China and the World

Silky touch required

Xi’s tour of the Middle East takes in two of the region’s great rivals

xi and king salman saudi

Xi Jinping with Saudi Arabia's King Salman Bin Abdulaziz Al Saud

One of the most acclaimed history books of 2015 was Peter Frankopan’s The Silk Roads. In it he tries to show how our understanding of global history has been warped by the recent rise of the West. As a counterpoint Frankopan puts more emphasis on a part of the world which has always been at the very “crossroads of civilisation.”

“It’s easy to feel confused and disturbed by dislocation and violence in the Islamic world, by religious fundamentalism, by clashes between Russia and its neighbours, or by China’s struggle with extremism in its western provinces,” he writes.

But Frankopan says these events are the “rebirthing pains” of a swathe of land now known as the Middle East and Central Asia.

Further, the events are “signs of the world’s centre of gravity shifting back to where it lay for millennia,” he concludes.

President Xi Jinping’s five-day visit to Egypt, Saudi Arabia and Iran this week has thrown the spotlight back on reviving the economic and diplomatic links that once supported the ancient Silk Road – a route which began in China’s Han Empire and passed through Iran’s Parthian Empire into the Mediterranean and Persian Gulf.

A Chinese president has not visited modern-day Iran since 2002, but during the Tang Dynasty, the Chinese court was sending 10 trade missions a year to Parthia to collect goods such as ivory and perfume.

Iran’s strategic location on China’s modern-day Silk Road (in fact, it comprises a series of routes identified in Xi’s ‘One Belt, One Road’ policy) has made Tehran the most important stop on Xi’s current tour.

Last Saturday’s lifting of sanctions against the Iranians has potentially made it the most lucrative visit for both countries too.

China’s status as the world’s largest oil importer means it has now overtaken the US as a trading partner with both Saudi Arabia and Iran. Last December, its ambassador to Riyadh said bilateral trade stood at $69.1 billion. This compares to $38.17 billion in Saudi-US bilateral trade to the end of November (the figure has almost halved since 2012, thanks to surging production of US shale gas).

Saudi Arabia’s regional arch-rival, Iran, has also seen trade with China boom in recent years. China’s exemption from economic sanctions means it has taken up almost half of Iran’s vastly reduced oil output. In 2014, Iran’s bilateral trade with China stood at $51.85 billion (similar to China/Saudi levels) and in stark contrast to the $185 million it recorded with the US (a few American companies were allowed to trade humanitarian goods).

Iranian President Hassan Rouhani first met Xi Jinping on the sidelines of the UN General Assembly last September. He made it clear where Iran’s loyalties would lie once sanctions were lifted. “The Islamic Republic will not forget its friends who maintained their good ties with the Iranian nation in hard times,” he promised.

That relationship is now likely to bear fruit on three levels. China wants to build up its deeper oil reserves, targeting a stockpile of 100 days worth of imports by 2020. Secondly it wants to extend the renminbi’s internationalisation by putting a currency swap mechanism in place with Iran. And thirdly, it has released a policy document to mark Xi’s visit, which highlights the potential to finance infrastructure development right across the Middle East.

A number of projects have already been flagged. Last November, China Railway Corp proposed a high-speed network from Urumqi in China’s far west through Central Asia to Tehran. The two countries are also jointly constructing an oil refinery in Kazakhstan, sourcing crude from Iranian oilfields to serve Chinese clients.

Both sides also want to develop Iran’s Chabahar port on the Gulf of Oman. The Chinese believe this would complement their existing investment in Gwadar port in Pakistan. But the news has not gone down well in India, which also wants to invest in Chabahar so it can bypass Pakistan and secure a direct route to Afghanistan, with which it enjoys closer relations.

The Egyptian government, meanwhile, hopes to secure Chinese investment for an expansion of the Suez Canal and for an electric train project, while CBN says the China-led Asian Infrastructure Investment Bank hopes to team up with Riyadh’s Islamic Development Bank to jointly invest in infrastructure projects across the region.

Throughout Xi’s visit to the Middle East, the Chinese press has so far been highlighting the deep pool of Islamic finance that might be tapped to finance One Belt, One Road projects. However, financial markets have been more concerned about an alternative possibility in recent weeks – that Middle Eastern governments will have to sell assets to raise cash.

Plummeting oil prices have forced the region’s sovereign wealth funds to refocus on covering growing budget deficits back at home, leading to questions about what might be ahead for their equity stakes in listed companies, most notably in Malaysia and China. The Kuwait Investment Authority, for example, has a 13.88% stake in the Agricultural Bank of China and a 7.42% stake in Dalian Wanda.

Another trend which became abundantly clear during Xi’s trip is that he has to walk the diplomatic tightrope between two increasingly bitter Islamic rivals (Saudi’s rulers are Sunni, Iran’s Shia). A similar trip in 2015 was postponed after the Saudis started military action against Iran-allied forces in Yemen. So it was important that Xi pitched something for everyone during his whirlwind tour. In Saudi’s case he offered to conclude a free trade agreement this year with the Gulf Cooperation Council (which comprises Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the UAE, and makes up China’s largest source of imported oil and its second largest market for construction projects).

Of course, the symbolism of announcing the surprise resumption of talks on a free trade agreement fits nicely with Xi’s broader rhetoric about reviving China’s Silk Road.

Keeping track: Beijing has long held a policy of neutrality in the Middle East but when Xi Jinping wrapped up his five-day trip to the region, there was little doubt which was his most interesting stop. While China and Saudi Arabia decided to establish a high-level committee to enhance bilateral trade, the China-Iran relationship has been upgraded to a “comprehensive strategic partnership”. In fact, China has been Iran’s top trading partner for the past seven years, despite the international sanctions on Iran for its nuclear programme. Xi’s visit comes just days after the bans were lifted. Now Beijing and Tehran have agreed to increase trade to $600 billion in the next decade. (This will compare with $50 billion as of 2014.)

Iran and China signed 17 cooperation documents and MOUs spanning nuclear energy and information technology during Xi’s Tehran visit. Beijing also promised to back Iran’s bid to become a permanent member of the Shanghai Cooperation Organisation (SCO). The Iranian transport minister and the governor of China’s Exim Bank signed a deal for financing the high-speed Tehran-Mashhad railway. The two countries also inked another commitment for setting up a “Silk Road scientific fund”.

All in all, Xi inked 52 cooperation agreements with Egypt, Saudi and Iran on his Middle East tour.

Xinhua noted that Western powers had dominated the Middle East for decades but their policies have only brought poverty and sectarian conflicts – as well as breeding rampant extremism. “[China] offers an alternative approach emphasising dialogue in settling disputes and development to ultimately haul the region out of the quagmire of bloodshed and terrorism.”

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