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Chinese Capital Comes to the Middle East

Chinese Capital Comes to the Middle East

Vafa BehnamAPRIL 6, 2018

The Middle East has been a key strategic area for centuries, with the Russian, British, Portuguese, French and Ottoman Empires all struggling to incorporate the region within their spheres of influence. And of course, the Middle East was a key transit for the Silk Road, which China is in the process of resurrecting.  Today, with globalization skeptics rising to power in the West, China has not only absorbed the slack, but is also surging ahead with its multilateral projects, not least its “one belt, one road” initiative. Indeed, this year’s World Economic Forum almost seemed like it took place in an alternate universe, where a Chinese leader was the champion of global integration, and the American President used the bulk of his speech defending himself against accusations of economic insularity.

A week after his inauguration, President Trump pulled the U.S. out of the Trans-Pacific Partnership (TPP). China rushed to exploit this, swaying 7 of the 11 original TPP countries to join its Regional Comprehensive Economic Partnership instead. The most powerful argument for the TTP wasn’t even economic, but rather geopolitical: it was a means of curtailing Chinese influence in the region. Obama’s Secretary of Defense, Ash Carter, said as much, arguing that “…passing TPP is as important to me as another aircraft carrier.”

This is part of a larger trend; another manifestation of the Chinese business empire, which has spread to nearly every corner of the world. Indeed, Africa, Latin America and China’s own backyard, Southeast Asia, have seen ample investments of the sort. Such omnipresence bestows China with influence and access to raw materials. Where the US cedes interest, China moves in. In a recent article for Foreign Policy, Max Boot bemoans the current administration’s contempt for American soft power. According to pollster Gallup, worldwide median approval of US leadership declined from 48 percent in 2016 to 30 percent in the latest survey, with China’s approval currently slightly higher at 31 percent. If even staunch US allies like Britain and Germany have been alienated, one can easily infer what effect Trump has had in the Middle East, a region already very skeptical of American interventionism.

With the notorious travel ban, which almost exclusively targets individuals from Muslim-majority countries, and the brash decision to move the US embassy in Israel from Tel Aviv to Jerusalem, Trump has completely erased the respectable damage-control Obama achieved in the wake of the Bush presidency (with the caveat that Obama’s policies such as drone strikes were widely unpopular in the region). Even Christian leaders in Jordan and Egypt explicitly refused to meet famously devout VP Mike Pence in the wake of his unrepentant address to the Israeli Knesset, in which he further reiterated the current administration’s commitment to moving the US embassy in Israel to Jerusalem.

Even longtime regional allies have felt estranged. Saudi Arabia (if only publicly) criticized Trump’s decision to recognize Jerusalem as the capital of Israel. Qatar, which contains an American military base, felt confused in light of Trump’s handling of its diplomatic isolation.

Of course, this is not to say this is all of Trump’s doing. The U.S. under Obama responded poorly to the creation of the Asian Infrastructure Investment Bank (AIIB), headquartered in Beijing. It was left flat-footed, with no say in the formation of an important multilateral institution, nor able to prevent its close allies such as the UK and Australia from joining the nascent bank. On top of that, foreign governments were frustrated with the US Congress’ five-year delay in ratifying the IMF’s quota reform, which would increase the Fund’s capital as well as the voting power of certain non-Western nations (including China).

The Chinese model of influence differs from the American counterpart. China is overwhelmingly extending its sphere of influence through “apolitical” business dealings, rather than on ideological, military or political excursions. Indeed, this approach has been taken to its logical hilt: China is willing to do business with literally anyone. This principle is manifested most strikingly with China simultaneously retaining close business ties with sworn enemies like Qatar, Saudi Arabia, Iran, and Israel.

While there are contradictions in this approach (which will be discussed in the later paragraphs), this “neutral” policy has been successful up until now, with China being the largest investor in the Middle East by some distance. Indeed, Chinese investment in the region amounts to $30 billion, a figure that easily swallows America’s measly $7 billion. And, barring any shocks, the One Belt, One Road initiative looks to power on.

In the Asian Infrastructure Investment Bank (AIIB), China has more than triple the shares of the second largest shareholder, India. Commentators reckon the AIIB will be a major competitor for the Asian Development Bank (ADB), an institution controlled by Japan, the US and the EU (it should be noted that China is also the fourth-largest shareholder in the ADB as well). Despite being founded only two years ago, the AIIB’s shareholder equity is already comparable to that of the far older ADB: AIIB has $100 billion worth of pledged capital, while ADB possesses $150 billion.

Turkey, Iran, and Saudi Arabia all desire moral leadership of the Islamic world, and one wonders how such pretensions can be reconciled with silence in the oppression of fellow Muslims by a foreign communist entity.

