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>> POLICY BRIEF

ISSN: 1989-2667

N 173 - JANUARY 2014

Chinas economic engagement


in the Middle East and North Africa

Ted C. Liu

>> Although political upheavals since 2011 have prompted


Beijing to review its posture in the Middle East and North
Africa (MENA), China had been ramping up its presence in the
region since well before the Arab Spring. As Beijing implemented its H I G H L I G H TS
going global strategy as a recipe for economic growth, China became
more commercially and diplomatically engaged to advance its China is the largest
interests in the region. Recent developments such as rising Chinese importer of oil from the Gulf
investments in the Iraqi oil sector and broader efforts to sell more region and OPEC's share of
Chinese goods and services to the MENA region have underscored China's oil imports is rising
Chinas increasing presence in the vast area stretching from Morocco fast.
to the Gulf. In turn, with Chinas stature in the region growing, some
The MENA region is a
MENA countries are responding by looking East for an alternative
growth market for more
partner. The increased Chinese footprint gives smaller regional
affordable Chinese
powers an additional partner to their traditional ties with the United
products and engineering
States and Europe.
services.

The region's governments


THE ENERGY FACTOR
see a more influential China
as a source of both growth
Since the 2003 US-Iraq war, China has been stepping up its profile in
and political leverage vis--
the MENA region. With domestic economic expansion as its priority,
vis the United States and
Chinas thirst for energy has guided much of the countrys Middle
Europe.
East policy, and Beijing seeks to maintain positive relations with all
countries in the region. As the Chinese economy grew, its oil imports
also surged from $664 million in 1980 to $235.75 billion in 2011.
CHINAS ECONOMIC ENGAGEMENT
IN THE MIDDLE EAST AND NORTH AFRICA

>>>>>> China is today the worlds largest oil importer. fields. To foster closer relations with Baghdad,
According to a 2013 report by Wood Mackenzie, Beijing forgave about 80 per cent of Iraqs $8.5
a consultancy firm, China will spend about billion debt to China in 2010 and has signed
$500 billion on crude oil imports by 2020, multibillion-dollar trade deals, including in the
while the share of the Organization of the heavy industry, government, tourism and
Petroleum Exporting Countries (OPEC) in transportation sectors.
Chinese imports will rise from 52 per cent in
2005 to 66 per cent in 2020. Chinas crude oil
imports from OPEC overtook those of the US A GROWING MARKET FOR CHINAS
for the first time in 2013. TRADE AND INVESTMENT

China uses its large foreign currency reserves to Aside from importing oil and gas from the
acquire equity stakes in energy companies, with Middle East, China also sees the region as a
Chinese national oil companies (NOCs) growth market for its products. Focused on
purchasing $18 billion in overseas assets in affordable consumer goods and services, such as
2011, including investments in the MENA construction and engineering, Chinese exports
region. In contrast, as China imports more oil to the MENA region have been modest but
and gas from the MENA region, the United steadily increased from 2.8 per cent in 1994 to
States is becoming more energy-independent 5.8 per cent in 2010 as a total percentage of
due to alternative means of oil and gas Chinese exports. According to Bo Zhiyue, a
exploitation. Meanwhile, as EU countries China expert at the National University of
decreased their crude oil imports from the Singapore, taken as a single economy, the
MENA region from 21.59 per cent in 2005 to Middle East would rank as Chinas fourth or
19.47 per cent of the total in 2011, they fifth largest trading partner.
increased their imports from former Soviet
republics from 38.40 per cent to 43.43 per cent Although Irans economic relationship with
over the same timeframe. All this sets China on China has been historically based on the oil and
the path to becoming an even more significant gas trade, international sanctions and Chinas
economic partner for the Middle East. increased economic significance have altered
these countries trade relations. While often
Ten years after the 2003 US invasion, China has inferior in quality, cheaper Chinese goods are
emerged as an influential economic player in now more accessible to Iranian consumers than
Iraq, for example. Robust Chinese investments the countrys traditional reliance on European
in Iraqs energy sector are expanding Beijings products. Previously, Germany, Italy and Greece
presence in the country, with Baghdad gaining were Irans top trading partners. Presently, China
an important partner in addition to American is the top destination for Iranian exports while
and European investments. As sectarian violence Chinese imports in Iran are second only to those
compelled Western firms to abandon southern from the United Arab Emirates (UAE).
Iraq in favour of oil sources in Iraqi Kurdistan, According to a Massachusetts Institute of
Chinese state oil companies stepped in to take Technology (MIT) index, oil makes up most of
advantage of the regions resources. With state Iranian exports to China while Iran imports
backing, Chinese firms are more risk-tolerant mostly automobiles, industrial equipment and
and have collectively made China the biggest consumer goods from China. Increasingly,
single player in Iraqs energy industry. The New Chinese firms are winning contracts for key
York Times reported that China presently buys infrastructure projects, such as Tehrans metro
nearly half of Iraqs 1.5 million barrel daily oil system and the Sadr expressway expansion
production. Chinas NOCs now own major project. Yet even as trade expands between the
stakes in the al-Ahdad, Halfaya and Rumaila oil two countries, both face challenges: Beijing must
P O L I C Y B R I E F - N 173 - JANUARY 2014

