Can China Remake Its Image in the Middle East?

By Nicholas Lyall

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This article is the third in a serious of four that will explore the nature of China’s growing presence in the Middle East and what China’s increasing leadership means for the region’s economic, humanitarian, and security situation. Part 1 can be found here; part 2 here.

While part 2 of this article series outlined the likely continuance of China’s slowly growing political-security involvement in the Middle East, the overwhelmingly dominant driver of China’s foothold in the region is, and will continue to be, its trade and investment ties. Indeed, the growing political-security involvement is largely geared to enable a regional environment conducive to the continuity and expansion of these ties, enabling Beijing to pursue energy security on the one hand while facilitating the expansion of its signature Belt and Road Initiative (BRI) on the other.

Trade

China’s Middle East trade focus is Gulf-centered. Saudi Arabia ($47.4 billion in 2017) and the United Arab Emirates ($40 billion in 2017) make up Beijing’s top two trade partners, with Iran coming in third ($35.3 billion in 2017). Israel is quickly rising as a major trade partner ($9.57 billion in 2017), while another significant trade relationship is with Egypt ($9.26 billion in 2017). China’s trade relationships with the remainder of North Africa are relatively minor, as EU countries tend to dominate trade in the nations on the southern Mediterranean littoral. Important to note is Syria’s reliance on Chinese trade, with China being the source of 25 percent of Syria’s imports in 2017.

The future of these trade ties will be channeled through Beijing’s “1+2+3” wider BRI model: hydrocarbon-based energy as the primary focus; expanding trade and investment alongside infrastructure projects as two extensions from this primary focus; and cooperation on “new” energy, nuclear energy and space as three peripheral areas of potential promise. Indeed, China’s 2016 Arab Policy Paper, China’s first ever blueprint for its engagement with the region, listed infrastructure construction, trade and investment facilitation, nuclear power, space, new energy, agriculture, and finance as key areas of focus for Beijing in the region.

Energy

Oil exports have been the traditional mainstay of China’s trade with the Middle East and North Africa (MENA) region, driven by China’s voluminous appetite for crude that accompanied its rapid economic development through the 1990s and 2000s. China sources more than half its oil from the MENA region, positioning it as the top destination for Saudi Arabia and Iran’s oil exports. This relationship is set to continue, with the International Energy Agency expecting China to double its oil imports from the MENA region by 2035. Oil ties extend beyond a mere export-import relationship, with China’s national oil companies (NOCs) having an extensive presence in the region.

While oil is set to remain a key feature of China-Middle East energy relations, the recent epoch of low oil prices that is set to continue is heralding new forms of energy cooperation between Beijing and the region. China is the world’s largest producer of solar electricity generation equipment and is also on track to triple its nuclear generation capacity by 2020. As Middle Eastern states look to diversify their energy mix, China’s emerging world leadership in renewable energy is attracting increasing attention across the region. Burgeoning partnerships in this arena between China and Middle Eastern, especially Gulf, states will be therefore be prominent going forward.

Investment: the Belt and Road Initiative

Not only have China and the Middle East’s mutual economic interests expanded beyond oil to other forms of energy, but they are also rapidly expanding to infrastructure projects, as well as sectors like fintech and artificial intelligence. In these areas, vast Middle Eastern demand has matched with vast Chinese supply to form a synergistic relationship. The BRI is the economic network envisioned to facilitate these partnerships. The Belt and Road is aimed to create a logistical and financial trading network stretching from China across to Western Europe that will open up and link foreign markets to excess Chinese capital and capacity across a range of industries.

As mentioned in part 2 of this article series, Iran – with the proliferating presence of Chinese factories as well as road, rail, and port projects, amongst other developments – has been well-covered as the central node of BRI expansion in the Middle East. However, three other key territories in the Middle East have emerged as focal points of BRI ambitions in their own right: Egypt, Jordan and Syria, and Israel.

In Egypt, the Suez Canal will be a critical passage for the maritime road of the BRI, with more than 60 percent of China’s exports to Europe transiting the passageway. Accordingly, Chinese investment along the canal, especially by its state-owned shipping companies, has proliferated. The China-Egypt Suez Economic and Trade Cooperation Zone – established in 2007 but operational since 2015 – is set to be drastically expanded. Chinese focus is not limited to Suez, with $1.7 billion in financing for Egyptian banks being announced in January 2016 in addition to deals amounting to $15 billion being signed across electricity, space, infrastructure, trade, energy, finance, culture, media, technology, and climate change.

The Levant is also set to become a critical node in BRI as it offers an alternative route to the Mediterranean as opposed to the Suez passage. China is eyeing Syria in the long term as the key Levantine region to achieve this aim. However, the instability and high-risk environment certain to exist there over the short term means neighboring Jordan is being positioned as the alternative focal Levantine region for the immediate future. Accordingly, Chinese ties with Jordan have flourished in the past couple of years. In 2015, Jordan joined the Asian Infrastructure Investment Bank and signed investment deals across transportation, energy, and trade sectors worth more than $7 billion. The upwards trajectory of Sino-Jordanian ties resulted in the bilateral trade volume increasing 32 percent in 2017. The increasing prevalence of this relationship points to Jordan not only being a regional fulcrum of BRI, but also shows that Jordan is being positioned as the staging point for China’s impending reconstruction efforts in Syria.

A further alternative land avenue China is developing to ensure guaranteed access to the Mediterranean is a high-speed rail project in Israel, planned to stretch from Eilat on the Red Sea to Tel Aviv on the Mediterranean. Some of the motivation for the “Red-Med” project can be attributed to the Arab Spring, where the overthrow of Hosni Mubarak disrupted the ability of Chinese ships to use the Suez Canal. Israel represents a more stable transit route, although admittedly the Suez Canal will continue to be the primary commercial passage for China due to its significantly higher capacity for the transport of goods.

