The China slowdown: Who loses in the Middle East?

The China slowdown: Who loses in the Middle East?

Recent volatility in China’s stock market signals investors’ general skepticism about the economy’s prospects. However, Middle East oil exporters may stand to lose the most if the growth of Chinese oil consumption slows down too much.

Deeper economic ties with the Middle East has been a top priority for Chinese leaders in recent years. According to the Economist, trade between China and the Middle East has increased by more than 600% within the last decade, to roughly $230 billion in 2014.

Though the relationship is largely based on the oil trade, the People’s Republic also enjoys access to a large market of relatively affluent consumers in places like Saudi Arabia, Bahrain, and Egypt.

But closer ties also pose a risk for China’s Middle East trading partners. When Chinese stocks fell about 16% last week, it led to massive sell-offs on exchanges across the region. John Sfakianakis, Middle East director at Ashmore Group, told that equity markets in the Gulf Cooperation Council fell 30% over the last two weeks. Moreover, a slowdown in Chinese investment and construction growth triggered sharply lower prices of basic commodities.

The consensus appears to be that China’s stock market volatility is linked to very real concerns about the country’s future economic performance. Most pertinent for the Middle East, analysts forecast slower growth in Chinese consumers’ demand for oil, which would add to an already flush global market and continue to put downward pressure on crude prices. Indeed, bilateral trade between China and its major Middle East partners is already down compared to last year.

Oil dominates the China-MENA relationship

In 2014, More than half of China’s oil imports came from the Middle East. But apart from the impact that slower Chinese growth could have on the price of oil, there are other signs that China’s energy market may be changing in ways that will negatively impact its trade partners in the Middle East.

Today, China still imports a record amount of oil—an average of about 640,000 more barrels a day than a year ago—but much of that is crude oil that is being refined and re-exported rather than consumed domestically. The country is also extracting more oil than ever, though persistently low prices may mean that China’s state-owned companies will think twice about the current level of production.

The obvious losers of this situation include the oil exporting nations of the Middle East, especially Saudi Arabia. Already battered by low oil prices (the Kingdom is expected to run a $150 billion budget deficit this year, or about 20% of GDP) China is also the biggest importer of Saudi oil. Any slowdown in growth or oil demand would create even more problems for the Saudi oil industry.

Other exporters could suffer too. Oman sends more than half of its oil to China, which amounted to almost 10% of China’s crude imports in 2014, more than any other country in the region besides Saudi Arabia. China has been keen to quietly cultivate economic ties with the Sultanate, which its leaders valued as a stable partner in a turbulent region. But the one-sided nature of the relationship leaves Oman highly sensitive to changes in the demand of Chinese consumers.

China also proved to be the biggest beneficiary of the post-war oil boom in Iraq. After investing more than $2 billion a year in the war-torn country, China received over 9% of its oil from Iraq in 2014. But again, a slowdown in Chinese demand would be a huge blow to a country struggling with a burgeoning economic crisis caused by low oil prices and the costs of battling ISIS.

One exception may be Iran, which reached a tentative deal with the P5+1 earlier this year to curb its nuclear program in exchange for lifting punishing economic sanctions in place since 2011.

With the prospect of a nuclear deal, there is consensus that Iran needs a significant injection of foreign investment to revitalize its decrepit oil and gas industry. China and its state-owned energy companies are well-positioned to benefit from Iran’s economic re-opening, having developed close economic and diplomatic ties with the Islamic Republic even during the sanctions period.

The only positive signs are outside of the energy sector

Predictions of slower Chinese economic growth have rattled commodities markets and capital-intensive industries, but there are signs that growing Chinese wealth may present opportunities for investors outside of the energy industry.

For instance, household consumption as a percentage of GDP has steadily increased since reaching a low point in 2010. This is good news for consumer-focused industries like luxury clothiers and iPhone maker Apple, but does not bode well for the oil-exporting economies of the Middle East.

There are also opportunities driven by Chinese political motivations, as opposed to economic viability. Rebecca Cockayne of Global Risk Insights describes how the $20 billion deal signed by China and Pakistan to develop an economic corridor from the Chinese border to the Persian Gulf was driven by concern for China’s domestic energy security, rather than the plan’s dubious economic practicality.

Whatever happens, Arab countries will continue to benefit from cheap and abundant consumer goods from China. But for the largely undiversified economies of the Middle East, a slowdown in Chinese economic growth poses large risks for regimes grappling with severe economic, social, and military crises.

About Author

David Wille

David Wille works for a research center affiliated with George Mason University, where he is pursuing an MA in economics. Prior to graduate school, David was a retail banking research analyst at a Virginia-based consulting company and was a Fulbright Scholar in Egypt until 2011. He writes about the political economy of the Middle East.