From 7-10 December, Chinese President Xi Jinping went to Riyadh, Saudi Arabia to attend the first China-Arab States Summit, the first China-GCC Summit; and paid a state visit to Saudi Arabia where the two sides signed the Comprehensive Strategic Partnership Agreement. The Chinese strategic community welcomed the development with much enthusiasm, as they argued that Chinese diplomacy has entered its “Middle East moment”, and that the United States’ (US) loss has become China’s gain”. Many believed that China-Middle East relations had now entered a new “Golden Age”, where Saudi Arabia, a staunch US ally, has now become one of China’s “circle of friends”, symbolising a major breakthrough in China’s Middle East strategy. Beyond all the fanfare and show, the visit also generated some interesting debates and discussions within Chinese strategic circles, which are worth noting and might have certain policy implications for India as well.
“From petrodollar to petro-RMB, is the process accelerating?”
In the run-up to the visit and thereafter, there were much discussions in the Chinese media about whether Saudi Arabia will switch from “petrodollar” to “petro-RMB”, and whether the oil and gas trade will now be settled in RMB. There were some optimistic analyses highlighting how China’s competitiveness in manufacturing fields such as automobiles, power special equipment, and chemical materials has risen rapidly in recent months. While the conflict between Russia and Ukraine has increased the manufacturing costs of Europe, Japan, and South Korea, helping China gradually replacing Japan, South Korea and Europe’s manufacturing market share. As China’s manufacturing industry gets upgraded, sections within Chinese strategic community are hopeful that imports from China and the demand for RMB will increase further and that will become the basis for the internationalisation of the RMB and the petro-RMB. It is this change, they argued, that will be brought about by President Xi’s visit to Saudi Arabia. However, others cautioned that China need not be overly optimistic about the emergence of petro-RMB any time soon. Although the “hegemony of US dollar” is declining by the day and China’s importance in the global economic system is increasing, however, they note, there is still a big gap between the RMB and the US dollar in terms of foreign exchange reserves, foreign exchange transactions, global payments, trade financing, and securities valuation. Indeed, the recent spat between the US and the OPEC+ countries over oil production has further raised hopes for petro-RMB, however, one should not lose sight of the fact that the current autonomy of the Gulf countries is quite limited, they still rely heavily on the US in terms of security and finance. For example, even for Iran, which has been on a collision course with the US and sanctioned by it for many years, much of its oil exports are still denominated in US dollars. On the other hand, it is being argued that China itself might not be fully ready in terms of trade structure and financial system to support and promote petro-RMB. Some Chinese scholars are of the opinion that the internationalisation of the RMB still needs to be deepened, particularly an RMB asset pool matching RMB’s growing international usage and capital pool is still needed to be built so that the RMB obtained by selling oil in other countries can be invested. No wonder, despite all the talks before the summit on China-Saudi Arabia reaching an agreement on the settlement of some crude oil trade in RMB, so far there has been no official announcement of a substantial breakthrough.
“Will the FTA negotiation between China and GCC make progress?”