The Red-Med route will not only expedite the passage of Chinese commerce from the Middle East to Europe, but will also elevate Israel as a key export market for China in its own right. Chinese commercial interest in Israel has been building significantly in recent years. Sino-Israeli venture capital and private equity deals spanning both nations’ Silicon Valley-esque tech hubs, Zhongguancun and Silicon Wadi, have been gaining traction. Additionally, China has acquired multiple large Israeli companies, and cooperates with Israel across military, technology, agriculture and various hi-tech fields.

Local Concerns

Traditionally, there have been two primary issues that have hampered China’s expansion of its presence in other countries or regions, with Africa being the primary example. First, there has been the image or perception that China’s presence benefits itself far more than it benefits the host country or region. Second, there have been concerns that China’s presence fails to adequately adapt to or adopt the host country or region’s characteristics or culture. A contemporary example that illustrates these two issues was Malaysian Prime Minister Mahathir Mohamad’s recent suspension of major Chinese infrastructure projects in the country. Chinese rail and pipeline projects were put on hold over Mahathir’s concerns they represented a debt trap, with the prime minister warning that such imbalanced partnerships could lead to “a new version of colonialism.” Additionally, China’s construction of a new city complex in southern Malaysia was suspended due to Mahathir’s fears that the visa arrangement for foreigners struck under the deal for the project meant it would become in effect a Chinese city.

While moves mirroring Mahathir’s are unlikely in the Arab world, the response to China’s growing investment presence hasn’t been totally devoid of criticism. For instance, China’s upcoming freight rail project in Jordan has received some disapproval for posing minimal benefits to the Jordanian people. Here, the accusation is that some Jordanian industries may even be worse off because of the project, and that it serves Beijing’s BRI interests far more than it does Jordan’s benefit. To avoid such criticism expanding in the region, China will need to ensure it balances its needs and goals with those of its investment’s host communities. Accordingly, Chinese investment may look to afford more focus on deploying its areas of specialization and overcapacity that have direct benefit to the region’s civilians. In the Levant, examples of these areas would be solar technology, infrastructure, fintech, and passenger rail. In recognizing the potential for civilian pushback to complicate its BRI ambitions in the Middle East, China’s 2016 Arab Policy Paper emphasized that its increasing presence would be defined by the three goals of “mutual benefit,” “common development,” and the improvement of people’s livelihoods.

Looking Ahead: A More Socially Conscious Investment Paradigm?

While China’s overseas development finance still has a heavy focus on infrastructure and industry, aid related to civil society – e.g. social infrastructure and services, developmental food aid and food security, support to nongovernmental organizations, and more – has been steadily growing. In the Middle East, this could be partly interpreted as a push by Beijing to assume some of the United States’ abrogated humanitarian leadership in the region. Indeed, at the July 2018 China-Arab States Cooperation Forum, Beijing elevated its relationship with the Arab world to a “strategic partnership” by emphasizing that it plans to leverage economic development to combat the security and humanitarian issues of the region. Accordingly, President Xi Jinping announced a loans and aid package of $23 billion for the Arab region at the forum. Selling this socially-minded investment paradigm will be a key vehicle to boost Beijing’s soft power as it goes about consolidating a regional environment fertile and welcoming to its BRI expansion.

The increasing role of Chinese humanitarian assistance within its overseas development policy in the Middle East is highlighted by the case of Jordan. Within the $91 million Chinese aid package announced for Syria, Yemen, Jordan, and Lebanon by Xi in July 2018, $15 million will go to Jordan to assist with the plight of refugees in the Kingdom. Further to this, China funded a $1.5 million World Food Program initiative in 2017 to feed newly-arrived Syrian refugees in Jordan. Chinese aid to the Kingdom in recent years has also assisted in the construction of Balqa Hospital, housing for the needy, and the expansion of the water supply network in Rusayfah.

However, this more socially-conscious economic presence may need to go beyond mere aid handouts in order to ensure that China’s booming investment presence remains well-received across broad swathes of Middle Eastern communities. Beijing has seemingly recognized this imperative, as a key feature of the 2016 Arab Policy Paper’s goal of “Cooperation on Production Capacity” was that Chinese transfer of its excess production capacity to the Middle East should be “employment-oriented.” In other words, it should produce jobs for the domestic population as opposed to merely exporting Chinese labor to implement projects.

In keeping with this stated aim, reports suggest Chinese investment in Jordan has already created 10,000 jobs for locals. Cases like the Chinese-funded shale oil project – predicted to create several thousand jobs for Jordanians – are set to continue this trend. Additionally, China’s September 2018 signing of an agreement to finance the expansion of the Al-Salt road overturns the traditional Chinese investment modus operandi of such projects being Chinese designed and implemented – the Al Salt road expansion will be driven largely by local companies, in coordination with Chinese counterparts.

Especially in the Levant, civilian populations are increasingly restive about a lack of employment opportunities. China will thus likely look to build on the above momentum and promote the joint-creation and mutual benefit aspects of its presence to create a more sustainable future for itself and the BRI in the region. Achieving a presence defined by genuine mutual benefit would be a notable boost for China’s efforts to promote itself as a responsible global leader.

Nicholas Lyall is an Amman-based researcher, where he is leading a research project on the opportunities for China’s increasing role in the Levant to address the region’s humanitarian and economic challenges. He can be contacted here.