Saudi investments have been flowing into China on three levels — industrial ventures, refinery joint ventures and investment in the capital market.
The low cost in China of both production and skilled manpower, together with mounting energy needs, have always acted as a magnet for institutional investors from the Kingdom. Even private sector entrepreneurs have been quick to capitalize on its natural resources, especially cotton, for converting it into finished textiles for which there is a growing market back home.
In July this year, a leading Saudi clothing company launched a $50 million cotton spinning project in Shihezi, in China’s northwest Xinjiang province. Ajlan ibn Abdulaziz Al-Ajlan & Bros, a leading Saudi garment manufacturer, set up a 160,000-spindle project. It goes into operation next June, according to Tageldin Saad, Ajlan’s CEO in China.
The project is expected to net 650 million yuan ($88 million) in annual sales revenues. Before the project in Xinjiang, Ajlan had invested $200 million in its five subsidiaries in east China’s Suzhou and Shandong, Tageldin said. Xinjiang, China’s largest cotton base, produced two million tons of cotton last year, while Shihezi’s output was 300,000 tons.
Referring to the Kingdom’s institutional investment in the energy sector, Li Yan Lin, Economic and Commercial Counselor at the Chinese Embassy, told Arab News that China Petroleum & Chemical Corporation (Sinopec) signed the long planned contract in March this year with Saudi Aramco and the US major ExxonMobil for a $3.6 billion refinery project in southern China’s Fujian province. The refinery, located in Quanzhou, will have a crude refining capacity of 240,000 barrels a day and is expected to be operational in early 2009, Lin said.
A separate contract was signed by Sinopec, Exxon and Saudi Aramco for a retail joint venture to manage and operate around 750 filling stations and a network of terminals in Fujian.
China urgently needs new refineries, with many of its existing plants operating at more than 90 percent of their capacity to meet the growing demand for gasoline, diesel and other oil products.
Investment in new refining capacity has been constrained by government-imposed limits on retail prices of oil products, which has left the refining businesses of Sinopec and PetroChina Co. (PTR) operating at a loss in recent years.
However, the government has repeatedly signaled its intention to bring its domestic oil products prices in line with the international market. State media have said that China introduced a new pricing mechanism at the start of this year that links the domestic price of oil products to a basket of benchmark crudes, namely Brent, Dubai and Minas.
Signing of the contracts took place less than a month after the National Development and Reform Commission, China’s economic planning agency, said on its website that the Fujian refinery project had been approved.
Sinopec will own 50 percent of the refining joint venture, with ExxonMobil and Saudi Aramco holding 25 percent each. According to Lin, the refinery will primarily process sour Arabian crude supplied by Saudi Aramco.
The joint venture also involves the construction of an ethylene steam cracker with a capacity of 800,000 metric tons a year, a polyethylene unit with a capacity of 800,000 tons a year, a polypropylene unit with a capacity of 400,000 tons a year and an aromatics complex to produce 700,000 tons a year of paraxylene. Support facilities including power generators and a berth capable of handling tankers with a capacity of 300,000 deadweight tons will also be built.
According to a statement released by the joint venture partners, “The signing of the two joint venture contracts marks significant milestones in the development of China’s first fully integrated Sino-foreign projects that involve refining, petrochemicals and fuels and chemicals marketing.” For the filling stations joint venture, Sinopec will hold 55 percent of the shares, with ExxonMobil and Saudi Aramco owning 22.5 percent each.
Sinopec, ExxonMobil and Saudi Aramco held an inaugural ceremony in March this year at the Great Hall of the People in Beijing to mark formal government approval of contracts and granting of business licenses for their two joint ventures in Fujian province -- Fujian Refining & Petrochemical Company as well as Sinopec SenMei (Fujian) Petroleum Company. The former will be owned by Fujian Petrochemical Company Limited (50 percent), ExxonMobil China Petroleum and Petrochemical Company Limited (25 percent) and Saudi Aramco Sino Company (25 percent).
Saudi Aramco is also planning a second refinery investment in China, acquiring a 25-percent stake in Sinopec’s planned $1.2-billion refinery at the port city of Qingdao, in the province of Shandong. Under the deal Aramco will supply 80 percent of the refinery’s oil needs. The first phase, with a 10-million ton annual processing capacity, was due to come on stream at the end of the year. However, it has been delayed by at least nine months and the deal with Aramco has not yet been finalized.
Saudi investors, along with some from Kuwait, are also reported to be involved in a third refinery project in Guangzhou, in Guangdong province. The project will involve a total investment of $8 billion.
Saudi investment in China’s capital market is also growing. Al-Azizia Commercial Investment Corporation (ACIC) and a group of Saudi investors signed an agreement last year for a strategic offer for $2 billion in the Bank of China, the second largest state-owned bank in China and one of the largest banks in Asia. Saudi investors included Kingdom Holding Company, which acquired $1.2 billion worth of shares in BOC. Other investors were Ma’an ibn Abdulwahid Al Sanie (chairman, Saad Group), Muhaidib Group, Olayan Saudi Investment Company, Bahamdan Holding Group and Amwal Al Khaleej Commercial Investment Company.
“China is among the top five leading global economies,” said KHC’s Chairman Prince Alwaleed ibn Talal at the time. “We are pleased with this historic offer in line with King Abdullah’s initiative and hope it will be one of many to come.” In the event the consortium was allocated an equity stake of $300 million.
This was seen as a historic move. The $2-billion offer would have represented a 2.7 percent stake in BOC common equity. “It was the first of its kind,” said Ahmed Halawani, CEO of ACIC. “It came in line with the royal initiative to develop and strengthen commercial and business relations with the People’s Republic of China which was the major highlight of the Custodian of the Two Holy Mosques, King Abdullah’s visit to China and the Chinese president’s visit to the Kingdom last year.”
Halawani also said that the offer affirmed the consortium members’ belief in the importance of diversifying geographical investments into in a country such as China that has an economy reflecting sustainable growth and visibility.
This steady flow of Saudi funds into the Chinese economy not only underlines the strength of bilateral relations but also recognizes the geopolitical compulsions behind the dynamics of the “Look East” policy.