Belt and Road: Middle East takes the slow road to China
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Belt and Road: Middle East takes the slow road to China

The Belt and Road Initiative offers much to the disparate markets of the Middle East and Africa, but not all those countries seem so enthusiastic in return.

The Suez Canal Economic Zone is a rare example of local banks working with China


Only the bold (or the foolish) would invest in a country where 5 million people have fled conflict and persecution, where 6.3 million people are internally displaced and where up to 475,000 people have died as a result of a bloody civil war. But that is precisely what China is doing in Syria. 

In April this year, China and Syria continued talks regarding the former’s investment in oil, telecommunications, pharmaceuticals and renewable energy in the Middle Eastern country – as a deadly civil war raged on.

China’s state-owned National Petroleum Corporation has large stakes in two of Syria’s biggest oil companies, the Syrian Petroleum Company and Al-Furat Petroleum Company, as well as in a number of Syrian oil fields. In telecommunications China’s Huawei signed an agreement with Syria in 2015 to support the country’s communications and broadband ambitions up until 2020. As Western powers pulled out of Syria, China leapt in.

“War in Syria will end, the country will stabilize, and when this happens China will be in the right side of Syria’s economic growth story,” says Altay Atli, research associate at Istanbul Policy Centre. “Chinese investment may even be an incentive to end conflict in Syria as citizens slowly realize that more money and development will follow once conflict in the country comes to an end.”  

One Belt, One Road will be much more important in war-torn and underdeveloped Middle East and African countries than anywhere else in the world, because the need for infrastructure is bigger - Altay Atli, Istanbul Policy Centre

When Iran resurfaced as a potential investment destination in January 2016 after years of sanctions relating to the country’s nuclear programme, China was one of the first to welcome the country back into the global order. 

Just days after sanctions were lifted, president Xi Jinping travelled to Iran and promised that China would expand bilateral ties and increase trade to $600 billion over the next 10 years.

That agreement will leverage the connectivity provided by a 575-mile electrified rail line that connects Iran’s capital Tehran with Mashhad, the country’s second most-populous city. The line was financed with a $1.6 billion loan from China. 

“Chinese investors are drawn to Iran because of recent shale oil discoveries in the country, as well as the fact that the country boasts the world’s largest natural gas reserves,” says Naser Al-Tamimi, an independent UK-based Middle East researcher. “While China ploughs ahead in Iran, others exercise caution.” 

Egypt has been struggling to maintain political and economic stability, yet it continues to receive a lot of Chinese investment. According to data from the Arab Investment and Export Credit Guarantee Corporation, China became the largest investor to the Arab region in 2016, with new investment in Arab countries totalling $29.47 billion. The vast majority of this went to Egypt – $22.49 billion or 76% of the total.

“The Egyptian government says that 200 Chinese companies are now operating in Egypt,” says Al-Tamimi. “China is also the biggest investor in the Suez Canal Economic Zone – a special economic area launched in 2015 along the banks of Egypt’s recently expanded Suez Canal.”

Sixty eight Chinese companies have already agreed to set up in the zone. The Egyptian government is looking to attract between 100 and 200 in the next three years. 

Good relationship

Despite the complex problems that each country faces, maintaining a good relationship with Middle Eastern and African countries in China’s Belt and Road Initiative is high on Beijing’s agenda. The region provides a continuous flow of commodities to meet China’s demand for natural resources, strategic access to sub-Saharan Africa and Europe through the Suez Canal and business opportunities for Chinese companies.

According to data from the World Economic Forum, China overtook the US as the world’s top importer of crude oil in 2015. Of the 6.2 million barrels a day that China imports, more than half come from the Middle East and North Africa. 

In return, Chinese investment offers economic development without the political demands that often characterized western investment and aid to the region in the past. Simply put, Belt and Road creates a framework within which Chinese investment in risky markets can be neatly explained in terms of mutual benefits. 

Alexious Lee, CLSA

“For less prosperous countries that may not meet conditions attached to ‘mainstream’ development initiatives from the west, China offers an attractive alternative,” says Alexious Lee, head of China industrial research at brokerage and investment firm CLSA. “This is because much of their investment doesn’t involve complex political obligations.” 

Although the US and Europe are generally cautious when it comes to investing in some of the region’s riskier countries, the tide is beginning to turn. As investors unpack the nuances and risks associated with individual countries in the region, opportunities have emerged and some investors are even beginning to revisit once abandoned deals in the region in the race for returns.

After withdrawing from Iran in 2010, Shell and ENI are now looking at potential deals and opportunities in the country. In July this year, French oil giant Total signed a $4.8 billion investment in Iran to develop its South Par gas field alongside China, after pulling out of the country in 2006. 

Just like China, South Korea and Japan are hungry for natural resources and are active in the Middle East and Africa. In January 2016, a Japanese-led consortium agreed to develop two natural gas-fuelled power plants in northern Oman for $2.3 billion and in May 2017, South Korean company GS began building the largest petrochemicals facility in Egypt at a cost of $3.7 billion. 

As competition builds, China could start losing out. In some cases investment from Europe, Japan and South Korea can come with strings attached, but developed economies often possess a technological sophistication that China is yet to exhibit. Despite their limitations, some emerging markets are willing to pay a premium for high-tech infrastructure.

