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Author: 
Dr. Mohamed A. Ramady
Publication Date: 
Fri, 2007-12-14 03:00

The groundbreaking overseas official visits that Custodian of the Two Holy Mosques King Abdullah made in January 2006, were to China, India, Malaysia and Pakistan. In the case of China this was reciprocated by President Hu Jintao’s state visit to the Kingdom in April of the same year. A large number of accords were signed during both visits and these set the stage for a new strategic partnership with the East.

Commercial relations between the Kingdom and Asia have been dominated by energy-related bilateral investment flows and the Asian region’s vast appetite for oil imports. Investment links are building up also in non-energy areas. Other traditional trading partners such as the United States and Western Europe have seen their relative share of trade flows fall to these new Asian strategic partnerships, causing some to express concern at the nature and extent of this deepening relationship, particularly that with China. The older trading partners, however, should not see Asia’s rapid trade advances and its need for energy from Saudi Arabia in terms of rivalry. All parties have a vested interest in ensuring steady and uninterrupted energy supplies in what is essentially a global market for energy.

The trade figures with Asia speak volumes about the shift in direction by the Kingdom. In 1984, Chinese imports to Saudi Arabia were a mere SR688 million or less than 1 percent of total imports. By 2006 this had risen to a dramatic SR21.7 billion, or 8.7 percent of total imports. India’s share rose from SR997 million in 1984 (0.8 percent) to SR9.3 billion in 2006 (3.7 percent). Asia and the Far East account for nearly 60 percent of total Saudi crude oil and refined product exports and the figures are rising given Saudi pricing premiums for the region. Will this new golden trading era continue and what are the implications for both sides?

The difference now in the global economy is that the world is less dependent on demand from US consumers to drive world growth than in the past. The power of incremental consumer demand from China, India and other rising economies in the Asia such as Vietnam, was for the first time in 2007, greater than from the US. China once again seems to be shouldering this incremental growth and the World Bank has raised its forecast for China’s economic growth this year by almost one percent. This means that China’s economy will expand at an incredible pace of almost 11.3 percent. What is more interesting is the perceptible change in the internal drivers of the Chinese economy. While strong investments and exports have so far been the main drivers of China’s amazing growth, there is now more confidence that a rise in domestic consumer spending will boost China, even if demand for some of its exports falls. The same trends are beginning to appear in other rising economies such as India, where prosperous middle and professional classes have started to spend more and save less.

This is the crunch and provides ammunition to those who caution against too fast a strategic shift from Saudi Arabia’s traditional trading partners. It centers on the scale and pace of economic growth in India and China and whether this can be sustained. This scale is sometimes hard to grasp, but to put it into perspective, it is estimated that more copper needs to be dug up in the next 20 years than has been produced in all history if current projected demands from India and China are to be met. What will happen to the world’s economic order if such demand is not met or internal bottlenecks and social problems appear in these new super-growth countries? The Chinese leadership itself is aware of the social and economic problems that could arise as evidenced by Chinese President Hu Jintao’s keynote speech in October when he noted that the Communist Party had fallen short of the people’s expectations.

Are some of the criticisms leveled against China valid?

The Chinese economy is still a centrally controlled one, where most of the investment decisions are determined by officialdom rather than by a free market process. State-owned Chinese banks make loans because the party says they must make a loan — and they have a different culture from commercial banks. Some financial reform of the banking sector is beginning, and foreign banks are entering China. Saudi banks, with many years of first-class commercial and investment banking experience, could be in a position to assist China by exporting their expertise to joint venture Chinese-Saudi banks. The other concern is resource-based, whereby Chinese economic growth has imposed some costs on the rest of the world, especially in its demand for more oil.

