Trade ties between China and region have grown beyond oil and are set to expand in coming years.
China to develop non-oil trade with Middle East
The Middle East's oil-fuelled economies have stuttered in the past year but with oil prices rising from their earlier lows, the outlook is again promising. The rise in prices is often attributed to China's oil-hungry economy and it is tempting to talk of a growing relationship between China and the Middle East built purely on oil. But this would be wrong. True, China buys nearly a quarter of its daily oil consumption from the Middle East's oil producers, and in spite of China's best efforts to diversify its energy sources, the country's factories will grow increasingly reliant on huge oil fields in Iran, Kuwait and Saudi Arabia.
But the ties that bind China and the Middle East are more complex than suggested by the oil tankers steaming between Ras Tanura in Saudi Arabia and Guangzhou. Trade between China and the Middle East has surged in the past few years. Oil is sent east, but almost as many consumer goods are sent west. China's exports to the Middle East have surged to US$60 billion (Dh220.38bn) from $13bn in the past five years, and China has overtaken the US as the world's largest exporter to the Middle East.
In China, it is private entrepreneurs who are responsible for the growth in trade with the Middle East, rather than policy makers sitting in Beijing. One of the great myths about the Chinese economy is the importance of the government in driving reform. In truth, the country's policy makers are more likely to be following the lead of a dynamic private sector. Yuan Chun is typical of these entrepreneurs. Mr Yuan sells porcelain from his small shop in Dubai. He used to sell blue porcelain to mainly US and European customers. But as demand dried up he quickly switched his stock and now sells mainly red porcelain to Middle-Eastern and African customers who have different tastes but continue to buy in spite of the crisis.
Private entrepreneurs from the Middle East also play an important role. Nearly 200,000 Middle-Eastern traders visit the Chinese coastal city of Yiwu annually, buying the type of cheap consumer goods that were once considered unaffordable in cities such as Egypt and Dubai. They find it easier to apply for visas to visit China than they do for either the US or Europe. But while trade is flourishing, investment between the two regions is not. Chinese companies have mainly focused on commodity assets, such as Chinalco's recent attempt to buy a stake in Rio Tinto. In the Middle East, commodity assets are mainly in state hands and not for sale.
Moreover, even if a Chinese manufacturer is looking to invest abroad, he is more likely to target a factory in Germany than Kuwait. Middle-Eastern investors face similar challenges when trying to invest in China. Their private equity funds have successfully acquired firms ranging from Malaysian banks to Pakistani telecoms. But it remains difficult, even rare, for foreign companies to acquire Chinese companies because of the difficulty in receiving official approval.
In this, Middle-Eastern investors face the same restrictions as other foreign investors. So while trade between China and the Middle East is flourishing, it is too early to suggest that China is ready to supplant either the US or Europe as the Middle East's largest commercial partner. But Dubai can only benefit. The emirate's economy has certainly suffered from the contraction in credit over the past year but like Hong Kong in 1997, Dubai is discovering that its future lies in intermediating trade, not building apartment blocks. And the emirate is more adapted to the flow of goods between China and the Middle East than it is adapted to credit.
Dubai's relative size also means that it takes just a small rise in the region's trade to have a large impact on the emirate's economy. Dubai has achieved much in the past decade, but its $80bn economy is still smaller than those of many fast-growing Chinese cities, not just Beijing and Shanghai, but also Guangzhou, Chongqing, and Shenzhen. And geography favours Dubai, with many Chinese companies viewing the emirate as a springboard into Africa. For instance, 37 per cent of Chinese exports are destined for North African countries. (The figure rises to 50 per cent if Nigeria is included to the list).
It makes more sense for a Chinese company to service these clients from Dubai than it does Johannesburg. It is the opening of new trade corridors like this that best describe what strengthening relations between China and the Middle East truly mean for the region, and global economy. One day, the flow of goods between Guangzhou, Dubai and Cairo might be as important as was the flow of goods between New York, Liverpool and Rotterdam.
Ben Simpfendorfer is the chief China economist for the Royal Bank of Scotland and author of The New Silk Road