“There are areas of infrastructure development – such as railways – where there will be very little competition in the Middle East and Africa, and China will drive investment in these sectors,” says Al-Tamimi. “But where commercial returns are at stake, technological know-how becomes a major selling point, and China could lose out because it simply doesn’t boast the expertise that other countries have built up over the last 20 or 30 years.” 

In Iran, for example, there has been a debate around whether or not oil and gas exploration in the country has been held back because of China’s lack of expertise in the field. 

“Some of this may be perception, but some is fact,” says Al-Tamimi. “I think Iran struggled to develop oil and gas further because China lacks the expertise to do so.” 

But it might not be that straightforward. 

“Some in the Middle East and Africa believe that Chinese goods are no good, while all things associated with South Korea and Japan are reliable and high quality. But this is an outdated sentiment,” says Atli. 

“A few years ago China’s manufacturing costs skyrocketed and many companies relocated operations to southeast Asia,” says CLSA’s Lee. “ But the fact is FDI into China is still growing. Money is flowing into financial services, technology and some of the more ‘advanced’ sectors. 

“China is undergoing a transformation and now has significant resources and expertise to share with the rest of the world.” 

Diversification, and not sophistication, will be a deciding factor in how emerging economies in the Middle East and Africa close deals with China and the rest of the world. 

“Some countries in the Middle East are attracting more mainstream investors and they will actively take up the opportunity to lower their reliance on Chinese investment,” says Atli. “But deals should be considered on a case-by-case basis, not on an outdated assumption that China does not have the expertise. Otherwise emerging markets may lose out on strong, affordable infrastructure from China.” 


Tapping new markets and creating new trade routes through the old Silk Road will boost China’s waning growth, as well as building political and strategic influence globally. China has ring fenced large amounts of cash to reach this goal. Beijing has committed over $300 billion for infrastructure loans and trade financing in the coming years. This includes a $40 billion contribution to the New Silk Road Fund and $100 billion to the Asian Infrastructure Investment Bank. Both have a mandate to invest in BRI countries’ infrastructure projects. 

Much more is needed, however. According to the World Bank, there is still a $30 billion to $40 billion a year deficit in infrastructure investment in the Middle East and North Africa alone. While dedicated BRI funds might cover the region for the next 10 years, China has the rest of the route from southeast Asia to central Europe to consider. A sudden shock to China’s weakening economic system (before it can really reap the benefits related to its BRI strategy) may force Beijing to put some of its projects in the region on hold.

Hasnain Malik, Exotix

But it will not be easy. As Hasnain Malik, head of equity research at Exotix in Dubai, says: “In Kenya, for instance, China has invested so much that even if there was a huge shock to the Chinese economy, I doubt they would be able to withdraw.”

In June this year, Kenya opened a new $4 billion Chinese-built standard gauge railway connecting the port town of Mombasa to the capital city Nairobi. This is just the first phase of a much longer infrastructure project that will replace the dilapidated ‘Lunatic Express’ built by the British over 100 years ago. It will eventually connect Uganda, Rwanda, South Sudan and Ethiopia by rail to the port in Mombasa. With few other investors interested in the project, China will have to see its development through to the end if it wants to benefit from revived connectivity in east Africa. 

Commercial banks could pick up some of the slack and China’s Belt and Road Initiative calls for just that. Chinese policy banks such as Agricultural Development Bank of China and the Export-Import Bank of China have been backed up by their commercial counterparts, such as Bank of China and Industrial Commercial Bank of China (ICBC). 

Chinese bank branches are opening up across the region. In the Middle East and Africa, ICBC has branches in Abu Dhabi, Dubai, Riyadh as well as a partnership with South African Standard Bank. Bank of China has offices in both Johannesburg and Dubai, while the Agricultural Bank of China also has an office in Dubai. 

But funding from local banks along the Belt and Road in the Middle East and Africa has been close to zero. 

“From what I understand the only local bank doing anything in the Middle East and Africa with China is the Arab Investment Bank, which signed a deal with China’s Tianjin Economic-Technological Development Area Corporation (TEDA) to build projects and promote investment opportunities in the Suez Canal Economic Zone,” says Al-Tamimi. “Other than that, local and regional banks have been pretty absent.” 

Many along the route do not have the capacity to participate in China’s BRI. 

“One of the main reasons that local banks in the Middle East and Africa are not getting involved in the programme is because a lot of these banks do not have strong dollar reserves and thus do not want to lend to projects that rely heavily on importing machinery in foreign currency,” says Malik. “It’s just too risky.”

There is also a maturity mismatch. “By their very nature, infrastructure projects need long-term capital,” says Gabriel Wong, capital projects and infrastructure leader for PricewaterhouseCoopers for China. “And although local governments are increasingly looking at public-private partnerships to get the private sector and local banks involved, I think this will take some time to happen, for the market to become more mature.” 

Local banks and companies are more likely to get involved when local opportunities gather momentum after China’s investment drive. When this will happen, however, is difficult to predict. Until then competition from European, Japanese and South Korean investors may be beneficial if it fills the funding gap and aligns with Chinese interests in the long run.

But for some, China still has the edge. 

“Not only is China becoming increasingly sophisticated, but I believe China’s costs will be more competitive than some other countries,” says Lee at CLSA. “Therefore, companies looking to do business in the region will find China more economically viable.” 

Atli says: “One Belt, One Road will be much more important in war-torn and underdeveloped Middle East and African countries than anywhere else in the world, because the need for infrastructure is bigger. While choices are increasingly on the table, Chinese investment is still attractive. China won’t be going anywhere for some time.”

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