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carefully navigate international sanctions on Iran states and China continue to be a sensitive
even as it uses Chinese goods to barter for Iranian political subject. In this respect, the regions
oil, while Irans dependence on trade with China manufacturing sector has struggled to compete
leaves the Iranian economy highly undiversified with Chinese imports. Cheap Chinese products
and threatens its non-oil sectors. have increased MENA consumers purchasing
power but Chinas manufacturing power is also
Egypts large population provides a consumer threatening the survival of local industries, such as
market for inexpensive Chinese products and the textile or the marble sectors. Chinese businesses
countrys strategic assets can also further Chinas practice of bringing Chinese labour to work on
interests in the region. As Chinese exports to infrastructure projects also contributes little to
Egypt surpassed those from the United States in alleviating local unemployment problems.
2011, Egypt in return can offer China economic
and geo-political influence in Africa and the As cited by a US National Defence University
Middle East. As a traditionally influential player (NDU) report, in 2009 violence broke out
in the Arab world, a closer relationship with between Algerians and Chinese migrant
Egypt could buy China political goodwill in the workers, and Iraqis who failed to benefit from
region, but may also facilitate practical benefits Chinas oil investments have threatened Chinese
such as expedited access to the Suez Canal for oil workers in the Wasit Province. Dating from
Chinese commercial vessels and warships. By 2010, Egyptian officials under Mubarak have
developing a working partnership with the Morsi deplored the trade imbalance between the
government, Chinese efforts initially produced nations. According to Chinese statistics, trade
increased bilateral deficits between the two countries rose to $5.8
trade with Egypt. billion in favour of China in 2011, and Egypt is
China presently keen to develop a more balanced commercial
In Francophone relationship in order to lift itself out of its
buys nearly half North Africa, Algeria current economic crisis. Moroccos trade deficit
of Iraqs 1.5 million stands out as the with China in 2012 was also very large, with the
subject of Chinese North African country buying $3.13 billion in
barrel daily attention. Although Chinese goods and services while only exporting
China mostly relies $558 million to China. For Iran, with Chinese
oil production on domestic natural consumer products flooding the local market
gas and liquid natu- and sanctions denying the country access to
ral gas (LNG) imports from the Persian Gulf and international capital, Iranian manufacturers are
Asia, it is interested in the Algerian consumer finding it difficult to compete. With cheap
market. Given Algerian banks ability to self- Chinese products and the outsourcing of major
finance development projects, China sees the construction projects to Chinese companies
country as a lucrative market for Chinese engi- driving many local firms out of business,
neering expertise. After France and Italy, China is Teheran may reassess its shifting economic
Algerias third largest source of imports. The relations with China.
Chinese economic footprint in Algeria is most
pronounced in the infrastructure development
sector. For example, Chinese firms built a large POLITICAL IMPLICATIONS
chunk of the 1,216 km EastWest highway to
link Algerias divergent regions. MENA regimes benefit from enhanced relations
with China. While the United States and EU
While states such as Saudi Arabia enjoy a members seek domestic political reforms
favourable trade balance with China due to their through foreign aid, Beijing focuses on trade
energy exports, trade imbalances between MENA and demands no quid pro quo in exchange for >>>>>>
CHINAS ECONOMIC ENGAGEMENT
IN THE MIDDLE EAST AND NORTH AFRICA

