The Middle East and North Africa region, where the ‘belt’ and the ‘road’ of China’s two-pronged initiative converge, is yet to see the same dizzying levels of Chinese investment as Sub-Saharan Africa and Eurasia. But growing alignment between the governments of the region and the Asian giant – plus a bit of fortuitous timing – could see Mena profit handsomely from China’s global expansion plans, writes Eleanor Wragg.
At the bustling second Belt and Road Forum for International Co-operation, held in Beijing in April, Chinese President Xi Jinping hosted around 5,000 delegates from around the world to discuss the country’s mammoth infrastructure project. However, despite its prominence on the historical Silk Road, the Mena region was conspicuously under-represented at the event: the forum saw enthusiastic attendance by European and Asian leaders, but from the Middle East and North Africa, only the UAE and Egypt sent top-level delegates, which one could take to mean that the Belt and Road initiative (BRI) just isn’t that interesting for the region.
Gaining momentum
But appearances can be deceiving. As China sharpens its focus for the BRI, and Mena economies redouble their diversification efforts, new synergies are emerging, making the region the next one to watch for the historic project.
“Everything [between China and Mena] is growing at double-digit rates: trade, foreign direct investment, tourist arrivals, projects and joint ventures,” says Florence Eid-Oakden, chief economist at Arabia Monitor, a research and strategy firm. “This is mutually beneficial for China and the Arab world, as it is the confluence of the BRI and the economic diversification underway in Mena. It has all come at the right time, because if either side were doing this a couple of years earlier, the momentum would not be what it is now.”
This momentum is being driven by several initiatives which have blossomed across the region as economies seek to lessen their dependence on hydrocarbons and introduce far-reaching economic reforms. Government programmes, from Smart Dubai 2021 to Saudi Arabia’s National Transformation Programme 2030, Morocco’s Mohamed VI Tangier Tech City and the China-Egypt Suez Economic and Trade Co-operation Zone, have seen Chinese technology firms increasingly look to Mena, while partnerships such as that between Dubai-based lender Mashreq and Chinese mobile payment platform Alipay have further supported Chinese integration into the region.
Even in the oil space, diversification in the Sino-Arab relationship is becoming apparent, as Eid-Oakden explains: “The foundation of the relationship has always been energy. Let’s not forget that. It continues to dominate the relationship because it constitutes a considerable amount of bilateral trade. But we are also observing very interesting trends. For example, while China is the biggest oil buyer for Saudi Arabia, Saudi Arabia is also investing a lot into the downstream business in China and is doing so via a number of joint ventures with a couple of Chinese provinces that are the most economically prosperous.”
In recent years, Chinese involvement with Mena has been mostly limited to its utility as a source of vital energy supplies in the shape of oil and gas. Ever since the US unilaterally withdrew from the Paris agreement on climate change in 2017, however, Beijing has taken up the mantle of global clean energy champion. Having now built up the requisite expertise at home – the country currently leads the world in terms of wind and solar power capacity – Chinese renewables firms are now setting their sights on the Arab world. They are backed by bilateral agreements such as that signed between the Saudi Public Investment Fund and China’s National Energy Administration earlier this year during Saudi Crown Prince Mohammed bin Salman’s visit to China, which will help Saudi Arabia meet its aims of becoming a regional hub for clean energy.
Infrastructure gives way to trade
Mena’s many and varied economies, at different levels of development and with different infrastructure needs, present a unique opportunity to Beijing, particularly as US influence in the region wanes. For its part, China is finding a mostly warm welcome.
“In China, the Arabs see a partner who will buy their oil without demanding that they accept a foreign ideology, abandon their way of life, or make other choices they’d rather avoid. They see a country that is far away and has no imperial agenda in their region but which is technologically competent and likely in time to be militarily powerful. They see a place to buy things they can use and enjoy. They see a country that unreservedly welcomes their investments and is grateful for the jobs these create,” said Chas Freeman, a US diplomat and senior fellow at the Watson Institute for International and Public Affairs in a speech to the Middle East Policy Council in 2013. In the six years since then, this growing openness to China has been illustrated by new Sino-Mena trade flows that are gradually criss-crossing the Mena region.