As the visit progressed, many Chinese strategists expressed hope that it may expedite the FTA negotiation process between China and the Gulf Cooperation Council (GCC) nations. The free trade area negotiations between China and the GCC started in July 2004. However, the progress has been slow and was temporarily suspended in 2009, while in January 2014, the negotiations were further resumed. Chinese scholars are of the opinion that restarting the China-GCC Free Trade Area (CGFTA) negotiations is important for China’s economic and energy security, to realise China’s strategic vision of the Belt and Road and it is an inevitable choice for China to prevent itself from being marginalised in regional competition. Chinese scholars believe that the foundation of China-GCC relations is anyway much shallower than that of Europe, the US, and other regional powers. At a time when the GCC has been negotiating free trade agreements with multiple stakeholders including the European Union, Japan, India, South Korea and other countries, if China-GCC free trade agreement doesn’t make progress, there is a risk that China might have to face the negative effects of trade diversion and become marginalised in regional competition. On the other hand, various Chinese researchers point out that signing of CGFTA will have an important trade creation effect on both China and GCC members—China can increase its exports of food, textiles, clothing, electronic equipment, machinery and other commodities to the GCC countries, and it will also become more active in labour services and investment and GCC’s exports to China can increase in terms of crude oil, natural gas, and chemical products, while producing trade diversion effects on other countries and regions, including India, Japan, and theUS. However, sections within China’s strategic community remain somewhat unconvinced if it will be as easy for China to establish an FTA, and realise trade liberalisation in the GCC countries, thereby, driving the growth of Chinese exports to the region, given these countries’ dependence on single economic structure, high per-capita income and small market size. The other major stumbling block in China-GCC FTA negotiation is understood to be tariff negotiations on petrochemical products. In the Chinese assessment, one of the key reasons why the CGFTA negotiations have been so protracted is that Chinese petrochemical companies which are comparatively less competitive are particularly worried that any tariff reductions will cause petrochemical products from the GCC to flood the Chinese market, delivering a big blow to China’s petrochemical industry and causing large-scale unemployment. Chinese strategists indicate a deal where China takes the lead in reducing tariffs on oil, gas, and petrochemical products, while in return, the GECC countries do away with the “Asian premium” in crude oil trade with Chinese companies, preferably through RMB settlement of oil trade[4].
Interestingly, in 19 September, Chinese State Councillor and Foreign Minister Wang Yi met with the GCC foreign ministers on the sidelines of the United Nations General Assembly in New York, where the issue of CGFTA figured prominently. It was reported that during the meeting, the two sides agreed to make joint efforts to reach common ground on the issue at an early date. However, this critical issue, which has been a major talking point amongst Chinese strategists, didn’t quite figure in the official statements.
“How will Iran view China’s GCC outreach?”
China also finds it difficult to navigate through the complex geopolitical landscape of the Middle East. China would ideally like to do, what Wu Bingbing, professor at the Center for Middle East Studies, Peking University says, a “positive balancing: in the Middle East—that is cooperating with one party, while creating a certain amount of pressure on the other party, thereby, influencing it to further improve its ties with China. It wants to avoid negative balancing i.e., restricting cooperation with one party out of fear of affecting relations with the other party, thereby, restricting China’s operating space in the region. For example, China has signed a 25-year cooperation agreement with Iran, but has not signed similar agreements with the Gulf countries. By doing so, it believes it can exert a certain amount of pressure on the Gulf countries and motivate them to better cooperate with China by expanding investment and energy cooperation etc. Similarly, in terms of trade, Qatar signed a 27-year natural gas agreement with China not very long ago. China hopes that this will have a similar effect on Iran, which is also a country with abundant natural gas reserves, more reserves than Qatar, but doesn’t yet have such an agreement with China.
However, such positive balancing might be easier said than done. As Pan Guang, Director of the Shanghai Cooperation Organization Research Center of the Shanghai Academy of Social Sciences noted the Arab countries have been most sensitive and suspicious about the 20-year long-term strategic cooperation agreement signed between China and Iran. Since China and Iran have not fully announced the content of the agreement, the Arabs and Israelis have been particularly concerned about China-Iran secretive dealings and the issue has already been casting a long shadow on China-Arab cooperation. Meanwhile, Iran has been keeping a close eye on the China-Arab dynamics. There has been news about Iran being displeased about China’s recent outreach to the GCC countries and even called in China’s ambassador over Beijing’s joint statement with Arab states which included, among other things, the issue of ownership of Greater Tunb, Lesser Tunb and Abu Musa – three islands in the Strait of Hormuz that are claimed by the United Arab Emirates (UAE) but are presently governed by Iran.
Overall, one can argue that Xi’s recent trip to the Middle East might have added new momentum to China’s “1+2+3” cooperation model in the region (energy as the number one focus, infrastructure construction, trade and investment facilitation as two wings, and the three high-tech fields of nuclear energy, aerospace satellites, and new energy as key breakthroughs.), however it somehow fell short in adequately addressing some of the key sticking points in China-GCC ties.
