategic thinking about the Middle East and energy security.

At the same time, the GCC countries will continue to look to the United States as the guarantor of their sovereignty and security. Yet the perceptions of an America in decline coupled with the promise of profiting from China’s booming economy will encourage the GCC to continue to look to Beijing, paving the way for even closer Sino-GCC cooperation in the years ahead.

1. Kuwait presently holds the GCC rotating presidency, with the UAE slated to assume the presidency next.
2. Yemen is also an aspiring GCC member and a recipient of economic support from the group. Yemen’s repeated requests for full membership in the GCC are regularly denied. Instead of full membership in the group, the GCC has granted Yemen membership in GCC committees related to social, educational, sports, and cultural issues.
3. Saudi Arabia, the UAE, Kuwait and Qatar are OPEC members.
4. While Bahrain was the first state in the Persian Gulf region to discover oil, its modest oil reserves are expected to run out sometime over the next two decades. Revenue earned from oil, especially oil refining, continues to represent a key aspect of the Bahraini economy. Most of the oil refined in Bahrain, however, is provided by Saudi Arabia through a pipeline. In an effort to diversify its economy, Bahrain has developed a robust financial services industry.
5. The GCC has engaged a number of countries and multilateral bodies over the years in various FTAs and related talks, including the EU, ASEAN, Singapore, Japan, South Korea, Pakistan, Australia, New Zealand, Turkey and Iran.

Chris Zambelis is an author and researcher with Helios Global, Inc., a risk management group based in the Washington, DC area. The opinions expressed here are the author’s alone and do not necessarily reflect the position of Helios Global, Inc.

(This article first appeared in The Jamestown Foundation. Used with permission.)

(Copyright 2010 The Jamestown Foundation.)

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s