“We see new trade routes being created in the Levant, for example, in the port of Tripoli in Lebanon, as well as the building of free economic zones in North Africa,” says Eid-Oakden. “There are different patterns of co-operation across the region. In the GCC we see a lot of joint ventures, such as in renewable energy in the UAE. In the GCC it’s more visible because these countries are very open in terms of their stance on the BRI. When the Chinese president visits, they give him the best reception possible, and when they come to visit China, they are very present and very visible. In other countries outside of the GCC, it’s less high-profile, but the BRI is still very significant to the local population. How much they interact with the Belt and Road depends on the countries’ own efficiencies.”
For banks active in the region, BRI’s impact on Mena trade is unequivocal. “What used to be an infrastructure flow is now turning into more of a trade flow as well,” says Sunil Veetil, HSBC’s regional head of trade.
And with this growth in trade comes greater demand for support from banks. “With the trade flows increasing we now also see demand for documentary credit and some open account structures,” says Veetil. “We are also increasingly seeing supply chain requests. This is a very clear indication of how these companies are maturing; they are getting more comfortable with their buyers and suppliers and they are willing to have a structured open account process where something like supply chain finance can come in. That’s another new trend.”
Opportunities for banks
While several banks have complained in the past about the dominance of Chinese state-run financial institutions in BRI projects, a growing presence by Chinese companies in Mena are now also opening up opportunities for banks in the local markets.
“The long-term funding for Chinese companies happens through their policy banks, and that is not going to change very quickly,” says Veetil. “But what is increasingly happening, especially in the Middle East, is that a number of the Chinese companies which used to come out as EPC [engineering, procurement and construction] contractors are now also doing the maintenance and operations post the infrastructure build. Therefore we are seeing a trend in the Chinese companies setting up shop here and bringing their own management teams, and starting to work with local banks for short-term working capital trade finance.”
He adds that HSBC has closed a number of supply chain financing deals for some of these companies in the last three to six months. “You can see the trend changing – while long-term funding still comes from the Chinese policy banks, on the capital needs side, especially in the trade business, it is moving slowly into the local market itself,” he says.
Mohamed Salama, UAE country head of global banking at Standard Chartered, is similarly enthusiastic. “While Chinese state-owned companies have been the early beneficiaries of development projects funded under the Belt and Road umbrella, the advantages are flowing two ways,” he says. “The UAE also hopes to become a major transhipment centre in China’s logistics corridor: in March, Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum approved and announced the Dubai Silk Road Strategy to focus on enhancing strategic and operational connection of logistics services and build on Dubai’s success as a vital trade link between east and west, and north and south.”
He adds that Standard Chartered has set up a dedicated team that manages the China desk from the UAE in order to take advantage of the resultant opportunities.
Another new trend across Mena is the increasing activity by the Export-Import Bank of China (China Exim) and Sinosure, the nation’s export credit insurer. February this year saw the signing of a massive US$2.6bn loan agreement between China Exim and Egypt’s state-run Egyptian Electricity Holding Company to finance a 2,400MW hydroelectric station, which followed a US$1.2bn deal signed by Egypt’s National Authority for Tunnels for a light rail system. “That is a very concerted, very focused effort on behalf of China to actually help Chinese companies expand with confidence into this part of the world,” says HSBC’s Veetil.
Globally, the expansion of Chinese influence along the Belt and Road has been met with some degree of mistrust, with the initiative now mired in controversy as problematic projects in places like Sri Lanka, Malaysia and Kenya have given rise to accusations of ‘debt-trap diplomacy’.
At the second Belt and Road Forum, President Xi was at pains to underscore the benevolence of the BRI, saying his government would ensure more transparency around the initiative. “We need to ensure the fiscal and commercial suitability of all projects so they can achieve the intended goals as planned,” he said. Whether this will come to pass or whether the Mena region will become home to unsustainable Chinese-funded initiatives remains to be seen, but for now, all indicators point to a concerted effort from both sides to get the most out of the convergence of the BRI expansion and economic diversification in Mena.
