After the Sheikhs: The Coming Collapse of the Gulf Monarchies (20 page)

Soft power in the East: China and Japan

Although the Gulf monarchies have little shared modern economic history with the principal Pacific Asian powers
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—notably China and Japan—their economies are now becoming increasingly intertwined. What began as a simple, mid-twentieth century marriage of convenience based on hydrocarbon imports and exports is rapidly evolving into a comprehensive,
long-term mutual commitment that is not only continuing to capitalise on the Gulf’s rich energy resources and Pacific Asia’s massive energy needs, but is seeking also to develop strong non-hydrocarbon bilateral trade and is facilitating sizeable sovereign wealth investments. Although this increasingly extensive relationship does not yet encompass the Gulf monarchies’ military security arrangements—which remain predominantly with the Western powers—and although few serious attempts have been made by either side to replace or balance these with new Pacific Asian alliances, there is nonetheless compelling evidence that the Gulf monarchies are seeking to strengthen their non-hydrocarbon economic ties and even non-economic ties with these states. Indeed, an abundance of state-level visits, often at much higher levels than with western powers, and a plethora of cooperative agreements, gifts, loans, and other incentives are also undoubtedly helping the Gulf monarchies build up a soft power base in the East as well as the West.

China and Japan now have the second and third greatest oil consumption needs in the world, behind only the US, while Japan still has the fifth greatest gas consumption needs in the world, ahead of Germany and Britain.
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According to the Organisation of Petroleum Exporting Countries although Japan’s demand for oil is likely to fall by 15 per cent by 2030, China, South Korea, and other Pacific Asian economies are likely to make up 80 per cent of net global oil demand growth over the same period.
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Most of this increased Pacific Asian demand is already being met by the Gulf monarchies, with their total hydrocarbon trade now close to $200 billion per annum
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—a figure likely to increase dramatically over the next decade. The Pacific Asian economies do little to disguise their dependency on hydrocarbon imports from the Persian Gulf, in contrast to many Western powers which are openly trying to reduce their dependency and diversify their sources. Although the non-hydrocarbon trade that takes place between the two regions is on a much smaller scale, there has nevertheless been an historical precedent for the importing of certain goods from Pacific Asia into the Gulf monarchies, especially textiles and electrical goods. And since the substantial rise in per capita wealth on the Arabian Peninsula following the first oil booms, the demand for such imports has increased correspondingly, along with new demands for cars, machinery, building materials, and many other products associated with the region’s oil and construction industries. In total, the Gulf monarchies’ imports from Japan, China, and South Korea could
now be worth as much as $63 billion per year.
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Moreover, there is no longer as much of an imbalance in non-hydrocarbon trade between the two regions as there used to be, as some of the Gulf monarchies’ export-oriented industries—especially those producing metals, plastics, and petrochemicals—are now gearing their sales to Pacific Asian customers.

While the Gulf monarchies’ sovereign wealth investments in the Eastern powers remain much more modest than in the West, this is also slowly changing as investments in Pacific Asia become regarded as realistic and more hospitable alternatives to the more mature western economies. Such an alternative was viewed as being particularly necessary following 9/11, after which many western governments and companies did little to disguise their distrust of Gulf sovereign wealth funds, with many commentators arguing that Gulf investments were not merely commercial and that power politics could be involved.
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With regards to Japan, Saudi Aramco has, for example, been holding a 15 per cent stake since 2004 in its fifth largest oil company, Showa Shell Sekiyu.
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In 2007 Dubai International Capital purchased a ‘substantial stake’ in the beleaguered Sony Corporation—the first ever major UAE investment in Japan.
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And in summer 2009 the Japan External Trade Organisation named the UAE as one of its top three target countries for sourcing FDI.
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Since JETRO’s drive began, Abu Dhabi’s International Petroleum Investment Company has taken a 21 per cent, $780 million, stake in Japan’s Cosmo Oil Company
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Although Kuwait’s sovereign wealth investments in Japan are more modest, the Kuwait Investment Authority nonetheless recently stated that it intends to increase by threefold its investments in Japan.
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In 2005 China’s Ministry for Commerce revealed that investments from the Gulf monarchies in China totalled $700 million,
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most having come from Kuwait. Back in 1984 a subsidiary of the Kuwait Petroleum Company took a 15 per cent stake in China’s Yacheng offshore gasfield, while the following year KPC set up a joint venture—the Sino Arab Chemical Fertiliser Company to invest in the Qilu petrochemicals facility in China’s eastern Shandong province.
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In the 1990s the Kuwait Investment Authority increased its portfolio share in Chinese investments from 10 to 20 per cent,
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and it is now the largest foreign investor in the Industrial and Commercial Bank of China.
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This has effectively made the Kuwaiti government the biggest investor in one of China’s first major public offerings. The relationship between the two countries was also strengthened greatly following the setting up of a $9 billion joint
venture between the Kuwait Petroleum Corporation and Sinopec in 2005. Since then, the two companies have been jointly financing the construction of a massive 300,000 barrels per day capacity oil refinery and ethylene plant in China’s southern Guangdong province. When the project comes online in 2013 it will be China’s largest ever successful joint project.
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But the most innovative and symbolic aspect of the investments between the two countries has been the establishment of the Kuwait-China Investment Company. Set up in 2005 and 15 per cent owned by KIA, the KCIC now has a capital base of about $350 million, about half of which is held in cash in order to facilitate rapid responses to strategic opportunities. It has specialised in investments in Chinese agribusinesses, particularly those producing crops with a high export value such as rice, wheat, corn, and sorghum. Meanwhile Saudi Aramco now has more offices in China than in any other country, and has taken a 25 per cent stake in a major joint venture with Sinopec and the China National Petroleum Corporation’s Petrochina subsidiary in 2001.
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The venture, named the Fujian Refining and Petrochemical Company, has involved the two companies expanding an existing refinery in China’s southeastern Fujian province along with building a brand new ethylene plant. Moreover, Aramco is now the largest shareholder in the Thalin refinery project in China, and in the near future it may embark on another joint venture with the two Chinese companies to build a refinery in the Chinese coastal city of Qingdao, again with Aramco taking the majority stake.
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This could lead to the building of one of the largest oil-refining facilities in the world and may require as much as $6 billion to complete.

