China-Saudi Relations: Booming Trade

Dr. Naser al-Tamimi

Published: Updated:

Trade is at the heart of the growing links between Saudi Arabia and China, which centre on the crude oil and petrochemicals industries. The trade between Saudi Arabia and China commenced before they established their official diplomatic relations in 1990. However, since the establishment of diplomatic relations in 1990, the trade between the two countries flourished largely based mainly in Saudi oil exports.

According to the International Monetary Fund (IMF) the two-way trade between Saudi Arabia and China in the last two decades increased almost 58 times from $1.28 billion in 1990 to about $74 billion in 2012. Today Saudi Arabia remains China’s top partner in the Middle East and North Africa (MENA), for eleven consecutive years. Tellingly, the year of 2011 will be remembered as a landmark in China-Saudi relations for; (a) both countries increased their trade by almost 50 percent and managed to achieve the trade volume target ($ 60 bn) of 2015 four years earlier, and (b) for the first time since the establishment of diplomatic ties between the two countries, China overtook the U.S. to become Saudi Arabia’s top trade partner, although the US retained their position last year by only a small percentage.

The growth in trade is the result of Beijing’s soaring demand for oil and the Middle East’s hunger for lower-cost goods. The bilateral trade between China and Saudi Arabia clearly favors the latter. The value of Saudi exports into China exceeded its imports by more than US$36 billion in 2012. The bulk of Saudi exports to China comprise crude oil. China is the second largest destination (after Japan) for Saudi Arabia’s exports. China also is largest supplier of goods and services to the Kingdom. While Saudi Arabia is the largest oil supplier to China, followed by Angola and Iran. Saudi Arabia became China’s 8th biggest source of imports in 2012, supplying goods and services worth of almost $55 bn. The kingdom’s exports to China include a growing segment of non-oil products, such as chemicals used to make plastic products. Cheap consumer goods including electronics, textile and food account for most Saudi Arabia imports from China. Furthermore, increasing participation by Chinese contractors in Saudi Arabia’s construction, communication, oil, gas, and petrochemical sectors is already becoming more evident.

China’s Oil Needs

China, the country with a population of over 1.3 billion, is the world’s second largest economy. China could be the world’s largest economy, (by purchasing-power-parity, PPP), as early as 2017, according to the IMF statistics. China’s booming economy is leading to large increases in the demand for oil and China’s need for oil is growing faster than any other country in the world. Clearly, China is drawn to the Middle East because of its thirst for oil. China was self-sufficient in energy until 1993 but, after three decades of rapid growth, it has turned abroad for its growing energy needs. The country now is the second largest oil consumer after the United States. China has been also a net oil importer and is now the second largest, behind the U.S., and is expected to lead global consumption and imports in the next two decades.

China’s growing appetite for oil is the product of the country’s 30-year-long economic boom, which has seen expanding external trade, rising incomes, a growing population, and increasing urbanization. According to the IMF, over the last decade only, China’s GDP has almost increased by 6.25 times from $1.32 trillion in 2001 to an estimate of $8.25 trillion by the end of 2012 and its oil consumption has more than doubled. It has become the world’s largest energy producer and the largest energy consumer (21.3 percent of the world’s total).

The International Energy Agency’s (IEA) latest oil market report estimates that china consumed almost 9.6 mb/d in 2012. China only produced about 44 percent of that consumption. The rest was imported, and over half of it had come from the Middle East (almost 20 percent from Saudi Arabia’s alone). As for the future, the BP Energy Outlook 2030 - January 2013, projects that China is on pace to match Europe as the world’s leading energy importer by 2030, and will replace the U.S. as the world’s largest oil importing nation by 2017. Demand in China will grow by 7 mb/d to 17 mb/d in 2030, surpassing the U.S. in 2029 (U.S. demand falls by 2 mb/d to 16.5 Mb/d over the outlook period).

The Logic behind the Boom

Within this context, China views Saudi Arabia with great importance for several reasons: (a) Saudi’s history as a reliable partner with all of its customers; (b) the Kingdom is the world’s largest petroleum exporter, with current crude oil production capacity to around 12 million barrels per day; (c) the Kingdom has a vast amount of oil which China desires. China realizes that nearly 17 percent of the world’s proven oil reserves are located in the Saudi Arabia, according to British Petroleum Statistical Review 2012. (d) Saudi Arabia is the largest economy among the Arab countries (GDP estimates: $ 657 bn in 2012) and the Kingdom is also a member of the Group of Twenty Finance Ministers and Central Bank Governors, (G20); and (e) China recognizes that Saudi Arabia, the leading member of the Organization of Petroleum Exporting Countries (OPEC), will play an increasingly vital role in supplying global energy in the future.

On the other hand, Saudi Arabia is adopting a “Look East” policy and sees China as one of the most important strategic markets for its oil exports. Since 9/11 terrorist attacks, Saudi Arabia has been seeking to rebalance its relations with the world major powers. As a result, the Saudis have been pursuing a “hedging strategy” towards the United States, by developing a more robust relationship with Asian powers, China in particular. Above all, Saudi Arabia recognizes that oil demand is shifting to Asia, and China is expected to account for much of the growing demand during the next two decades. Exports to the United States rebounded since 2010, but in the long run the decline in American demand and the growing importance of China represent a fundamental shift in the geopolitics of oil.

Today, China’s oil imports from Saudi Arabia for the whole of 2012 stood at around 1.1 mb/d, which means that Saudi Arabia supplied nearly 20 percent of total crude oil imports at about 5.5 mb / d to China. Saudi officials increasingly see the writing on China’s “Great Wall”: China will be their biggest oil market in the future, making it important to cultivate good relations with China. Ali Al-Naimi, the Minister of Petroleum of Saudi Arabia, put it in a very simple argument: ‘We view China as a strategic partner and seek to strengthen and enhance such partnership.

