Is the Gulf ready for the year of the tiger?

China now has one of the fastest growing economies in world, as noted by the International Monetary Fund, which revised its forecast for the country's growth upwards to 10% for 2010 and 9.7% for 2011, outperforming the world economy by 6.1% and 5.4%, respectively.

'The times are over, when the world catches a cold when America sneezes. The world economy has four engines now: the US, Europe, China and the emerging markets,' says Dr. Nasser Saidi, Chief Economist at the DIFC Authority in Dubai.

Brothers in oil

Gulf states have benefited immensely from the rise of the Far Eastern giant. Dubai's free port Jebel Ali has boosted its status as a hub by moving goods from East Asia to Europe and Africa and vice versa. Meanwhile, China played an increasingly important role in the oil price rally which took place from 2004 to 2008 as it receives 46% of its oil from the Middle East.

For its part, China supplies about 95% of the global market for rare earths, which are essential parts in BlackBerry phones or hybrid cars. Meanwhile, trade between China and the GCC amounted to over $32bn in 2007, with McKinsey consulting predicting that trade flows between the two partners will climb to between $350bn and $500bn by 2020.

Both sides started talks to establish a free trade agreement, but this will not be easy due to challenges of getting the Arab nations to reach a consensus. 'Beijing speaks with one voice, but Arab states unfortunately still tend to talk in different political languages,' says Dr. Abdullah Joda, General Manager of China-based Orbit trading in Yiwu, a trade stronghold in the Eastern coastal province of Zhejiang.

Nevertheless ties are getting closer in nearly all fields. Saudi Aramco and China's Sinopec have formed a partnership to build a $5bn oil refinery in eastern China's Fujian province, while KSA's petrochemicals giant Sabic recently received permission to build a $3bn petrochemical complex in the north-eastern Chinese city of Tianjin.

Tourism in Dubai and Abu Dhabi also got a boost when China eased travel visa restrictions in September last year, as both emirates have been receiving about 10,000 Chinese tourists per month ever since, whereas the monthly figure was about 3,000 under the prior visa rules.

Challenges remain

But how sustainable is the new Silk Road in the wake of the economic crisis? In recent months political overtures between China and the Middle east have quieted. The last visit by China's president Hu Jintao to the region was in February 2009 when he inaugurated a railway construction project between the Muslim holy cities of Mecca and Medina.

Increasingly, the Middle East has grown more dependent on China, rather than the other way around. According to Alia Moubayed, Senior Economist at Barclays Capital in Dubai, the sensitivity of emerging economies (of which the GCC is part of) shifted from the old G7 to China.

'While in the 1990s, the Beta-sensitivity between emerging markets and the G7 stood at 1.6, indicating a high correlation, it fell to about 0.2 in the last decade,' Moubayed says. 'The swap is eminent, when comparing the Betas of 0.75 and 1.1 respectively during the same time frames between emerging markets and China.'

But some analysts already worry that China's economy is overheating with a too-aggressive monetary and fiscal policy. Meanwhile, Arab head of states will also watch closely if the Muslim Uighur minority in China's West will benefit from the boom.

At the moment, however, politics might drive Beijing even closer to its new allies in the Gulf. The recent move by President Obama to send more weapons to Taiwan puts Beijing's détente policy with Taipeh in jeopardy.

China, a member of the UN Security Council, also strictly opposes full economic sanctions against the Islamic Republic of Iran. Although the GCC, and Riyadh in particular, is not interested in a nuclear Iran, sanctions would harm trade in the Gulf, especially in Dubai with its Jebel Ali port being a key door to Western goods for Tehran.

With so much to gain, GCC governments should stand together to support increased relations with China. In exchange, Chinese firms need to increase their presence in the GCC in order to show their commitment for a long-term partnership.

The majority of Mandarin firms exhibiting at fairs in the Dubai World Trade Centre are selling their goods via distribution partners to the 40 million inhabitants in the GCC. 'But in the Middle East you have to be there,' Dr. Saidi says.