Xi Jinping’s visit to the Middle East: what’s in store for Saudi Arabia, Egypt, and Iran?

Xi Jinping’s visit to the Middle East: what’s in store for Saudi Arabia, Egypt, and Iran?

The Chinese president’s visits to Riyadh, Cairo, and Tehran signal an expanding role for China in the Middle East. But China’s uncertain economic prospects and antagonism toward Western dominance mean that some countries in the region stand to benefit more than others.

China heads to the Middle East

Last week, Chinese President Xi Jinping concluded a five-day trip to the Middle East that included meetings in Saudi Arabia, Egypt, and Iran. The stated purpose of the trip was to deepen ties and cooperation between China and the countries of the region. The trip also exemplifies the growing influence that China seeks over Middle East affairs.

Prior to President Xi’s departure, the Chinese government issued its first “Arab Policy Paper”, outlining Beijing’s broad policy goals toward the region. These goals include the so-called “1+2+3” formula, which centers around (1) energy cooperation as the core; (2) infrastructure, trade, and investment; and (3) high-tech fields like clean energy and aerospace. Other initiatives include concluding a free trade agreement with the Gulf Cooperation Council and Chinese efforts to combat terrorism.

GRI breaks down what’s in store for ties between China and Saudi Arabia, Egypt, and Iran.

Saudi Arabia: Desperate to keep the oil flowing

President Xi’s first stop was in Riyadh, where he met a Saudi delegation led by King Salman. At the top of the agenda was soothing tensions between the Kingdom and the Islamic Republic of Iran, which escalated after Saudi Arabia executed a prominent Shiite cleric on terrorism charges. The move spurred protests in Iran and while violent conflict is unlikely, any disruption of Saudi or Iranian oil production could cause significant harm to the Chinese economy.

As Gordon Kwan, head of oil and gas research at Nomura, told the Wall Street Journal: “China wants some reassurance that tensions in the Middle East will not continue to escalate, especially between Saudi Arabia and Iran”.

The Chinese-Saudi relationship is centered on the oil trade. In 2014, the Kingdom provided China with 16 percent of its oil imports. And as exports to the US declined in recent years due to the fracking boom, Saudi Arabia is increasingly relying on trade with China to compensate for the loss and to maintain its market share. But that growing dependence could make the Kingdom the biggest loser from a slowdown in Chinese growth — China’s economy grew only 6.9 percent in 2015, a 25-year low.

Record low oil prices battered Saudi’s oil-centric economy, leading to a deficit of over 360 billion riyals in 2015. The 2016 budget forecasts another 300 billion riyal deficit, forcing the Kingdom to cut back its generous subsidies and other domestic spending. And a decline in Chinese consumers’ demand for oil would put even more pressure on an already shaken Saudi economy.

Egypt: Consolidating the counter-revolution

The second leg of President Xi’s Middle East tour began in Cairo. Ever since the January 2011 revolution that ousted then-President Hosni Mubarak, Egypt has been suffering from an economic crisis that cut her foreign currency reserves in half. But while Egypt relied on billions of dollars in aid from wealthy neighbors like Saudi Arabia and the UAE, the precipitous fall in oil prices cast doubt on the sustainability of Gulf support.

Current President Abdel Fatah al-Sisi, who ousted his predecessor Mohammed Morsi in a 2013 coup, hopes that a deeper relationship with China will facilitate more aid and investment into the Egyptian economy. Sisi may be looking to China’s plan to develop a $46 billion economic corridor in Pakistan as a template for expanded Chinese development and infrastructure spending in Egypt.

Before President Xi’s arrival, Egypt’s ambassador to Beijing announced that China would lend $1 billion to Egypt’s central bank and an additional $800 million to the state-owned National Bank of Egypt and Banque Misr. Other planned investments include civil aviation projects, electricity projects, and an agreement concerning the construction of Egypt’s new administrative capital.

President Sisi hopes that such large-scale infrastructure projects, like the widening of the Suez Canal earlier this year, will deliver the jobs and economic dynamism demanded by the protesters who ousted former President Mubarak and later President Morsi. But Egyptian dynamism remains hindered by unchecked executive authority, rampant corruption, and burdensome regulations.

Iran: Connecting to the Silk Road

The final stop in President Xi’s tour of the region was in Tehran, where he met with Iranian President Hassan Rouhani and Supreme Leader Ali Khamenei. President Rouhani said that he and President Xi signed 17 agreements that would boost trade to $600 billion. There are also proposals on the table to build a 2000-mile high-speed train to Tehran from the Western region of Xinjiang, as well as a potential deal for China to build two nuclear power plants.

China enjoyed a privileged relationship with the Islamic Republic for many years as international sanctions suspended trade from the US and Europe. Today, China is Iran’s biggest trading partner: 40 percent of Iran’s oil exports go to China and it is the main provider of technology and capital to the Islamic Republic.

But Iran’s reopening following the lifting of sanctions is sure to mean that an influx of European companies and capital will threaten that privileged relationship with China. According to Ali Vaez, a senior Iran analyst with the International Crisis Group, “China will face rivals in a market that heretofore was under sanctions and uncontested”.

The question of increased competition from Europe aside, Iran stands to benefit most from China playing a larger role in the Middle East. In particular, China and Iran share a common antipathy toward Western domination of the international order.

It is therefore not surprising that, before Xi’s arrival, China’s official Xinhua news agency announced that Iran would be an important component of China’s “Silk Road” initiative. The Silk Road Economic Belt, along with the 21st Century Maritime Silk Road, are parts of the broader “One Belt, One Road” plan by President Xi to facilitate development, investment, and trade across Eurasia.

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.