Similarly to Aramco, SABIC has already helped to initiate three petrochemicals projects in China as part of its ‘China Plan’, which aims to facilitate mutual investments between the two countries by supporting China’s economic development and, as its premier supplier of petrochemicals, helping to satisfy its ever-increasing demand.
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And in 2009 SABIC entered into an agreement to build a fourth petrochemical complex, costing $3 billion, in China’s northeastern Tianjin province.
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The Qatari Investment Authority is also becoming active in China, and has recently followed Kuwait’s lead by signalling its intent to purchase $200 million worth of shares in subsequent public offerings from the Industrial and Commercial Bank of China.
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It has also opened a permanent office in China with the intention of pursuing further sovereign wealth investment opportunities in the country, with QIA’s CEO having
explained that ‘China and Asia are growth markets for Qatar—we are really serious about finding the right opportunities there’.
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Most significantly perhaps, it was announced that Qatar Petroleum would enter into a joint venture with Petrochina worth $12 billion. This deal, if followed through, would eclipse even Kuwait’s investments in China and would lead to the construction of a new petrochemicals plant in China’s eastern Zhejiang province, along with an oil refinery, an ethylene plant, and a port for oil supertankers.
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Much like its neighbours, the UAE, and more specifically Dubai, is also investing in China, and has been since the late 1980s following the establishment of the Dubai Oriental Finance Company.
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More recently Dubai Ports World has made significant investments in Chinese coastal cities, and now operates seven container terminals in the country, three of them in Hong Kong. Crucially DPW has faced none of the opposition it experienced in its 2006 bid to operate ports in the US, and its success has been attributed to its well developed partnership with China’s Tianjin Port Group Company.
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In the near future the joint venture will also open a terminal in China’s northeastern Qingdao province and in 2009 it announced that it would also take an 80 per cent stake in a joint venture with both a Chinese company and Vietnam’s state-owned Tan Thuan Industrial Promotion Company in order to build yet another Asian container port outside Ho Chi Minh City.
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Abu Dhabi has thus far been more cautious than Dubai with regard to investing in China, but there are nonetheless some proxy examples: IPIC has a 65 per cent controlling stake in Borealis
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—a plastics company based in Austria that has links with the Abu Dhabi Polymers Company—and in turn Borealis is investing in a polypropylene plant in China, to help boost the supply of plastics for its booming automobile industry,
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which now comprises more than forty-five car manufacturers, including Beijing Automobile Works and Chery Automobile.
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With regards to building non-economic soft power ties, a part of the strategy seems to have been regular and high level diplomatic visits from the Gulf monarchies to Pacific Asia. While economic and trade matters are certainly discussed at these carefully staged events, the meetings are nonetheless also valuable opportunities for rulers and their ministers to convene with their Pacific Asian counterparts and consider a range of other matters. Often substantial gifts or interest free loans are granted during these meetings—especially to China, in an effort to build more
sturdy political and cultural understandings, and undoubtedly to generate further goodwill. The frequency of these visits has greatly intensified, but more important has been the increasing seniority of the visitors, which now eclipses that of those dispatched to Western capitals.
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A report published by the US-based Middle East Institute in 2009 also identified the trend, stating that there has been a ‘steady, incremental process in the building of personal and institutional relations—the essential latticework of Gulf-Asia economic interdependence… [and the diplomatic visits] have been capped by a slew of ambitious cooperation programs and joint ventures’.
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In 2006 the Saudi king visited China to sign several new agreements that were intended to ‘write a new chapter of friendly cooperation with China in the twenty-first century’. As a gesture of goodwill he also agreed to grant China a substantial loan in order to build infrastructure in the oil rich Xingjiang province.
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This was his first international trip as the newly-installed king—before visiting any western states—and the Chinese president declared that the visit ‘would begin a new phase in partnership between the two countries in the new century’.
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Following the Abu Dhabi ruler’s visit to China in 1990 the UAE has made many large donations to China, including grants to establish an Arabic and Islamic Studies Centre at Beijing Foreign Studies University and the financing of the expansion of a printing factory for the China Islam Association. Subsequent visits also led to China being granted permission to set up UAE branches of the Xinhua News Agency and the
People’s Daily
newspaper.
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And soon the UAE’s Zayed University will establish a Confucius Institute as a result of an ‘imaginative new partnership’ that is being developed with China’s Xinjiang University.
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Meanwhile, Kuwait has been one of the most generous suppliers of low interest loans to China, with the Kuwait Fund for Arab Economic Development having provided China with over $600 million in such loans since the 1990s.
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There have also been several large gifts, including a disaster relief package in 1998 following serious flooding in China.
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The poorer Gulf monarchies have been less active in providing gifts and development assistance to China. Nevertheless, in 2001 Oman’s ruler donated $200,000 to assist the Guangzhou Museum of Overseas History build a new Arab and Islamic exhibition room.
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