China and the Middle East

Whether you are based in Dubai, Riyadh, London or Paris, and are looking out at the world around you, there seems to be one inescapable fact to take into account: for good or for bad, this is the American decade - a period of time in which the United States is clearly the world's single superpower.

To paraphrase an old saying, governments, political movements, rebel forces, businesspeople, even artists can be for the United States, or against the United States, or they can take some sort of intermediate position. But what they can't do right now, it seems, is to ignore the United States.

US foreign policy, cultural values and business practices have all become a kind of standard against which everyone else measures themselves. It is not going to be like this forever.

At some point after this decade is over, maybe from 2020 or 2030, or perhaps even earlier, China is going to achieve 'superpower' status. We will once more move away from a 'unipolar' world, where there is a single, dominant military and economic power.

In fact, even in the midst of this 'American decade,' China is already making a significant impact on the Arab world, and it will do so increasingly over the next few years. The starting point is to understand what is going on in one of the world's largest and most populated countries.

With a population of 1.3 billion people, China is currently experiencing a massive industrial revolution, and emerging as a manufacturing power of global significance. The scale of the transformation that is under way is hard to comprehend. One estimate is that at present no more than 200-300 million Chinese form part of what could be called the urban, market-based economy.

Within the space of the next two or three decades the current government believes that they will be joined by another 500 million people. That means that over the next 20-30 years a mass of people, roughly equivalent to the current population of Europe, will emigrate from thousands of poor Chinese villages into the towns and cities, where they will get jobs, seek education, open bank accounts and begin to join what could be called the consumer society.

Geographically and socially, this is a major upheaval. Any visitor to China's big cities can see this happening with their own eyes right now. In Beijing and other cities there is a building boom going on, with skyscrapers under construction 24 hours a day.

With rural immigrants pouring into the cities, cheap labor is plentifully available, and the building companies think nothing of running three consecutive eight-hour shifts a day.

Visitors have commented that the pace of life in Shanghai makes New York appear slow and sleepy. Urban and industrial development has traditionally evolved along China's eastern coastline, but the process is now beginning to move further west and inland.

Two of the most important development clusters are currently to be found around two eastern coast river deltas: the Yangtze delta, which includes Shanghai, and, further to the south, the Pearl River delta, including the province of Guangdong and the city of Guangzhou (formerly known as Canton).

The 'Yangtze corridor' is seen as the main 'way in' to China, a massive transport artery for imports. The Pearl River delta, on the other hand, is the 'way out' for China's equally massive export boom, flooding the world with highly competitive manufactured goods.

China is big and hungry, and it is going to get bigger and hungrier. Measured at current exchange rates, China's GDP is under five percent of the world's total, compared to over 30 percent for the United States. That places it as the world's sixth largest economy, after the United States, Japan, Germany, Britain and France.

But measured on a purchasing power parity basis (which takes account of exchange rate distortions) the gap is narrower: China now represents 11-12 percent of the world's GDP compared with 21-22 percent for the United States. That makes it the world's second largest economy, behind the United States, but ahead of Japan.

With the Chinese economy growing significantly faster than the US, as it has over the last decade, and will most probably continue doing so for the next few decades, the gap will narrow further. Some economists believe that China's economy will catch up with the US by 2030 or 2040.

Already, China is the world's largest consumer of steel (using just under 25 percent of world output, compared with 12 percent used by the US) and also the largest consumer of copper. Demand for other metals such as aluminum, zinc and platinum is also roaring ahead. China's import boom has been a major factor underpinning world economic growth in the last year or so, boosting economies as far apart as Japan and Brazil, and lifting shipping rates world wide.

The Yangtze River is quite literally a traffic jam of cargo ships trying to get in. Special attention needs to be paid to China's oil needs. An industrial revolution is an energy-hungry beast. This year, it is estimated that China will need 270 million tons of oil, and will have to import just over one-third of that, approximately 100 million tons.

This year's imports will have risen 9.6 percent on the preceding year's total of 91.2 million tons. Rising energy needs mean that in the space of only 10 years (1993-2003) China has gone from self sufficiency in oil (zero imports) to displacing Japan as the world's number two oil importer after the United States.

