Belt and Road woes could benefit the Gulf

31 March 2023

The Gulf region could benefit from the growing signs of strain affecting China’s Belt and Road Initiative (BRI).

Beijing has substantially increased its lending for bailouts to developing countries following a series of debt write-offs, controversies and corruption allegations. As the financial burden increases, Chinese companies and financial institutions could respond by shifting their focus to less risky markets such as the Gulf. 

A study published by the Kiel Institute for the World Economy found that between 2019 and the end of 2021, China extended $104bn in rescue loans to developing nations, almost equal to its bailout lending over the previous two decades. From 2000 until the end of 2021, China carried out 128 bailout operations in 22 countries with a total value of $240bn.

Interest rates

Compared to loans from agencies such as the IMF with interest rates of about 2 per cent, the Chinese emergency loans come with interest rates in the region of 5 per cent, making them unaffordable for some countries. This has led to criticism of China’s aid strategy – claims that Beijing has publicly rejected.

The BRI is a global infrastructure initiative that aims to build a network of trade and infrastructure projects connecting China with more than 100 countries across Asia, Europe, Africa and the Middle East.

The BRI has been a way for China to expand its global economic and political influence by financing and constructing infrastructure projects such as roads, railways, ports and power plants, among others, in participating countries.

Chinese President Xi Jinping formally announced the initiative during a speech at Nazarbayev University in Kazakhstan in September 2013. During the speech, Xi Jinping proposed the creation of a Silk Road Economic Belt and a 21st Century Maritime Silk Road. The initiative promoted regional and global economic development, strengthened cooperation and connectivity among participating countries, and enhanced cultural exchange and mutual understanding.

As well as burdening countries with unaffordable debts, another criticism of the BRI is that it needs to be clearly defined and centrally managed in Beijing. After being announced in a speech, Chinese companies have been tacitly encouraged to support development projects overseas. Without oversight, these projects and associated loans have sometimes failed to succeed commercially.

Regional connection

While the BRI has yet to be clearly defined, the Middle East is part of it. The clearest demonstration came in December last year when Saudi Arabia’s King Salman bin Abdulaziz al-Saud and President Xi Jinping signed a comprehensive strategic partnership agreement in Riyadh, and a series of high-level commitments, including one to harmonise the goals of Saudi’s Vision 2030 with China’s BRI.

If China chooses to become more risk-averse with its BRI investments, Saudi Arabia and several other key Middle Eastern markets could be prime areas of focus. The other countries are the UAE, Kuwait, Iran, Iraq and Egypt. The Gulf countries have large hydrocarbon reserves, which are a strategic priority for China. The revenues they generate also give countries the cash flow to service any loans extended by Beijing.

According to the US Energy Information Agency, China was the world’s second-largest oil consumer behind the US in 2021. It consumed 14.76 million barrels a day, which equates to 15 per cent of the global total.

Egypt is considered strategically important because of the Suez Canal. The waterway enables China to import raw materials from the Middle East and Africa and export finished goods to Europe and other markets. Any disruption to the flow of goods through the canal, such as the blockage caused by the Ever Given container ship in March 2021, can have significant economic consequences for China.

Busy working

China is already backing significant levels of project activity in these countries. Major contract awards secured by Chinese construction companies in Saudi Arabia during 2022 include contracts to build photovoltaic solar power plants, tunnels, roads, bridges and a cement plant.

This year a Chinese-led consortium is well placed to win work on the $7bn Saudi Landbridge project. It was reported in January that negotiations are ongoing for the final cost and financing of the scheme, which involves building a railway network across the kingdom from the Red Sea coast to the Gulf.

China National Nuclear Corporation is also one of the companies bidding for the contract to build the kingdom’s first nuclear power plant.

Chinese companies are involved in various major projects in the UAE, including Etihad Rail, the Hassyan coal-fired power plant and the Mohammed bin Rashid Solar Park. China’s oil and gas infrastructure investments include China National Offshore Oil Corporation (CNOOC), a subsidiary of China National Petroleum Corporation (CNPC), which holds a 4 per cent stake in Abu Dhabi’s hydrocarbon blocks. In addition, Chinese companies are investing in other sectors, such as the development and operation of Khalifa Port’s second container terminal and the China-UAE Capacity Demonstration Park.

In Egypt, China State Construction Engineering Corporation (CSCEC) is working on the New Administrative Capital project east of Cairo. China is also involved in constructing a new industrial zone in the Suez Canal Economic Zone, which aims to attract foreign investment and boost economic growth. For example, at the end of March, it was reported that Chinese company Xinxing Ductile Iron Pipes plans to invest $2bn in iron and steel plants in the economic zone.

In Iraq, Chinese companies are heavily involved in the oil and gas sector. Chinese contractors dramatically ramped up their activities in Iraq’s energy sector, winning 87 per cent of all oil, gas and power project contracts awarded in the country during 2022.

There is plenty of room for Chinese involvement to grow in the future. According to regional projects tracker MEED Projects, there are $1.3tn of projects in the pre-execution stages across Saudi Arabia, the UAE, Kuwait, Iran, Iraq and Egypt.
Colin Foreman
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