>>>>>> its investments. For resource-based economies maintains its special ties to the US military
such as Saudi Arabia and other members of the establishment, Morsis outreach to China was
Gulf Cooperation Council, pivoting east has long meant to reduce Egypts traditional reliance on
been a strategy to diversify their economic and the West. However, while Morsis overture to
political partners. Non-rentier states undergoing China produced Chinese investment to build a
political transitions also see China as a source of power plant, a water desalination plant and
both investment and political leverage via--vis a high speed rail line connecting Cairo
the United States. Through informal alliances and Alexandria, his June 2013 deposition
and diplomatic hedging, smaller nations in the put relations on hold. While commercial
Middle East could maximise their relationship diversification is likely to remain a priority for
with extra-regional powers. the new regime in Egypt, it remains to be seen
how actively that will be pursued, including
With a number of MENA countries undergoing with China.
political transitions since 2011, the Chinese
political elite has debated how best to engage the
regions emerging political actors. For most CONCLUSION
countries in the region, such as Saudi Arabia,
Iran and Algeria, Beijing has maintained its Chinas history of involvement in the MENA
working partnerships with the local political region has been solidly anchored in the principle
establishment. While abstaining on UN of mutual non-interference and a preference for
Resolution 1973 which paved the way to military commercial relations above political and
intervention in Libya in 2011, Beijing continued military initiatives. To sustain its need for oil
to stress its policy of mutual non-interference and and gas, China seeks friendly relations with
preference to solve the Libyan civil war and the MENA regimes, and is now one of the largest
ongoing conflict in Syria through negotiations. investors in the regions oil and gas sector.
But in some of the MENA countries undergoing However, over the past decade, Chinas
political transitions, Chinese foreign policy economic involvement in the Middle East and
officials actively engaged the regions then rising North Africa has evolved from its dependence
Islamist political currents, such as Egypts on the energy trade to much broader
Muslim Brotherhood (MB) and Tunisias commercial engagement, including trade in
Ennahda, in order to establish relations with the consumer goods, automobiles and services such
regions rising political forces and to mitigate the as engineering, construction and infrastructure
Islamic worlds criticism of Beijings crackdown development. China is now the largest trade
on Chinas restive Uighur population. partner for some of the regions most influential
economies, including Saudi Arabia and Iran. In
In particular, deposed Egyptian President Iraq, although the United States remains the
Mohamed Morsis decision to make Beijing his countrys top economic partner, Chinese
first foreign trip outside of the Middle East and investments in the oil and gas sector now
Africa reflected Chinas growing importance to account for a significant segment of the
the MENA region. Chinese officials held private countrys economic output.
visits with Egypts Muslim Brotherhood (MB)
even before the 2011-2012 elections; in turn, Notwithstanding Chinas preference for a low-
during its political campaigns the MB publicised key political profile in the MENA region,
its working relationship with Chinese officials to political upheavals during the past decade have
demonstrate its foreign policy competence. As given Beijing the opportunity to enlarge the
suggested by Wang Suolao, a Middle East expert Chinese presence in the region. From working
at the Centre for International and Strategic through multilateral fora to economic
Studies at Peking University, though Egypt diplomacy, Chinas newfound activism,
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combined with regional political actors desire to For the United States and Europe, a strengthened
diversify their economic and political partners, is Chinese role in the Middle East presents both
beginning to foster a new political dynamic in challenges and opportunities. China greatly
the Middle East. Although the United States values its economic and political partnership
and Europe continue to be the most significant with the United States and the EU, and is
extra-regional actors in the region, MENA concerned with preserving political stability and
regimes increasingly seek a higher level of fostering its economic ties in the Middle East.
Chinese involvement in the Middle East and The question is whether Chinas approach to
North Africa. stability in the region will prove compatible with
US and European policies and priorities, or will
In Iraq, Beijings engagement with the al-Maliki challenge them.
government is paying off by injecting much-
needed foreign investment into the Iraqi Ted C. Liu is former associate fellow at FRIDE.
economy while providing the Chinese economy
with additional sources of oil. While China, the
United States and the EU have often disagreed on This Policy Brief belongs to the project Transitions and
punitive measures targeting Tehran, Beijing Geopolitics in the Arab World: links and implications
continues to play a key role in the P5+1 nuclear for international actors, led by FRIDE and HIVOS.
negotiations with Iran even as China continues to We acknowledge the generous support of the Ministry
be Irans largest trade partner. Although the of Foreign Affairs of Norway. For further information
Egyptian military deposed President Morsi in on this project, please contact: Kawa Hassan,
June 2013, Beijings brief rapport with the former Hivos (k.hassan@hivos.nl) or Ana Echage, FRIDE,
president demonstrated Egypts potential not (aechague@fride.org).
only as an influential diplomatic partner in the
Middle East, but also as an attractive market for e-mail: fride@fride.org
competitively priced Chinese consumer goods. www.fride.org

The views in this publication are the author's own and do not necessarily reflect the views of FRIDE and Hivos.
www.fride.org www.hivos.net

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