How GCC countries can benefit from China’s Belt and Road plan
In 2016, China released a blueprint for building its economic and financial relations with the Middle East, titled China’s Arab Policy Paper.
But to forge links between the two geographies is nothing new: a long history since 200BC is witness to the strong ties and engagement of the Middle East with China along the old Silk Road trading routes. The Chinese blueprint proposes the establishment of a “1+2+3” co-operation framework. One is to build on energy co-operation as the core, while infrastructure, construction and trade and investment facilitation are the second wing of the policy. Breakthroughs in the fields of nuclear energy, space satellite and new energy that China intends to achieve in the Middle East is the third part. China’s “Belt and Road” initiative is an embodiment of this vision: it is China’s modern strategy of revitalising the Silk Road with investments in infrastructure, roads, highspeed rail, ports and airports to transform economic geography from China to Europe, encompassing parts of the Middle East.
China has created an imposing array of international financial institutions – the Asian Infrastructure Investment Bank along with the China Development Bank, the China Export-Import Bank and others – to fund its ambitions. The countries and businesses on the new Silk Road are bracing for the initiative to shift growth and economic diversification to a new phase. How can the Middle East and GCC countries benefit and participate?
Banking co-operation
Since 2014, the Arab countries have signed more than $50 billion in contracts with China.
More recently, China has listed Egypt as one of the top five destinations for mergers and acquisitions activity under the initiative. The UAE, specifically Abu Dhabi Ports in its capacity as a regional trading hub, has signed a partnership with Cosco, China’s largest shipping company to build new terminals to support the expected rise in flow of trade along the new maritime routes.
About 60 per cent of China-UAE trade is re-exported to Africa or Europe, which will support the initiative’s purpose, while making the country – and particularly Dubai – an important component of China’s trade strategy in the Middle East, Africa and beyond. The strong presence of Chinese banks in the GCC provides the financial underpinning for deeper and wider linkages. Banks in the GCC should use their financial muscle to make use of this opportunity to provide co-financing with Chinese banks for trade, investment and economic activity in the B&R countries.
This would open wide opportunities for GCC infrastructure, logistics, services and real estate development companies that are internationally competitive. We should develop a Shanghai I regulatory framework rather than a Basel IV.
Use the B&R to drive economic diversification
As the B&R takes shape, GCC countries can partner with China to drive greater economic diversification through privatisation and public-private partnerships and the transfer of technology.
Energy has obviously been a key element of the relationship: among China’s 10 largest sources of crude oil imports, four of them are GCC countries. China’s project finance in the Middle East has mostly been in energy and natural resources, similar to investments in other B&R countries.
However, there is a massive opportunity, as many countries along the B&R need to improve their infrastructure stock. This is an opportunity for Chinese and GCC sovereign wealth funds to partner, co-invest and co-finance, as well as develop public-private partnership co-financing of B&R development and infrastructure projects. More important is to build for the future. The GCC countries should build on China’s growing leadership in renewable energy – solar, notably – artificial intelligence and blockchain; augmented and virtual reality; FinTech; technologies to combat climate change; robotics and autonomous vehicles; and life sciences, to diversify their economies and participate in the emerging Fourth Industrial Revolution. A GCC-China free trade and investment agreement spanning these areas would build a new platform of co-operation between the two. The New Silk Road is a Digital Silk Road, it is a Tech Silk Road.
Develop and use the PetroYuan
The B&R will also boost the internationalisation of the renminbi by encouraging the currency’s use in both trade and financial transactions. Chinese and GCC banks can efficiently finance China-GCC trade, including oil (GCC, Iran, and Iraq now account for 60 per cent of China’s imported oil, with China now the second largest oil export market for these countries).
Set up an Arab Bank for Reconstruction and Development
Looking beyond the B&R initiative, the AIIB, the EIB, EBRD and other multilateral financial institutions, working with GCC sovereign wealth and economic development funds can participate in the finance of the reconstruction and development of war-torn Middle East nations.
A Middle East reconstruction and development plan embodied in an Arab Bank for Reconstruction and Development, closely integrating the private sector, would be a growth lifting initiative, facilitate the transfer of knowledge and technology, be a major source of job creation to fight Arab youth unemployment, alienation and extremism, alleviate poverty, and start addressing the dramatic and overarching political-social and economic issue of the more than 15 million refugees and forcibly displaced people in our region.