China will expand energy, economic partnerships — not security — in Middle East

To:

Al-Monitor Pro Members

From:

Howard J. Shatz 

Senior Economist, RAND Corporation 

Date:

June 30, 2022

Bottom Line:

China has focused on economic engagement in the Middle East, attempting to maintain good relations with every country in the region. Although it has established a special focus on Iran, at least on paper, it has declined to become embroiled in the region’s many interstate disputes. 

With the United States focused on security issues in Asia and Russia embroiled in its war on Ukraine, China may have the opportunity to create stronger security relationships. It may engage in more arms sales, exercises and other military interactions, but China’s main security interests focus on its immediate neighborhood.   

China’s most serious challenge is the reform of its economy — something at which it has so far not succeeded. Despite the many messages about the Belt and Road Initiative, one of its main motivations, if not the main motivation, has been to strengthen China’s own economy. Rather than an investment effort, as often portrayed, it is largely a lending and contracting effort meant to stimulate China’s industrial base and employ Chinese labor. This focus on lending and construction can be seen clearly in the Middle East. 

It also needs to maintain the ability to import hydrocarbons, with about 90% of its oil consumption in 2020 imported and Saudi Arabia and Russia the leading source countries. 

Rather than losing focus by increasing security activities — and potentially alienating some of the countries with which it does business, China is likely to continue to maintain an emphasis on economic activities in the region and avoid becoming embroiled in regional disputes. 

Data in this executive brief are from the Fall 2021 version of the American Enterprise Institute – Heritage Foundation China Global Investment Tracker, dated Feb. 21, 2022, which includes transaction-level investment and contracting data for BRI activity from 2013 through 2021. 

Background Facts: 
  • Most Chinese financing activity in the Middle East related to the Belt and Road Initiative from 2013 through 2021 is contracting rather than investing, with contracting amounting to $122 billion and investments totaling $33 billion
  • Investments in 11 countries are concentrated in the economically advanced countries of Israel (31%), UAE (22%), and Turkey (11%). 
  • But capitalizing on the opening of the Iraq oil sector and China’s need for reliable oil supply, investments in Iraq are also 11% of the investment total. 
  • At $17.1 billion, energy investments account for more than 50% of total investments
  • Contracts in 15 countries are more evenly distributed than investments, although four countries capture the largest share: Saudi Arabia (20%), UAE (17%), Egypt (13%), and Iraq (10%). 
  • As with investments, energy captures the largest share of contracts, at 41%, followed by construction (when projects are identifiable, generally of industrial facilities) and property development, at 19%, and then transport projects, at 18%. 
  • Despite their long-term agreement, Iran has proved an uninteresting country for China: Investment has totaled $950 million, less than 3% of China’s investment in the Middle East, and contracting activity has totaled $11 billion, only 9% of China’s contracting in the region. 
Alternative Scenarios: 

Scenario 1: China may shift to more intensive security cooperation with Iran, such as by greater involvement in Iran’s ports, including making them more suitable for the People’s Liberation Army Navy, thereby safeguarding oil shipment lanes and even serving as an irritant to the United States, which is active in the Persian Gulf and which has headquarters for US Naval Forces Central Command in BahrainReinforcing Iran militarily could alienate Saudi Arabia and the UAE, both major oil suppliers to China. China also has a deepening business and investment relationship with Saudi Arabia and is likely to want to continue its balancing act between Iran and the Gulf Arab states. 

Scenario 2: Rather than focusing on just Iran, China may shift toward trying to become a security provider to all its partner countries in the Gulf region, seeking basing rights on both sides of the Persian Gulf and seeking a more active role in diplomacy and mediation among the disagreeing parties. Although China may seek greater basing or security cooperation in small steps, it is unlikely to challenge the United States among the Gulf Arab states. They use predominantly US military equipment, which is generally superior to Chinese equipment, and would find it difficult to switch. Furthermore, a more active Chinese diplomatic role could also end up alienating countries that see China as standing in their way; while the downsides for China are strong, there would be few upsides for now. In addition, such a role could distract from China’s continued economic reform efforts and its security efforts focused on its Asian neighborhood. 

Scenario 3: A third scenario would be that, facing increasing financial losses from its foreign financing activities, China pulls back from these activities, limiting its contracting activities and investments and refocusing its economic attention to other regions. China did, in fact, lower its contracting activity after 2018, when it peaked at $21 billion. But after a covid-induced low in 2020, contracting activity rose again in 2021. The same is true of investment activity. China may well increase its activities further. Ensuring oil and gas supplies are a priority, and with high oil prices and the potential lifting of sanctions on Iran, the oil producers of the region have even more money to spend and more ability to borrow. 

Conclusion - Most Likely Scenario: 

China will seek to take small steps toward increasing its security footprint through a variety of means, but it is unlikely to shift its main efforts away from building economic relations, focusing on energy and infrastructure development and construction. With an enormous and growing trade surplus, it has plenty of deployable capital to lend or, less prominently, to invest, throughout the world, including the Middle East. And with China’s domestic policies not only failing to reform to spur sustainable growth but actually moving in a direction counterproductive to that goal, foreign economic activity will continue to play the dominant role in China’s international strategy. Getting more involved in political disputes may prove costly to business, and relying on the United States to remain the region’s main security provider, rather than challenging that role, is a cost-effective strategy for safeguarding economic activity. 

Contributor Background

Howard J. Shatz is a senior economist at the nonprofit, nonpartisan RAND Corporation and a professor of policy analysis at the Pardee RAND Graduate School. He specializes in international economics and national security and in international development. His research has covered China’s role in the developing world, technology development in China, great power competition in the Middle East and socioeconomic policy issues in several Middle Eastern countries.  

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