China's Axis of Oil

The mainland's growing energy needs and the Middle East's investment billions are building a two-way trade route between the regions

It is not difficult to find examples of China's growing ties with the Middle East. Although Beijing's primary focus in the region concerns access to oil and gas, the resulting increase in foreign direct investment and trade between the two regions is redefining geopolitics.

China obtains 50% of its imported oil and gas from the Middle East. Iran and Saudi Arabia alone account for over 30% of the oil portion of this. In return, the Gulf States have been sinking more and more of their petrodollars into China and throughout Asia.

Historically, this money would have been destined for the US and Europe, almost without question, but times are changing.

MONEY COMING INLast year, investments in China by the six primary Gulf States - Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Oman and Bahrain - totaled about US$20 billion. In the same period, two-way trade between China and the Gulf States climbed dramatically to roughly US$135 billion.

There are also ongoing government-sponsored discussions on the possibility of creating a massive free trade zone between the regions.

Recent deals of note include: Kuwait building a US$5 billion downstream oil refinery in China's Guangdong province; Saudi Arabia setting up crude oil facilities with a storage capacity of 30 million metric tons on Hainan Island; a reported tie up between Aramco and Sinopec that will see a wave of new refineries; and Dubai Ports World investing US$500 million in a container port facility in Tianjin. Similar investment flows are occurring in property developments and infrastructure.

One particular deal - which is being closely watched by Washington - involves China's energy dealings with Iran. Last year Beijing signed a US$100 billion agreement to import 10 million tons of Iranian natural gas over the coming decades. In return, Chinese companies will become 50% stakeholders in Iran's Yadavaran oil fields.

It is here that China's business and political interests in the Middle East converge. Beijing, alongside Moscow, has repeatedly blocked US-led moves to impose strict sanctions on Tehran over its nuclear developments. While urging Iran to comply with international inspection teams, China and Russia have persuaded their fellow Security Council members to tone down the language of directives issued.

The new political tensions that exist in the Beijing-Washington-Middle East extend beyond Tehran. The international diplomatic community was put on notice by Saudi Arabian ruler King Abdullah's decision to visit Beijing rather than Washington on his first overseas trip. Five years ago this would have been unthinkable. King Abdullah's move was a validation that the growing trade ties between China and the Arab States is occurring as US-Middle East ties continue to chaff in a post 9/11 world.

If oil sales can be considered a barometer, Saudi exports to the US have decreased every year since the spring of 2002. Exports to China, on the other hand, have been increasing steadily.

INCREMENTAL INFLUENCEHow significantly does China's growing bond with the Middle East affect the global status quo? Not as much as it would seem - at least in the short-term.

While there is clearly a growing rivalry for energy resources and influence in the Middle East between Beijing and Washington, the two countries have mutual interests that run far deeper.

Beijing's economy is still largely export dependent and it needs access to US markets as well as to continued technology transfers. Washington, on the other hand, must protect huge sunken investments in China by US corporate interests as well as ensure that Beijing continues to fund its current account deficit through the purchase of government issued debt instruments.

Despite its ascendant role in the world, it is clearly in China's interest to keep a low profile in the Middle East. Beijing's priority remains internal development as China strives to develop into a "complete" power over the next several decades.

Beyond that, the landscape is less clear. Much will depend on whether the idea of a China-Middle East free trade zone will make it past the negotiating table. Uniting the two regions under a trade pact would mean more business for everyone, including America.

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