Chinese President Xi Jinping’s proposed “Silk Road” initiative – also called “One Belt, One Road” (OBOR) – has promised to resurrect the ancient Eurasian trading route by investing in connectivity and infrastructure projects on a massive scale across Asia, Europe, and the Middle East. Offering some $1 trillion in total investment, the project has the ability to transform global trade. Sean Miner, China Program Manager at the Peterson Institute for International Economics, sat down with the Cipher Brief to talk about how the OBOR will affect the countries of the Gulf Cooperation Council (GCC) – Saudi Arabia, United Arab Emirates (UAE), Qatar, Kuwait, Oman, and Bahrain – and the Middle East at large.
The Cipher Brief: How do the New Silk Road Initiatives – the One Belt, One Road initiative specifically - pertain to the Middle East and the countries of the GCC?
Sean Miner:
The first thing to know when we talk about OBOR and the Middle East is that it is, first of all, linked to China’s energy security. That’s the first tier. China has what’s called the “Malacca Dilemma.” 80 percent of their goods flow through the Straits of Malacca, and then through the South China Sea, so they’ve been looking to diversify not just their hydrocarbon energy flows through there, but also trade in general.
More generally, China has some serious domestic economy issues - its East Coast, urbanized areas have developed much faster than the West Coast which, of course, has a lot of ethnic minorities and more security issues. So they are hoping that opening up and connecting western China to Central Asia, Europe, and the Middle East will help to balance out the GDP/Income growth gap between east and west China.
Another problem for China is the domestic overcapacity issue. China is producing too much steel and aluminum and many of its state-owned enterprises are basically “zombie companies.”
These problems lead into the second tier of OBOR, which is infrastructure. China is just looking to build as many infrastructure projects as possible. Some make sense, some don’t. China has even admitted that some of these projects won’t be profitable, but they are willing to take that loss in order to keep its SOEs going, as well as adding some strategic benefit.
Finally, the third tier is China trying to find breakthrough technology and export some of that technological knowhow. This is largely focused on nuclear, aerospace, and new energy expertise. The nuclear side of this relates the most to GCC countries because Beijing is looking to build 30 nuclear power plants in the GCC region by 2030, which is a huge amount. China is very motivated to build these nuclear power plants, especially in Saudi Arabia.
TCB: Do you see any attempts to keep building infrastructure within countries like Qatar, for instance, which is a major Liquid Natural Gas (LNG) producer. Is China trying to secure access to Qatari LNG with infrastructure projects, even as it tries to diversify its own energy sources?
SM:
They are diversifying away from Middle Eastern energy but, yes, I think they are also ramping up their paths to get oil and gas from the Middle East to China. Qatar, with its natural gas resources, is certainly an attractive target for OBOR investment.
In fact, China has recently opened a Renminbi (RMB) clearing house there, which fits into China’s plan of RMB internationalization. These clearing houses make it much easier to pay for goods, especially energy, in RMB rather than dollars and China would like to accelerate the use of RMB in these transactions as much as possible, although this doesn’t really seem to be happening, especially after China’s slowdown.
For the Qataris this is an easy win because they also want to diversify and increase trade with China. However, in general, many of these GCC countries have been a little bit slow to jump on this Belt and Road train.
TCB: The GCC has announced that it is negotiating a bilateral free trade agreement with China and, for most of the member countries, economic reform and the promotion of new non-oil exports is a major goal. However, with the overcapacity problem in China, it seems that a major part of the New Silk Road Initiative is focused on funneling this excess capacity out of China. So, are these GCC policymakers planning in the wrong direction?
SM:
Yes, that’s been a big criticism of this Silk Road plan. Basically, trains and ships leaving China will be full but, coming back, they will be empty. Another problem with China’s economy is that domestic demand is slow and imports have actually come down, while China’s current account balance has grown tremendously. So people ask “well, you’re facilitating all this trade with Central Asia, Southeast Asia, the Middle East, etc. but what are you going to buy?”
Smart countries will recognize this and try to negotiate a deal for themselves. Russia, for example, drew from the $40 billion Silk Road Fund – which is made up from Chinese Central Bank foreign exchange reserves – and they invested in nanotechnology firms in Russia so that they would have more high value exports back to China.
But I haven’t seen much more of that. This could be a serious issue going forward with these projects. In a lot of these countries, China is one of their biggest trading partners but, in most cases, this means that they import a ton of goods from China and export very little. If that continues it could cause some serious political issues and might instigate a wave of protectionism. So, China wants to lock in free trade agreements (FTA), like this GCC-China FTA, in order to prevent future protectionist measures.
TCB: Can the GCC countries use these massive pools of infrastructure investment – the Silk Road Fund, the AIIB – to build things they’ve been wanting to build for a long time?
SM: The key here is the low interest rate. These projects are getting tremendously low interest rates, which basically allows these countries to borrow for nothing. So it’s a win-win for both, China gets to export its excess capacity, and these countries get to make their constituents happy by building these massive infrastructure projects.
TCB: So, to bring it all together, let’s say this pile of OBOR money – some $1 trillion supposedly by the end – materializes, what does the world look like? How does this affect the region? The United States?
SM:
For the U.S. I don’t think this is really a big threat security-wise or economically because, at the end of the day, this is free global infrastructure, this is trade facilitation, U.S. and European companies are going to be able to use these rail transportation networks as well. So, if this lowers shipping and transportation costs then ultimately it’s a good thing.