x Abu Dhabi, UAEThursday 27 July 2017

Three strands run through the new Silk Road

China’s economic presence in the Middle East is fast expanding. Everywhere you look, the interdependency between the regions is strengthening.

“[If] you seek success then head for the land of the east,” said Ibn Battuta, who travelled the Silk Road in the 14th century. Universal History Archive / Getty Images
“[If] you seek success then head for the land of the east,” said Ibn Battuta, who travelled the Silk Road in the 14th century. Universal History Archive / Getty Images

When the German geographer Baron Ferdinand von Richthofen coined the term “Silk Road” in 1877 to depict the 2,000-year-old east-west trade artery built on the exchange of Arabian stallions and fine fabrics, he could never have imagined that 137 years later one in every three new cars in China would be fuelled by Middle East oil.

China’s economic presence in the Middle East is fast expanding. Chinese engineers assembled the 26,000 reflective glass panels, each individually hand cut, for the 828-metre-high Burj Khalifa, the world’s tallest building. Chinese goods are big business in the modern shopping centres in Dubai and the old bazaars and souqs in Egypt and Morocco. Everywhere you look, the interdependency between the regions is strengthening.

The relationship has three distinct strands.

The first is a thirst for oil.

China’s rapid industrial growth and continued urbanisation have vastly increased the country’s energy needs. In 1993 China became an energy importer. By the end of 2013 it had overtaken the US as the world’s largest importer of crude oil. China imports more oil from the Middle East than any other region. The International Energy Agency expects China’s imports of Middle East oil to jump from 2.9 million barrels per day in 2011 to 6.7 million in 2035, equivalent to 60 per cent of today’s total US oil imports. Saudi Arabia is the largest source of China’s oil imports.

Saudi oil companies own refineries in China, while Chinese firms have begun to invest in Saudi infrastructure and industry. In late April, Abu Dhabi signed a joint oil production deal with China National Petroleum Company to boost output from ageing oilfields.

The second strand is the desire to sell goods.

Mena-China trade has increased 50-fold in the last 20 years to nearly US$300 billion in 2013. Beyond oil, the Middle East is looking to build economies that have the capacity to create jobs for its large, youthful populations in sectors including tourism, technology and aviation. Saudi Arabia’s exports of plastics, chemicals and pharmaceuticals are already growing faster than oil exports.

As far as Dubai’s imports are concerned, China leads the list of trading partners, followed by the US then India. This is turning the city-state into a regional hub of the new Silk Road. Negotiations for a free-trade agreement between China and the GCC appear close to restarting, after a hiatus of more than two years. Given that China is now the GCC’s main trade partner, this is encouraging. China can play a role in supporting Middle East economic diversification.

The third strand is the development of closer financial links.

The renminbi is becoming the currency of choice along this new Silk Road. As the trading relationship between the Middle East and China grows, companies are beginning to weigh up the advantages of financing trade and investment flows in renminbi, as opposed to dollars or euros.

With the Chinese currency already almost fully convertible, there are clear efficiencies. Chinese steel is being used to build Abu Dhabi’s Midfield Terminal, the eagerly awaited multibillion dollar extension to the airport and key pillar of its 2030 economic vision. The steel is being paid for in renminbi, reducing the total cost of each shipment. In the longer term there is the prospect of commodities contracts, including oil, being written wholly or in part in renminbi.

Greater interdependence is the source of much opportunity for China and the Middle East. It is no surprise that high level delegations from both regions have worked to deepen relationships in recent years. That Saudi Arabia’s King Abdullah in 2006 made Beijing – not Washington – his first overseas destination underscores China’s importance to the Gulf. The shared history is long-standing.

The first evidence of the silk trade dates back to fibres found in the hair of an Egyptian mummy in 1070BC. During the Middle Ages, large merchant ships made of bamboo travelled the seaways between China and Egypt filled with Persian rugs and Chinese porcelain.

During this golden age, the Middle East possessed enormous economic power. To unlock the region’s formidable growth potential today, the private sector must become the main source of growth.

Ibn Battuta, the 14th-century explorer whose travels along the Silk Road took him to China, said: “[if] you seek success then head for the land of the east”. Today, the reawakening of ancient trade links could help the Middle East secure lasting prosperity.

Georges Elhedery is HSBC’s head of global banking and markets, Mena

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