World

For Gulf Arab states, China is a temporary friend

Bloomberg September 8 | Updated on September 08, 2020

A strategic partnership with China does not help achieve regional balance against Iran; it is American power that guarantees the free movement of international shipping

At a time of American retrenchment from West Asia, there’s a tendency in foreign-policy circles to overestimate China’s influence in the region, even an expectation that it will take on some of the hegemonic historic responsibilities in the region.

But Beijing’s interests there are economic and tend to be concentrated in the Gulf Arab states. What’s more, they have a very limited lifespan, tied to Chinese demographic trends that point to declining demand for hydrocarbons over the next two decades.

This period will coincide with a fiscal dilemma for the oil and gas exporters of the Gulf Cooperation Council, when their own demographic burden of an ageing population reaches retirement, even as pension systems go underfunded and social welfare states are eroded. The dilemma is especially acute for states that are now building a significant sovereign debt repayment schedule for years to come.

Little thought is being given in Washington to what comes when China’s imports of oil and gas tail off, leaving the region with neither superpower supervision nor a major consumer of its principal product. For the Gulf Arab states, a strategic partnership with China does not help achieve regional balance against Iran.

It is American power that currently guarantees the free movement of international shipping in the Persian Gulf and the Red Sea corridor. Beyond guarding a global free market, a forceful American presence in West Asia would discourage the kind of Turkish adventurism we now see in the Eastern Mediterranean and the competitive basing and intelligence operations taking place in Sudan, Somalia and Yemen. There is a role for regional powers to play, but we are all better off when there is systemic order, anchored by American hegemony.

Fiscal cliff GCC states face

The governments of the GCC member states are acutely aware of the fiscal cliff they face in the next 20 years, when global oil demand plateaus and they have burned through much of their accumulated wealth. The trendlines in the GCC’s largest member state, Saudi Arabia, prefigure the approaching crisis. It faces future that is more middle- or working-class in its citizen demographics, more female in family leadership and bread-winning roles, with growing consumer debt burdens. Its population will be more heavily taxed, concentrated in cities that are more and more expensive to live in.

In the same 20-year timeframe, Saudi pension systems will be grossly underfunded, public health and education systems overburdened, and social safety nets for the chronically unemployed and underemployed frayed. The debt-servicing burden will, meanwhile, balloon.

Thanks to an external-debt issuance spree by GCC states, West Asia is already a leader in bond sales, surpassing Asia and Eastern Europe. In 2008, Gulf external sovereign debt issuance was negligible as a proportion of emerging-market debt; by 2017 it was more than $50 billion. Last year saw $52.9 billion in new GCC government debt, outpacing chronic borrowers in Latin America. Already in 2020, we’ve seen $40 billion in new Gulf issuance and the total could reach nearly $70 billion.

In these circumstances, it is useful to have an external source of investment that does not require a bond prospectus, and a powerful partner which can provide technology and defence material. China looks very good as a bridge strategy for Saudi Arabia and the Gulf oil exporters.

Energy markets

There is a small window to capitalise on energy exports to China, whether in the form of oil and gas or petrochemicals. If China, in the meantime, can serve as a co-investor in energy projects from petrochemical facilities in the Saudi Red Sea port of Yanbuto a refinery in Oman’s Arabian Sea port of Duqm so much the better.

For how long, though? China’s birth rate is in rapid decline, and its economic growth slowing by one reckoning, to just 2.5 per cent this year. Even rosy pre-Covid estimates by the World Bank saw China’s GDP growth slowing below 5 per cent by 2030; investment bank Natixis, in a recent report on the global effects of an ageing China, projects it at as little as 2.5 per cent. Meanwhile, Chinese investments in renewable energy are exploding.

Any way you look at it, Beijing’s need for Gulf oil will inevitably diminish, with grave consequences for GCC economies and by extension, the legitimacy of its ruling elites.

This grim outlook, combined with American retrenchment from the region, has inspired some experimental foreign policy by the Gulf Arab states. It informs their improving relations with Israel and even some tentative outreach toward Iran, under the cover of cooperation in dealing with the coronavirus pandemic. But these are no substitute to the American protective umbrella.

In the next 20 years, we can expect a power vacuum to emerge across West Asia. This will be problematic for the heavily populated economies that sit along its most important sea trade routes. What comes after the Gulf’s China fling is something American policymakers should be thinking about more seriously.

Published on September 08, 2020

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