China’s Growing Economic Interest in the Middle East
By Jonathan Selling
China’s influence in the world is growing. Under Xi Jinping, the Chinese government has initiated many large and flashy projects to expand China’s reach. Notably, the Middle East looms large in the nation’s projects. As a nearby region, and the source of most of China’s oil, the Middle East plays an important role in China’s economic future. China has declared the Middle East a “neighbor region,” indicating the importance the Chinese government has placed on the Middle East.
While this new engagement and investment between the two regions has garnered a lot of attention-- how big is it in reality? Does this new development signal China’s emergence as a regional power-broker in the region? Or is it a momentary bout of over-extension by a rising nation that has taken on too much too soon? In this series, I hope to explore the various permutations of Chinese engagement with the Middle East and North Africa (MENA) region. This series will seek to explain China’s investment and objectives in the region, as well as what China’s newfound engagement means for American involvement in the region, and whether the two nations’ involvement can coexist.
Belt and Road Initiative
In this first article, I will explore Chinese economic interest and investment in the Middle East, specifically the Belt and Road Initiative (BRI), which currently is China’s foremost venue for investment in the region. While undoubtedly an important subject, this initial article will not tackle China’s interest in oil. Oil remains China’s overwhelming priority in the Middle East, and therefore is deserving of its own analysis, which will come in a subsequent article. I will currently focus on how China is using its newfound economic strength in the region, and what China is hoping to gain from this endeavor.
Despite the new prominence of the concept, Chinese investment in the region spans decades. As a nearby region, the Middle East has long figured heavily in China’s foreign policy. As early as the 1980’s, Chinese firms were investing in the MENA region; although at the time these investments were mostly energy related. China also engaged in significant exports to the region, mostly in the realm of military equipment, throughout the 1980’s.
BRI has been promoted as the main vector for Chinese engagement in the MENA region, and is the only area of systematic investment in the region. As such, it is often seen as the end-all-be-all of China’s interest in the region. While this is not true, and non-BRI investments in the Middle East do exist, these other investments are comparatively small and largely ad-hoc.
The Chinese government has eagerly promoted BRI since its inception in 2013, often comparing it to the Marshall Plan. While BRI is often presented as the start of Chinese interest and investment in the region, China’s interest long predates the launch of the BRI initiative. Serious economic interest dates back to the 1970’s and rose steadily over the following decades before skyrocketing in the 2000’s. Much has been said about BRI, especially as it relates to Chinese strategic aspirations. However, this strategic aspect of BRI is often grossly overstated, especially by panicked American policy makers, and nationalistic Chinese officials. The two groups have their own, seemingly opposite, reasons to make BRI out to be a massive effort to spread Chinese influence far and wide. This is an effort to dislodge the United States as the world’s leading state. While there are strategic aspects of BRI, the initiative is fundamentally a vehicle for China to find new markets to relieve domestic economic pressure. The initiative also aims to secure China’s supply of energy resources through upgrades to the region’s infrastructure. With these objectives, BRI can be better described as a policy designed to influence Chinese domestic politics and economics, rather than international dynamics.
Trade in MENA
China suffers from over-production in multiple industries, including steel, cement, and aluminum. Normally, this would cause a recession, as excess production shuts down due to a lack of buyers--but if export markets can be found, then it could be possible to forestall this. BRI was conceived as an answer to overproduction. China has found itself in a bind economically. By propping up industries and artificially inflating their output, the Chinese government has set up a situation where a large and painful correction looms.
This potential correction is often likened to the popping of the Japanese asset price bubble in 1991 due to the similarities of overproduction in both countries. The popping of the asset bubble led to what is called “the lost decade”, where the Japanese economy barely grew throughout the 1990’s and 2000’s. Clearly, the Chinese leadership wants to avoid this-- as any government would. However, for the Communist Party, it is even more essential to evade this lack of growth. Throughout the last thirty years, the Party has based much of its legitimacy on delivering economic growth. Thus, a slowdown, like the one Japan experienced in the 90’s, could prompt a crisis of legitimacy in China and even imperil the survival of the Communist Party.
