May 11, 2009 / 11:00 AM / 9 years ago

The Middle Kingdom meets the Middle East

BEIJING (Reuters) - With no fanfare, a $5 billion (3.3 billion pounds) refinery in which Saudi Aramco has a 25 percent stake quietly began processing oil a couple of weeks ago in eastern China.

The start-up of the Fujian plant, half-owned by top state-owned refiner Sinopec (0386.HK), testifies to the thickening trade and investment ties between China and the Arab world.

China’s exports to the 22 members of the Arab League jumped to $62.3 billion last year from just $7.2 billion in 2001, the year China joined the World Trade Organisation. The share in total Chinese exports rose to 4.4 percent from 2.7 percent.

Imports from the Arab world over the same period grew to $70.3 billion from $7.5 billion, doubling the share in total imports to 6.2 percent, according to official Chinese data.

With markets and media riveted by China’s hunt for natural resources in Australia, Africa and Latin America, the Middle East story has perhaps been underplayed.

That’s the view at least of Ben Simpfendorfer, an economist in Hong Kong for Royal Bank of Scotland, who seeks to redress the balance in his book “The New Silk Road. How a Rising Arab World is Turning Away from the West and Rediscovering China”.

For Simpfendorfer, an Arabic and Chinese speaker, the world is witnessing nothing less than two historical powers simultaneously reclaiming their economic and cultural primacy in the world.

“The stories often appear unrelated, but they are in fact part of a larger global rebalancing that represents the rise of the East after centuries of Western dominance,” he writes.

These are grand claims. Do they stack up?

Xu Changwen, a researcher with a think-tank under the Chinese Ministry of Commerce, said a complementary trade structure had fuelled the boom: China needs oil from the Middle East, which is an avid buyer of Chinese clothes and other consumer goods.

Talks on a free trade agreement with the countries of the Gulf Cooperation Council underlined the scope to develop ties, but it was important to keep a sense of proportion, Xu said.

“Market demand from the United States and Europe is huge and will recover when the financial crisis is over, so it’s still too early to say anything like ‘The Middle East will replace the U.S. and Europe’,” he said.

DEEP TRENDS

Trade will ebb and flow with the price of crude, Simpfendorfer acknowledges. Oil makes up 40 percent of two-way trade. China imported more than a fifth of its crude last year from Saudi Arabia; Oman, Kuwait, the United Arab Emirates and Yemen were also among its 10 biggest suppliers.

Yet even if oil traded at just $30 a barrel, Simpfendorfer believes Chinese-Arab relations would continue to flourish because of three deep currents.

-- The appeal to the Arab world of China’s economic model, with its emphasis on rapid growth and political stability. You will not hear Beijing demanding regime change.

-- The clout of Arab sovereign wealth funds, which have been diversifying their investments away from the United States since the September 2001 terrorist attacks on New York and Washington.

-- The revival of an “Islamic Corridor”, a string of historic trade routes stretching from Africa through the Middle East and into Asia. Embracing the majority of the world’s Islamic population, this corridor is comfortable territory for Arab investors, Simpfendorfer argues.

Trade along the original Silk Road collapsed in the 1600s with the decline of China. New European sea powers switched most of their Asian trade to the African Cape route, delivering a knock-out blow to the Arab economies.

In Damascus, one of the terminuses of the old Silk Road, there are plenty of Chinese shoes and such on sale in the souks, and cheap Chinese cars are making inroads into the Syrian market.

But it was hard for this casual tourist on a recent visit to find evidence that China is inspiring an economic revival.

Not so, writes Simpfendorfer. Haier, the appliances maker, has captured 20 percent of the Syrian market for washing machines and microwave ovens; Huawei has grabbed a big chunk of the local telecoms market; and Chinese construction companies are building hydroelectric plants and other infrastructure across the country.

    Yet he admits the changes are hard to observe. “It is individuals, not governments or corporations, who are the lifeblood of the New Silk Road,” he says.

    ENTHUSIASM, WARINESS

    Nowhere is this more in evidence than in Yiwu, a town in eastern China whose vast wholesale markets draw traders from across the globe in search of cheap consumer goods.

    The number of Arab visitors to Yiwu has surged, to about 200,000 a year, since many countries -- but not China -- tightened visa rules for Arabs after the 2001 attacks.

    Yiwu has made them feel at home by building mosques, opening more Arabic restaurants and recruiting more interpreters from among the Arabic-speaking minorities of northwestern China.

    “We don’t see too many Europeans any more. These days, most of our customers are from the Middle East,” Zhu Shanshan, a sales representative at Dove Candle, which sells scented candles and handicrafts, said on a recent visit to Yiwu.

    A survey by Global Sources, which matches buyers and sellers of Chinese goods, found 52 percent of Middle Eastern buyers plan to increase their purchases from China in 2009, according to Bill Janeri, general manager of the firm’s Dubai office.

    Chinese exports to the United States and European Union slumped in the first quarter, but shipments to Saudi Arabia fell by just over 1 percent, while those to Jordan shot up 32 percent.

    Despite his optimism, Simpfendorfer injects a few notes of caution: politically, other parts of Asia have stronger Islamic ties with the Arab world than China does.

    And Beijing must ensure that its “Go Global” policy of encouraging local firms to venture abroad does not swamp Arab markets with imported goods, destroying jobs and goodwill.

    Ties are flourishing but have yet to be seriously stress-tested, Simpfendorfer concludes.

    “It is still too early to judge the outcome,” he writes. “Tensions between the China growth model and Go Global are a useful reminder that relations between the Arab world and China are still delicately poised.”

    Additional reporting by Zhou Xin and Jason Subler; Editing by Mathew Veedon

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