China’s relations with the Middle East: gold mine or minefield ahead?

While Sino-Arab economic ties have deepened, China is nowhere near replacing the US in the region
Beijing is trying to balance its dependence on Middle East oil with increased arms sales to the region, a development that may prove significant

James David Spellman

Published: 5:30am, 11 Apr 2024

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Flush with capital, investors throughout the Arab world are frantically investing in technology and infrastructure to replace oil as a locomotive of growth. China is among those swept up in the gold rush, jockeying for capital and access to markets as the world’s second-largest economy leverages its relations with Arab nations as a counterweight to the West.

This scramble to broaden and deepen Sino-Arab economic ties involves the biggest players in the Gulf, including 10 of the region’s largest sovereign wealth funds whose combined assets total nearly US$4 trillion. Such funds invested more than US$2.3 billion in Greater China last year, compared with about US$100 million in 2022, according to Global SWF, a database tracking the world’s sovereign wealth funds. Together, China and members of the Gulf Cooperation Council generate more than one-fifth of global gross domestic product.

The spurt of investment follows Chinese President Xi Jinping’s visit to Riyadh in December 2022, when several agreements were signed with the Saudis. The optics affirmed both powers’ overlapping ambitions.

Mergers and acquisitions are a major path for investment. The Middle East’s outbound M&A activity in China grew in 2023, with at least 16 deals worth US$8.5 billion, a significant increase compared to a single US$300 million deal in 2022, data from London Stock Exchange Group shows. This is the highest-ever annual total for Middle Eastern M&A activity in China since records began in the 1980s. In the other direction, Chinese companies also made more direct investment in Saudi Arabia in 2023 than ever before. All are foundations for the long haul ahead.

Hong Kong is hoping that family offices from the Middle East will join the fray, too, as those funds increasingly look to Asia for opportunities.

While the Sino-Arab investment flows are historic in scope, scale and pace, they still pale in comparison with those between the United States and the Middle East. In 2022, US foreign direct investment in the Middle East reached US$94.7 billion, while capital flows from the Middle East into the US totalled US$41.6 billion; manufacturing, mining, real estate and nonbank holding companies attracted the most capital.

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Arab leaders’ foreign policies remain focused on the West for armaments, markets, technology and strategic support, despite these leaders’ efforts to assert greater latitude. This is true even as rivalries have sharpened among Saudi Arabia, the United Arab Emirates and Qatar. Meanwhile, the West is pivoting towards the Indo-Pacific to contain Beijing’s influence while diversifying suppliers away from China.

The war between Israel and Hamas, the attacks by Houthi rebels on ships navigating the Red Sea, and Saudi Arabia’s prioritisation of a security guarantee from the US in exchange for normalisation of relations with Israel all attest to how the US continues to be the fulcrum on which stability in the Middle East rests. This reality complicates what China can achieve in the Middle East.

However, national security commitments typically follow financial transactions and vice versa. Military allies are likely to trade more with one another than with non-allies. Security arrangements assure those involved that they will be protected from disruptions. Trade is a carrot to lure a reluctant ally and it can increase wealth for all concerned, with any surplus being spent on building up defence. Eventually, security and trade become hard to untangle.

World needs China to take up diplomatic gauntlet in Middle East

China is counting on this, as the dynamics unfolding between Beijing and the Middle East suggest. Leaders are leveraging shared concerns over the destabilising influence of radical Islamist groups. China has increased arms sales to the Gulf, including of Dongfeng ballistic missiles and Wing Loong bomber drones, and promoted joint weapons production. In August last year, China and the United Arab Emirates held their first joint air drill.

While China is proud to point out the role it played in restoring diplomatic ties between Saudi Arabia and Iran in March last year, that agreement was largely driven by the self-interest of Riyadh and Tehran – namely, Saudi anxiety over realising the country’s Vision 2030 for socioeconomic development, and Iranian insecurity amid anti-government protests and fears that Beijing was aligned too closely with Riyadh. Nevertheless, the Saudi Arabia-Iran rapprochement has enhanced China’s clout.

Wang Yi, China’s top diplomat, attends a meeting with Saudi Arabia’s national security adviser Musaad bin Mohammed al-Aiban and Ali Shamkhani, then secretary of Iran’s Supreme National Security Council, in Beijing on March 10. Photo: China Daily via Reuters

The future of Sino-Arab relations is challenged by an inherent friction: the inequality of exchange. China, the world’s largest oil importer, depends on the Middle East for about half of these imports. Saudi Arabia is its main supplier in the region, while Iraq, Oman, Kuwait and the UAE are among its other key suppliers. This dependency is deepened by the importance of the Gulf to China’s Belt and Road Initiative.

But China is finding clever ways to make its dependence on the Middle East less of a constraint by bartering its armaments for Gulf countries’ oil and gas.

Moreover, ties with Opec+ members provide China with another avenue to deepen relations with Russia, as US warnings about Chinese support of Russia’s military industrial complex grow louder.

Yet China is also trying to displace Russia as the preferred alternative source of armaments, against the complex backdrop of China and the Gulf States pursuing various triangulation strategies in the Middle East. Chinese arms sales to the region are up 80 per cent over the last decade, and involve every US ally there except Israel.

Two millennia ago, China and the Arab world had established a bridge through the Silk Road for trade, cultural and scientific exchanges. The Prophet Mohammed advised followers to seek knowledge as far as China. History is repeating itself somewhat, with new plots and undercurrents.

James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington, DC