Within or without the AIIB, the breadth of China’s investments in the Middle East is, very simply, stunning. It is impossible to find a single nation in the region that has not had at least one major project financed by China. Looking forwards, China has indicated it wishes  to play a vital role in the reconstruction of Syria, still in the throes of war and in urgent need of $250 billion, according to UN statistics. The Greater Levant has also seen some of this action; Jordan has already attracted large investments, with power plants, telecommunications networks and even a national railroads to be financed by the Chinese. Moreover, Lebanon courts some of the Chinese funds earmarked for Syrian reconstruction.

The tentacles of Chinese investment have also reached farther south. Indeed, trade between the UAE and China is now worth $35 billion (for context, trade between the US and the UAE numbered $25 billion). Building on the $10 billion joint investment fund set up by the Chinese Development Bank and by the Abu Dhabi state fund three years ago, Emirati citizens can now travel to China without a visa. Qatar, which is in midst of a diplomatic row with the UAE and five other countries, has also set up its own $10 billion joint investment fund with a Chinese state-owned corporation. In neutral Oman, China is literally building a city out of the desert.

Saudi Arabia as well, a long-lasting US ally, has very intimate ties with China. Saudi Arabia’s King Salman led a trade mission to China early last year, and signed $70 billion worth of trade deals. Rumors abound that China is suggesting payments for petroleum exports be made in yuan instead of the dollar. As intimated previously, it is striking how deep China’s links with Saudi’s arch-rival Iran. In fact, China is Iran’s largest tradingpartner, providing the country respite from American sanctions. Even ravaged and mostly-forgotten Yemen has not escaped the attention of China, which sees the Gulf of Aden as a key strait. This is perhaps where China is taking a more explicitly “political” role than a purely “economic” one, as stability in Yemen will mean stability for China’s trade routes.

To Yemen’s Southwest, the tiny nation of Djibouti is awash with Chinese cash and also housesChina’s first permanent overseas base. Indeed, China’s influence in Djibouti is such that it has single-handedly altered the trajectory of Djibouti’s economy. The Chinese-funded DoralehMultipurpose Port will cost $590 million, a third of Djibouti’s entire GDP! Therefore it is at all unsurprising the IMF reported that both the biggest drivers and the biggest risks to growth in the country were Chinese loans.

From the perspective of the Middle East, the entry of a new player should be beneficial for competition. Unlike Africa and Latin America, which at least have the Development Bank of Latin America and the African Development Bank, respectively, the Middle East has no corresponding regional infrastructural bank. Both China and the Asian Infrastructural Development Bank can be helpful in this regard, allowing the bargaining power of Middle Eastern countries to rise, and better terms be offered. Private capital markets charge high premiums, sometimes excessively. Just ask Egypt, which had to offer 21 percent interest on three-month bonds to sway investors. China might be able to help lower such rates, as a former Angolan Finance Minister argued in 2004 that a $2 billion Chinese loan was the impetus for better terms on commercial loans from the private sector.

Furthermore, competition can jolt traditional multilateral financial institutions to adopt badly-needed reforms, some of which were identified by the Zedillo Report. If done properly, China’s emphasis on infrastructure spending can provide the foundations for long-term development.  

Yet, of course, there are risks with such loans and investments. Back in the 1970s, when the development agenda of the World Bank and others were firmly set on large-scale infrastructural investments, the limitations of such an approach were brought to light. There is a risk that such infrastructure depreciates before benefits are accrued. Moreover, there is a related risk that these countries will be dependent on foreigners for the operation of such facilities.

Anecdotal evidence exists of China disproportionately employing its own citizens, rather than those of target countries, to carry out infrastructure projects. Furthermore, top-down projects offer opportunities for elite capture and government corruption, and, where the US at least pretends to care about human rights, China doesn’t even bother. Finally, even with lower rates, debt-traps remain a perennial threat. The case of Sri Lanka is illuminating, as it is struggling to pay back its Chinese debtors, and some are even conjecturing the debts are a covert means of grabbing land and usage rights.

From China’s perspective, there is one unresolved issue that may snowball into a much larger one. While China’s “neutrality” was a key reason for its successful expansion, the contradictions of such an approach are looking more and more unsustainable. It seems inevitable for major powers to take sides. China’s pivots on Yemen are emblematic of this trend. Because it has interest in stability first and foremost, it initially threw weight behind Abdel Hadi’s government when it looked like the Houthi’s power was waning. Now, it is in support of a UN inquiry into human rights abuses in Yemen.

China’s fractious relations with its Muslim Uyghur minority further complicate issues. Turkey, Iran, and Saudia all desire moral leadership of the Islamic world, and one wonders how such pretensions can be reconciled with silence in the oppression of fellow Muslims by a foreign communist entity.

At the critical juncture, strategists have predictedChina will take Iran’s side, since the Iranian bloc is ideologically committed to undermining American interests. China’s desire for deep economic relations with Assad’s Syria, as well as its ties with Qatar, buttress this view.

In any case, China will delay this predicament as much as it possibly can. Until that point is reached, one wonders where the Middle East will end up. Will China be an earnest partner to the economic development the Middle East badly needs? Or is this merely another iteration of a long history of foreign exploitation?


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