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China Goes Beyond Oil in Forging Ties to Persian Gulf

BAGHDAD, Jan. 12 - Lured by the world's largest oil reserves and some markets considered too risky by Western companies, China is quickly becoming a major economic player in the Persian Gulf, making deals in transportation and technology, showcasing its consumer goods and shoring up agreements to meet its enormous energy needs.

"The current state of business ties between China and the gulf states is definitely growing, with an interest from both sides to expand ties," said Christian Koch, program director at the Gulf Research Center, an independent institute based in the United Arab Emirates. "Oil is certainly the most central aspect to the relations, but ties should not be seen exclusively through that prism."

Trade volume between China and the six rich countries of the Gulf Cooperation Council - the United Arab Emirates, Saudi Arabia, Bahrain, Kuwait, Qatar and Oman - was expected to reach $20 billion in 2004, up from $16.9 billion in 2003, according to the National Bureau of Statistics in China.

Trade between China and Iran is expected to have totaled $7 billion in 2004, up from $5.6 billion in 2003, according to the Iran-China Chamber of Commerce, which was established in 2000.

China and the Gulf Cooperation Council countries began talks to try to strike a free trade agreement last summer.

Middle East analysts say they have noticed increased business between Chinese officials and companies and their gulf counterparts. The increase has been "in scale and scope," said John Calabrese, an editor at The Middle East Journal, a scholarly quarterly in Washington, who wrote his doctoral thesis on relations between China and the Middle East. The surge in wheeling and dealing hardly represents a triumph of free enterprise. The trade mostly amounts to state-owned companies in China and the gulf nations pairing up to get oil and natural gas to China, and state-owned Chinese consumer and technology companies exporting their wares to the gulf.

Recently, Chinese symbols have begun appearing on the sandy dunes of the Middle East. Last month, for instance, officials in Dubai, the glittering city-state of the United Arab Emirates, opened the Dragon Mart, a 1.6-million-square-foot shopping mall built in the shape of a dragon and heralded as a showcase for Chinese products. China has been buying crude oil from anywhere in the world that sells it since 1993, when its explosive economic growth turned it into a net importer of oil. But in the last few years, analysts say, the country has realized it must vie more aggressively and have a greater physical presence in the region to gain access to the Middle East's diminishing reserves at a time of increasing competition for them.

"They realize they can't just buy crude," Mr. Calabrese said in a telephone interview. "They've got to play ball now in producer countries and develop refining capacity in the region."

And there was a lot of ball-playing last year. In one of the biggest deals of a busy year between China and the gulf, the China Petroleum and Chemical Corporation, known as Sinopec, signed an agreement in March with Saudi Aramco to spend $300 million to develop natural gas resources in Saudi Arabia near the Ghawar field.

The deal raised eyebrows for its high risk and potentially low returns. But Colin Lothian, senior analyst for the Middle East at the energy consultant firm Wood MacKenzie in Edinburgh, said it put China in a good position for the future.

"It's a political deal," he said. "It's about forming relations with Saudi Arabia in order to secure China's long-term energy needs so when they do come looking for crude they'll be viewed favorably."

Across the gulf in Iran, Sinopec agreed to buy 250 million tons of natural gas over 30 years, to jump-start the country's stalling natural gas industry. In exchange, Iran will export 150,000 barrels of crude a day to China after Sinopec has developed the Yadavaran oil field in a package deal worth $70 billion.

Zhuhai Zhenrong, a Chinese oil-trading firm, signed a 25-year natural gas deal in Iran last March worth $20 billion. And the China National Petroleum Corporation bought the Iranian subsidiary of Sheer Energy of Calgary, Alberta, giving it a 49 percent stake in the Masjed-i-Suleiman oil field, in a seven-year deal worth $121 million.

According to Amy Myers Jaffe, a fellow at the James A. Baker III Institute for Public Policy at Rice University in Houston, "The Chinese companies have a policy of trying to find oil and gas deals where they don't have to compete with the U.S. oil companies."

"They tend toward countries where the U.S. has sanctions like Sudan, Iran and Iraq," she added, in an e-mail message.

China has been active in Iraq as well, despite security concerns there, though it now imports no more than four million barrels of Iraqi oil a month. In September, Sinopec signed a $15 million deal to build oil storage operations in Basra, while China National Petroleum continues to make noises about a memorandum of understanding it received from Saddam Hussein to develop the Ahdab oil field in Iraq.

China has long had some ties to the Middle East, often marketing weapons to regimes that Washington abhorred as well as selling cheap consumer goods.

In the 1980's, China's main exports to the Middle East were "plastic fly swatters and Silkworm missiles," Mr. Calabrese, the scholar, said. "Though it had an interest in penetrating the Middle East economically, it didn't have the ability."

China's nonpetroleum businesses in the gulf now go much deeper. FiberHome Communication Technology, a Chinese maker of equipment for fiber optic networks, won a contract to help build a broadband network in Iran, while the Hisense Electric Company, a state-owned television maker, has built a factory there.

Iran is also home to the first foreign assembly plant of the Chery Automobile Company, based in rural Anhui Province of China. Built last year, the plant is on track to turn out as many as 50,000 cars a year in partnership with an Iranian company, Sanabad Khodro Tus.

The China North Industries Corporation, or Norinco, has signed a $680 million deal to build a line of Tehran's expanding subway system. Huawei Technologies, China's largest telecommunications equipment maker, won the contract to upgrade the broadband capacities of cellular networks in the United Arab Emirates, and a deal to build a G.S.M. network in Saudi Arabia. Also, the Sinoma International Engineering Company of Beijing won contracts last year worth $376 million to build cement plants in Saudi Arabia and the emirates.

Oil needs may also motivate such nonpetroleum deals, Mr. Lothian, the analyst, said. "If you're showing willingness to invest in those areas," he said, "it can only help in securing the oil supply."

Few experts say the Chinese can subvert the dominant economic position of the United States in the region, at least anytime soon. Trade between the United States and Saudi Arabia alone totaled $22 billion in 2003, up from $18 billion in 2002, according to reports by the Saudi Arabian Embassy in Washington.

Still, America's military and political dominance in the Middle East does not seem to bother the Chinese. Indeed, analysts said, Beijing seems happy to sit back and let Washington manage the region's myriad security and stability issues.

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