The Saudi deputy crown prince’s Asia trip: Rebooting China-Saudi economic ties
Saudi Arabia has been China’s largest global supplier of crude oil and its biggest trading partner in the Arab world and MENA region
Since the establishment of diplomatic relations between China and Saudi Arabia on July 21 1990, their economic ties have made rapid progress. The two sides maintain frequent political exchanges and expand areas of cooperation continuously.
The logic behind this steady growth is simple: China needs to import large quantities of energy, while Saudi Arabia is the world’s largest oil exporter and the biggest petrochemical producer in the Middle East.
Saudi Arabia became the centre of gravity for Chinese economic activities in the Middle East largely as a result of its regional and global status or as Chinese President Xi Jinping summarized it as “Good Partners for Common Development.” “An oil kingdom with huge oil and gas reserves, a country with time-honored history which is the birthplace of Islam, and the magnificent setting sun against the vast expanse of the desert: these are the images that Saudi Arabia brings to our mind,” he said.
Saudi Arabia has been China’s largest global supplier of crude oil and its biggest trading partner in the Arab world, Middle East and North Africa (MENA) since 2002. In 2013, China became Saudi Arabia’s number one trade partner for the first time. Two-way trade reached $69.1 billion in 2014, growing by 230 times since the establishment of diplomatic relations in 1990.
Today, nearly one in seven barrels of crude oil China imports comes from Saudi Arabia and one out of every seven dollars the Kingdom earns from its exports comes from China. Last year, China imported 6.7 million barrels per day (b/d) of crude oil, with Middle Eastern countries accounted for almost 51 percent. Saudi Arabia serves as China’s single largest oil-trading partner, supplying over 15 percent of the country’s total annual crude imports.
The logic behind this steady growth is simple: China needs to import large quantities of energy, while Saudi Arabia is the world’s largest oil exporter and the biggest petrochemical producer in the Middle EastDr. Naser al-Tamimi
Yet China-Saudi relations have been restricted mainly to energy exports, Chinese manufacturing goods, and limited cross-investment. Certainly the decline in global oil prices has hit the trade between Saudi Arabia and China very hard. The volume between the two countries dropped significantly to $51.6 billion in 2015, a decline of over 25 percent from the previous year.
Saudi Arabia Deputy Crown Prince Mohammed bin Salman’s visit to China, beginning Tuesday, is set to include the kingdom’s participation at the G20. The visit represents a significant opportunity for him to advance relations with China while marketing his reform agenda or Vision 2030 during the 11th G-20 summit, scheduled to be held on September 4-5 in China’s eastern city of Hangzhou.
Energy is set to top the agenda during his trip. Saudi Aramco is aggressively looking to expand its activities in China, especially in the refining sector. The company in its latest annual review 2015 says that it envisages “a modern ‘silk road’ business alliance with companies in China.” In the words of Clyde Russell, Asia Commodities Columnist at Thomson Reuters, Saudi Aramco may be trying to pursue a strategy in China similar to what has worked well for it in the United States.”
Interestingly, the Daily Telegraph recently reported that Aramco hopes to entice China’s state-owned, Sinopec Group, the world’s largest refiner, to become a strategic shareholder of Aramco via its planned initial public offering in return refinery deals.
Banking and financial opportunities are other promising areas for both the countries. Chinese banks are looking at global markets for growth, while Saudi government is set to borrow billions to fund the budget deficit. In addition to this many of the Saudi and Gulf companies need new sources of financing in light of the scarcity of financial liquidity as a result of falling oil prices.
In June 2015, the Industrial and Commercial Bank of China Ltd (ICBC) set up a branch in Riyadh, becoming the first Chinese bank in Saudi Arabia. Then in mid-August 2016 Mobile Telecommunications Company Saudi Arabia (Zain KSA) secured a $600 million loan ICBC. In June this year, ICBC lent $1.5 billion to state-controlled utility Saudi Electricity Co.
Despite this optimistic view, in the short and medium term there are still challenges for the development of relations between China and Saudi Arabia. The most serious one is China’s sever economic slowdown, or as the Financial Times warned recently that; US-style credit crunch or Japan-style grinding malaise is not a far-fetched scenario.
Another potential problem is protectionist policies. As long as there is no free trade agreement between Beijing and the Gulf states, China could resort to protectionist measures in the future, especially toward the petrochemical producers.
Competition is the third challenge; Saudi Arabia is now facing competition from Russia, Iraq, and even Oman for the Chinese market share. The market shares of the three countries in China have grown more than that of the Kingdom.
In 2010-2015, Saudi Arabia’s crude oil exports to China increased by about 118,000 barrels/day. During the same period, Russia’s crude oil exports to China had a growth rate of up to 546,000 barrels/day, while Iraq had a growth rate of up to 418,000 barrels/day, and Oman 326,000 barrels/day.
Above all, China’s relations with Iran will remain a source of concern for the leadership of Saudi Arabia.
Dr Naser al-Tamimi is a UK-based Middle East analyst, and author of the forthcoming book “China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?” He is an Al Arabiya regular contributor, with a particular interest in energy politics, the political economy of the Gulf, and Middle East-Asia relations. The writer can be reached at: Twitter: @nasertamimi and email: firstname.lastname@example.org