New Situations in the Gulf Region and Recent Cooperation Priorities for China and the Gulf Nations

International Center for Risk Assessment, June 1,2016 | 作者: Wei Min | 时间: 2016-12-21 | 责编: Wang Jiapei
Adjust font size: + -

 

I  Remarkable Changes in the Gulf Region since the Beginning of This Year

With respect to security, numerous regional hot issues are cooling down thanks to the strengthened and effective political cooperation among regional powers. The implementation of Iran nuclear deal (or The Joint Comprehensive Plan of Action) is under smooth progress. The diplomatic crisis between Saudi Arabia and Iran shows signs of easing. Things may turn around in Syria with the ongoing ceasefire and the possibility of political reconciliation. The mess in Yemen is likely to be sorted out. At the same time, intensified anti-terror efforts have heavily hit ISIS. China, instead of being an onlooker, actively promotes political settlements for the above hot issues.

Economically speaking, the failure of OPEC in reaching consensus on oil freeze deal will keep international crude oil prices low, making it inevitable for the Gulf nations to pursue economic diversification. Saudi Arabia announced an agenda, named Vision 2030, on April 25 this year with an ambition to diversify its economy and break its addition to oil industry by 2030, through fostering the development of non-oil sectors including mining, manufacturing, tourism and leisure and financial investment.

China is gaining a significantly increasing diplomatic influence in the Middle East Region. It is promoting “Belt and Road” Initiative, and the Middle East Region, located along the route, acts as a crucial pivot to both Africa and Europe. The focus of President Xi Jinping’s first visit to Egypt, Saudi Arabia and Iran, was to discuss with these nations’ leaders on upgrading pragmatic cooperation under the framework of “Belt and Road”. The Gulf Cooperation Council (GCC) countries actively pursue closer contacts with China and propose to elevate the GCC-China relations to special strategic partnership. China and GCC resumed FTA talks, announced the end of negotiations on trade in goods substantively in principle and will hopefully enter into a blanket agreement within this year. In the just-concluded 7th Ministerial Meeting of China-Arab States Cooperation Forum, both sides determined to make connectivity enhancement, production capacity cooperation and people-to-people and cultural exchanges the three major pillars in the co-construction of the “Belt and Road”. 

 

II  Recent Cooperation Priorities for China and the Gulf Nations

In the aspect of economic and trade cooperation, six Gulf nations, the world’s second largest contracting projects, labor and engineering construction market, are China’s largest crude oil source and China is the eighth largest trading partner of the Gulf nations. In 2015 China became Dubai’s biggest trading partner for two consecutive years. China-GCC FTA, if concluded within this year, will explore more space for the development of bilateral economic and trade relations. Chinese enterprises’ investment in the Gulf Region used to be resource- and raw material-oriented, but has now been driven by more diversified demands and motivations, among which the greatest ones are enhancing Chinese enterprises’ brand influence and exploring international markets.

China and the Gulf nations can conduct production capacity cooperation. China started supply-side structural reform from November 2015 and will accomplish five tasks in a short term, namely tackling industrial overcapacity, destocking housing inventory, deleveraging steadily, lowering corporate costs and shoring up weak growth areas. The Gulf nations need to wean themselves from dependence on oil industry. In this sense, both sides are undergoing historic transition. The production capacity and financial cooperation, coordinated by Chinese government, boost Chinese enterprises’ overseas expansion and usher in a new era for overseas investment focusing on production capacity cooperation and characterized by large scale and rapid growth. Those investments will continue flowing towards diversified and high-end sectors. For example, during their overseas expansion process, Chinese companies will mainly focus on high-end equipment manufacturing industries including high-speed railway, nuclear power, satellite navigation and new energy resources in order to realize their transformation towards the high end. Besides, China will cooperate with Arab countries to push forward the fusion of industries and ports and build the ports with good geographic location into comprehensive bases of economic development, trade cooperation, industrial production and others in accordance with the mode of “port plus industrial park”. Investment in ports will effectively enhance bilateral cooperation in both production capacity and infrastructure construction. Supported by China’s cost-effective equipment, along with necessary financing, technology transfer and personnel training, Arab countries can enter a fast track of industrialization with low-cost and high-baseline, and can enhance employment and improve people’s well-being.

Financial sector represents another cooperation priority. Financial integration acts as a critical support for “Belt and Road”. All GCC countries except Kuwait peg their currencies tightly to the U.S. dollar, thus with little relief on the exchange rate front, those countries are exposed to increasing financial risks considering the low crude oil prices. According to MENA Intelligence, the financing requirements of GCC countries are projected to reach 151.3 billion U.S. dollars in 2016, of which 52% will be raised though foreign exchange reserves, 38% through issuing domestic and international bonds and 10% through loans. China’s efforts to boost RMB’s internalization can partly meet those financing requirements and both sides should jointly push forward the Gulf’s financial centers such as Dubai and Qatar as offshore trading hubs for RMB. SWIFT data shows that in 2015, the UAE’s use of the RMB accounted for 74% of payments by value to China (including Hong Kong), representing an increase of 52% compared to 2014. On December 14, 2015, the People’s Bank of China and the central bank of the UAE signed a memorandum of cooperation on RMB clearing in the UAE and agreed on expanding the RMB Qualified Foreign Institutional Investor (RQFII) to the UAE at a quota of 50 billion Yuan. The currency swap agreement was extended on the same day. Besides, financial support from China’s policy-base financial institutions, commercial banks and multilateral financial institutions including the AIIB and Silk Road Fund will focus on projects along the “Belt and Road”.

Several factors will contribute to the development of energy cooperation. The Gulf nations represent 1/3 of China’s crude oil imports. Under the framework of “Belt and Road” Initiative, the two sides should integrate China’s policy of opening up to the west and the “Look-East” intentions of the Gulf nations with the purpose of promoting sustainable development of bilateral energy cooperation. The energy independence policies of the Western countries and low crude oil prices provide an important opportunity for both sides to establish an energy community of common destiny. The plummeted commodities prices may boost counter-cyclical investment from China and bring energy and mining resources back to those investors’ consideration. But it should be noted that pursuing comprehensive and balanced industrial distribution has replaced merely obtaining natural resources as the fundamental purpose of Chinese enterprises’ overseas expansion.

 

III  Major Cooperation Risks

Some Gulf nations are undergoing a turbulent phase due to their political system and economic structure transitions, which pose risks from different aspects to China’s investment in the region. The remaining regional tension, terrorism and extremism are political threats. Economically speaking, rising debt burden of the Gulf nations due to low crude oil prices creates larger uncertainties for foreign investment. Chinese enterprises also encounter numerous obstacles during their localization efforts because of the region’s social and cultural characteristics including multiple ethnics, culture diversity, multiple languages and religious beliefs. As to China, its high-end manufacturing industries, though competitive to some extent, still lag behind world-class enterprises in terms of core parts and components’ precision, product standards and certifications and marketing. Besides, China’s investment in the Gulf region may face fierce competitions from developed countries.

The above risks, however, will not restrain China’s investment in the region. But Chinese enterprises need to adequately evaluate these risks and endeavor to avoid them during their going-out process. The Gulf nations, while looking forward to China’s investment, should rationally manage their expectations. As to possible problems, both sides should take them with dispassion and actively pursue settlements so as to avoid deterioration in bilateral cooperation.

 

 

Wei Min is a Senior Research Fellow at Department for World Economy and Development, China Institute of International Studies.

 

Source: International Center for Risk Assessment, June 12016.

http://icra.ae/article/new-situations-in-the-gulf-region-and-recent-cooperation-priorities-for-china-and-the-gulf-nations/

0