While Chinese economic interests span the region, it is primarily concentrated in several states. The UAE, thanks to its status as a regional financial hub, is the typical entry point for Chinese money. From the UAE, funds spread out across the region. Iran also plays a major role in China’s designs on the region, partially due to the two countries’ mutual dissatisfaction with the U.S.-led world order, and also because of Iranian oil reserves. Finally, Saudi Arabia, China’s largest oil supplier, plays a major role in the country’s plans for the region because of Chinese dependence on those reserves.
Opening new markets comprises a major new component of China’s economic interest in the region. The Middle East is a large market for Chinese consumer goods and boosting them there has a strong potential for growth.
China’s Strategy
A significant long-term goal of the Chinese government is to get more global buy-in to Chinese manufacturing standards. This will make Chinese goods more competitive, as foreign goods will have to conform to Chinese standards, giving Chinese-made products a natural advantage and allowing China more power in this realm. This area mostly concerns infrastructure and capital goods, such as train and subway cars. Currently, standards are set and dominated by American and European manufacturers-- and China hopes to be able to change this. If China gets a country to adopt its standards, it now has a captive market, as the cost of switching standards is too high for the country. Furthermore, it raises the barriers of entry for non-Chinese firms, as they have to redesign their products. To this end, China seeks out developing economies that will be willing to accept Chinese standards. Developing nations generally are not tied to any national standards, which provides an opening for China. This is especially true when these products are offered at a steep discount over comparable European or American products.
However, this strategy does present some issues for China. Most pertinently, it is difficult to generate profits when selling products at a loss. Developing economies know full well that Chinese standards are not the global standard, and that in buying these products, they may be limiting their options in the future. The natural choice to maintain flexibility in this situation is to still buy goods produced to western standards. To get around this, China has generally needed to offer their products at greatly reduced prices or even essentially donate them. While this works well enough if the Chinese government is only looking to prop up domestic manufacturers, it is much less sustainable if one is looking for any sort of economic return on investment. With Chinese debt levels steadily increasing, the question arises of just how much longer the country will be able to maintain this level of spending.
This brings us to the inconvenient fact that much of China’s current economic investment in the region is just not very good at actually making a profit-- and often times is outright costing China money[1]. While the concept of debt trap diplomacy is fiercely contested, the fact remains that China is offering staggering amounts of risky loans, many of which are unlikely to be repaid. Unlike with a person or a business, it is much easier for a sovereign state to renege on its debts. Other states have limited options to collect, and often the best they can hope for is to receive a small portion of the owed funds. This is not a recipe for profit, and evidence suggests that the Chinese government is limiting its investment for this very reason.
Future Role China May Play
The prospect of default is made worse by the fact that Chinese government debt loads are rapidly increasing, and have become an issue for the country. While they are not yet at crisis level, the government is trying to reduce expenditures and to this end, foreign investment is being cut; especially riskier loans. Similarly, the government has become more concerned about the health of the Chinese economy, especially as reforms undertaken in recent years have failed.
Even before COVID-19, the various projects that make up BRI were rampant with funding problems and were continuously delayed. At the party’s fifth Plenum, BRI dropped in importance, potentially signaling a retrenchment from the expansive initiative, Although a complete abandonment of investment in the region, or abandonment of the idea of BRI is unlikely, slowing economic growth and rising costs at home may reduce how much the government is capable of spending on overseas investment. Additionally, Chinese projects have earned a reputation for their poor quality, which has not endeared them to potential customers.
While BRI may be poised to be relegated to the pile of unsuccessful government projects, Chinese interest in the Middle East will only continue to grow in the decades to come. Even if China’s interests return to only securing an oil supply, this will guarantee that China will need to play a bigger role in the region in coming years. Chinese investment in the region is ultimately driven more by domestic and economic rationales, rather than foreign policy grand strategy. The Chinese economy needs new markets, and the Middle East is an attractive area. However, the heavy investment in the region by China is likely to wane from it's 2010's peak. Chinese economic expansion has been driven by cheap credit and strong growth rates. As the economy slows and other spending priorities become more important, expect to see Chinese international investment slow.