According to Scott Roberts, China specialist at the US-based Cambridge Energy Research Associates: 'China accounted for 30 percent of global oil consumption growth in 2003, and 40 percent of growth in the past few years.'

Andy Xie, chief economist at Morgan Stanley Asia, says that last year China's daily consumption rose to 6.2 million barrels per day (b/pd), double the level 10 years earlier. He expects it to rise to 7 million b/pd this year, and to 14 million b/pd over the next decade.

That would bring Chinese oil consumption to US and European levels. Chinese experts admit that the economy's massive growth over the last decade, and the failure to find large new oil reserves at home, have increased the country's energy vulnerability.

'We wasted so many good opportunities to cooperate in energy with Russia and Central Asia,' says Qin Xuanren, a professor of macroeconomics. 'We were too slow, we lacked an overall plan, and each department operated only for itself.' Now, however, a plan is beginning to emerge.

After almost a decade of debate among the country's leaders, last year construction began on a system of strategic oil reserves, with giant tanks being built in four coastal cities that by the end of 2005 should have the capacity to store 15-20 million tons of crude oil, equivalent to 30 days' worth of net imports.

In this, China is emulating Japan and South Korea, two countries that have built up their own strategic reserves to reduce their exposure to short-term oil price volatility. An important feature of China's current energy strategy is a desire to increase the country's direct ownership stake in oil fields around the world.

This is being done through state-owned oil companies such as Sinopec, Sinochem and China National Offshore Oil Corporation, which own shares in oil fields in countries as varied as Venezuela, Myanmar, Sudan, Libya, Kazakhstan, Turkmenistan and Indonesia. Taken together, output from these fields accounts for one-fifth of the country's total oil import needs.

To some extent, the Beijing authorities are latecomers to a series of supply relationships built up over decades by the European powers and the United States. China only established diplomatic relations with Saudi Arabia in 1990, and it now imports around 15 million tons of Saudi crude every year.

In February, Sinopec signed a 25-year contract with the Saudi authorities to develop a 40,000 square meter field in the east of the country. The authorities in Beijing are deeply aware of their vulnerability on the energy front, and this explains another aspect of their policy: to diversify sources of supply as much as possible.

According to Yang Yufeng, who helped write the energy policy paper for China's Development and Reform Commission, 'Our strategy should be to diversify our energy diplomacy, so as not to be controlled by one country, and at the same time not lightly give up cooperation with anyone.'

On land, China is developing an oil pipeline to bring in 10 million tons of crude per annum to Xinjiang from Kazakhstan's Caspian Sea fields, starting in 2005. It is also lobbying fiercely, against competition from Japan, to get a pipeline to bring in oil from Russia's Siberian fields to Daqing. Japan wants the pipeline to go instead to the Russian port of Nakhodka, from where it could be shipped to Japanese buyers.

However much diversification is achieved, the fact remains that China will be dependent on Middle Eastern sources of supply for at least half its oil import needs for the foreseeable future. That fact alone suggests that the country is going to have to develop a more proactive diplomatic and strategic approach to the region. Some signs that this is happening are already evident.

On Iraq, for example, the US invasion meant that China lost supplies from a 26-year oil production field contract it had signed with the Baghdad government in 1997. At the same time it remains uncomfortably dependent on US naval power to ensure the safety of its tankers. But it is marking out a diplomatic line different to Washington's.

At the end of May, Beijing issued a statement within the UN Security Council fixing its position on the future of Iraq. It said that the mandate of the US-led military presence in Iraq should end in January 2005, with the election of a transitional government, and should only be renewed with the agreement of both the Security Council and the Iraqi government.

Suggestively, the Financial Times ran the story under the title 'China Gently Flexes its Security Council Muscles.' As one diplomat commented, 'China has taken the initiative this time. In the past it often hung back or abstained from voting because it did not want to annoy the US.'

In the long term, will the arrival of Chinese strategic influence in the Middle East be more beneficial for the region than the present status quo under the 'American decade'? That's a big question, and there appear to be no quick or easy answers.

But there is at least one clear preliminary conclusion: China is important for the Middle East, and it is going to get more important as time goes on.