The world’s present economic cycle seems to be now determined by China and the United States, and both are much more important than Europe to many aspiring world economic players. The Chinese will be watching very carefully for signs of a downturn in the US economy. The most likely sign will be the bubble in US house prices bursting, because consumers had borrowed against rising house prices. This would be a disruption to the Chinese economy until substitute markets were found, leading to some disruption throughout Southeast Asia. The Chinese are not waiting for this to happen and have moved to other areas of the world, especially Africa and the Middle East.

For the time being though, there is sufficient momentum in the rising Asian economies that should carry them through any downturn in their major overseas markets in reasonable shape, thanks mainly to their new-found domestic growth. For countries in the Gulf that have been busy establishing strategic economic alliances with these rising new economies, such economic “bets” are now paying off.

For Saudi Arabia, it would be prudent to expand its economic ties with China, with joint ventures both in the Kingdom and in China. This would meet regional demand for consumer goods in a more predictable manner as well as satisfying third-party country demand from joint ventures operating out of China. Investments not prone to cyclical world recessions should be identified and oil energy conservation technology should be a priority for both parties in the long run. There is another area where Saudi Arabia and other Asian countries can cooperate and this is in the area of strategic management of their liquid (mostly dollar) reserves.

This will translate into Chinese partnership in prospecting activities in China’s Asian neighbors, Africa, Middle East, Australia and Latin America. Such strategic partnership could focus on oil and gas fields as well as strategic metal extraction. Chinese participation could encompass equity stakes in new joint ventures, or through acquiring existing foreign companies and projects. The pace of such partnerships will be limited only by the extent of any shortage in overseas Chinese management expertise, but the Chinese already seem to be doing extremely well in the most unlikely places around the world, from Siberia to Sudan. In the end, given the pace of China’s accumulation of new foreign exchange reserves, the spending of $200 billion in this new strategy out of reserves estimated at nearly $1.3 trillion is roughly equivalent to the pace of annual growth of Chinese reserves. The problem for China will be to identify sufficient projects and willing overseas partners.

In Saudi Arabia, China has found a willing partner. Following the state visits of the two countries’ heads of state, a number of accords were signed in security, defense, health, trade, and youth matters. There have been discussions about establishing a strategic oil reserve in southeast China using Saudi supplies. In other major developments, Saudi Aramco and Sinopec, China’s top refiner and petrochemical producer, signed a memorandum of understanding to increase trade cooperation as well as reviewing Sinopec’s gas exploration activities in the Saudi Rub Al-Khali (Empty Quarter). At the same time, Saudi Basic Industries Corp. (SABIC) discussed with their Chinese counterparts plans to establish a $9.3 billion refinery and petrochemical project in northeastern China. It is already obvious to the world’s major petrochemical players that the only viable competitive route to multinational companies is to enter Saudi Arabia as a major petrochemical producer. In this way the Chinese can ensure competitive supplies to their domestic markets as well as feed China’s growing petrochemical needs from their Saudi Arabia operations.

At the same time, the Kingdom has a growing need for more investment in technology, management skills, science, technology and infrastructure. China, India and the other fast developing Asian countries have an opportunity to establish an important commercial presence in the Kingdom beyond an energy relationship. China in particular has the capability to expand its already significant export of labor services to a region with a growing demand in construction areas.

The emergence of this new strategic partnership should be viewed positively and not with alarm by others. Chinese activities in Saudi Arabia will increasingly be driven by commercial realities rather than politics. The more that China and others in Asia are locked in economically with the global system, the more important for them that there is stability in the energy market. The reality is that the two super economic giants of the world today — the US and China — must co-exist while competing increasingly on a commercial basis.

What direction then for the Kingdom? Once again, the indications point East rather than West as one Gulf country after another signs up to long term strategic economic relationship with Asian countries, particularly China and India. Companies from these new economic giants are already setting up businesses in the GCC, attracted by the region’s free-trade zones, enhanced FDI regimes and oil-price-based boom. The Kingdom is truly thinking West but moving East.

(Dr. Mohamed A. Ramady visiting associate professor, finance and economics, King Fahd University of Petroleum and Minerals.)

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