Markets Diversication

While there is no denying that China and Saudi Arabia have extensive energy ties, it is clear that China has shown a desire to keep its oil sources diversified. China has made significant efforts to diversify its sources of oil, developing resources in North America, Russia, Central Asia, Africa, Latin America and other parts of the Middle East. The Heritage Foundation, “China Global Investment Tracker, January, 2013” shows that China’s outward investment (non-bond transactions) from January 2005 to December 31, 2012 hit $ 386 bn, almost half of them in 5 countries only, (U.S., Australia, Canada, Brazil and Venezuela).

As for Saudi Arabia, despite its aggressive policy towards China, it has also shown a desire to keep its oil sources diversified. According to U.S. Energy Information Administration (EIA) the Kingdom has approximately 2 mb/d of refining capacity overseas through joint and equity ventures in facilities in the United States, China, South Korea, Japan, and the Philippines. Saudi Arabia exported an average of 1.4 million barrel per day (mb/d) of total petroleum liquids to the United States through the first 11 months of 2012, accounting for 13 percent of total U.S. oil imports. Saudi Arabia ranked second after Canada during that time as a petroleum exporter to the United States. Other major Saudi customers in 2012 included Japan (1.1 mb/d), South Korea (0.8 mb/d), and India (0.7 mb/d). In the United States, Saudi Aramco and partner Royal Dutch/Shell own three Motiva joint-venture refineries in Louisiana and Texas. The three facilities currently have a total capacity of about 740,000 bbl/d. Saudi Aramco owns 50 percent of Motiva through a subsidiary, Saudi Refining.

Indeed, China-Saudi relations have been restricted largely to oil exports to China and limited cross investment. Chinese National Oil Companies NOCs’ activities in Saudi Arabia are very much limited to engineering services, such as pipeline and well repair, seismic data collection, and natural gas projects, which involve higher risks and capital input. The Kingdom does not allow foreign companies (including Chinese companies) to invest in its upstream (exploration and production) oil sector, but it has allowed them to invest in the upstream gas sector and refinery. Energy expert, Philip Andrews-Speed, highlights another important point; Saudi Arabia’s tight restrictions on inward investment in the oil sector and the high degree of competence for Saudi ARAMCO are likely to limit the engagement of China’s NOCs in the Kingdom. Likewise, the growth of Saudi ARAMCO’s investments in China’s refining industry will be constrained as long as China’s domestic pricing policy for oil products is unfavorable to refiners.

Economic Obstacles

Despite this rapid growing trade between the two countries, The Heritage Foundation, “China Global Investment Tracker, January 2013” also indicates that Saudi Arabia’s share of China’s total global outward investment ‘between’ 2005 and end-2012 was only 3.3 per cent and ranked in 12th position. Meanwhile the Saudi direct investments in China are still small compared to the size of the economy and the amounts of the overall FDI in China. If we exclude the importance of Saudi oil exports, the total volume of trade between Saudi Arabia and China constitute less than 1.9 percent of China’s total foreign trade in 2012. On the other hand, we find that the Saudi trade with China accounted for around 14 percent of Saudi Arabia’s total foreign trade in 2011. This trend indicates that Saudi Arabia could be the one who is courting the Chinese market, not the other way round.

It is also important to point out that when analyzing (from UNComtrade data) the composition of trade between China and Saudi Arabia, the large share of its trade is in small consumer goods. The Chinese exports do not contain sophisticated technology; their composition is similar to China’s exports to most countries in the region. Its largely low-price products, including textiles, garments and toys, which have a ready market among migrant workers and the low and middle income workers in Saudi Arabia, where they do not compete with local products as they do in Africa and some other Arab countries. On the other hand, when analyzing the composition of China’s imports from Saudi Arabia, we will find that exports of oil, chemicals, and plastics account for almost 100 percent of the total Saudi exports to China. They represent about three-quarters of the total trade volume between China and Saudi Arabia, evidence that the trade is based on oil.

One of the obstacles still facing the growing trade between the two countries that there is a significant shortfall in the numbers of the specialized companies which study and market opportunities. Furthermore, the perception that the Chinese companies lack advanced technology in comparison to western companies. Still China has a big sales job in persuading buyers that the qualities of their high-end products are just as high as that of its competitors. Faced with copycat and quality problems, many companies in China are struggling to shake off the ‘made in China’ stereotype. Additionally, with the continued U.S. and international pressure on China to revalue its currency, there are increasing concerns among Saudi economists and traders that this step will make Chinese goods more expensive at a time of high rates of inflation in the Kingdom.

Above all, the obstacles of Chinese markets to Gulf commodities and goods, especially petrochemicals; China has accused Saudi Arabia’s companies in the past of dumping petrochemicals on its markets. On the other hand, many foreign companies (including the Chinese) in Saudi Arabia still complain of an unsatisfactory regulatory climate, requirements for maintaining large local bank balances, particularly in the case of foreign-owned trading companies, and ‘Saudization’ of the work force, as specific impediments to further growth and investment.

In sum, the energy interests still largely define the China-Saudi relations but they have developed rapidly, coupled with frequent high-level exchanges with growing mutual political trust. Indeed, the relationship between China and Saudi Arabia suggests (at least for now) that this is an energy-economic partnership and not a strategic-political alliance. However, the shift in the geopolitics of oil could bring with it a shift in political relations in the long term.

Dr. Naser AL-Tamimi is a UK-based Middle East analyst and the author of the forthcoming book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He is also Al Arabiya's regular contributor with particular research interest in energy politics and political economy of Saudi Arabia, the Gulf and Middle East- Asia relations. The writer can be reached at: Twitter: @nasertamimi or Email: nasertamimi@hotmail.co.uk

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.