Sensitive partners

The Chinese Communist Party has enjoyed progressively improving relations with the Arab countries of the Middle East, with the latest diplomatic victory dating back to 1990 when Saudi Arabia switched ties from Taiwan to the mainland.

Since then, Saudi Arabia has become China's biggest Middle Eastern trade partner, and also its main inward investor from the region. For example, the state oil company Aramco is currently negotiating to build a US$1.5bn refinery in Shandong province with Sinopec and South Korea's Ssangyong. 'However, the typical Saudi investment in China is much more modest. One example is the family firm Abdull Atif Jameel which operates joint ventures in Qingdao and Chengdu, exporting Chinese washing machines and telephone sets back to Saudi. Another is the Alzamel company with an office in Tianjin which sells metal imported from Saudi Arabia to local construction projects.

Egyptian deficit
The region has also been an important source of capital to China. Three of the most prosperous Arab states ? Saudi Arabia, the United Arab Emirates and Kuwait ? temporarily replaced the West as major creditors to China after the West imposed sanctions in response to the June 4 crackdown in 1989.

China is now mainly looking at the region as a provider of raw materials, notably oil, and as a market for its products, a big element of which is thought to be weapons. Meanwhile, China's western autonomous region of Xinjiang has some features that attract interest from Middle East countries.

Egypt is probably exemplary for most of China's dealings with the Middle East. The country has been called an 'all-weather friend' of China, after having established diplomatic ties in 1951. But according to Mr Fikri Tadros, commercial minister of the Egyptian embassy in Beijing, Sino-Egyptian economic relations changed drastically after 1989. Before then, both countries operated government-to government barter trade dictated by agreements preventing a trade imbalance. After 1989, the arrangement was replaced by free currency trade, resulting quickly in a big surplus in favour of China.

According to Fikri, this imbalance has arisen because China has an abundance of Egypt's major export items of cotton, yarn and leather. Egyptian exports to China fell dramatically from US$13m in 1995 to US$3.4m last year. The main commodities are now non-textile raw materials such as aluminium ingots, fertiliser, iron and steel. Even these commodities are subject to export capping. According to Fikri, the export of fertiliser has been hit because of the need to develop the Egyptian agricultural sector.

In common with other countries in the Middle East, Egypt has invested very little in China. "Egyptian businessmen are not accustomed to this market. They have the idea in the back of their mind that China is still a closed country," admits Fikri.
Rather, it is China which is starting to invest in Egypt, albeit on a limited scale. China has one warehouse in the free trade zone in Alexandria.

But interest is growing. Egyptian prime minister Kamal El Ganzory, who paid an official visit to China last April, came with a delegation with 27 important business people. Contracts were signed for at least two joint-ventures to be established in Egypt. These factories were inspired by joint ventures in China. "The idea is that the Chinese bring know-how and machines", says Fikri. Factories will be created by the Tianjin Cement Institute and the Egyptian Aircraft Factory, on whose site parts of the cement factories will be constructed. This factory was producing military aircraft before the peace agreement with Israel but it has since changed to civil engineering. The Sino-Egyptian joint ventures will be 40 per cent Chinese-owned, although the amount of investment remains under discussion. The factories are designed to start producing cement within the next two years.

Tehran subway deal
A similar deal was signed in 1995 with Iran ? a US$573m contract between the Teheran Urban and Suburban Railway Company and three Chinese companies, China North Industries Group, China National Technology Import and Export Corp. and the China International Trust and Investment Corp. The Chinese side is providing the equipment for the subway trains and the technical support to maintain them. China and Iran also cooperate in the field of power stations, cement plants, dam design and fishing. Iran currently exports 70,000 bpd of oil to China, an amount 1996 which Iranian oil minister
Gholamreza Aqhazaheh was seeking to increase Expos during a five-day visit to China last month. Joint oil exploration was also said to be on the agenda.

Before Saudi Arabia established ties with China, two trade fairs were held in Jeddah organised by CPPIT with participation from China State Shipbuilding Corporation, the China National Electronics Corporation and the China Kuwait North Industries Corporation. That fair was only the second to be held by a communist country in Saudi Arabia. Local companies secured joint venture deals with Chinese partners worth US$32m.

Libya is one of the few Middle East to have established a joint venture within China. The country's first and, to date, only investment there is by Libya-China Textile Corp. established in Ningbo, Zhejiang province involving an initial investment of US$3.6m.

SEZ idea adopted
In addition to the joint venture concept, Egypt is looking to replicate the success of China's Special Economic Zones (SEZs). China will send experts to help carry out a plan to develop a zone near the city of Suez. Based on the Chinese model, the zone will also target Chinese companies as potential investors.

"Chinese industries will go there", says Fikri. "They will have a base in the Middle East from where they can export their products to Egypt and Europe and thereby save on transportation costs."

Growing trade ties between the Middle East and China are illustrated by the opening of a mission of the Arab League in Beijing in 1993. This body, similar to the European Union representative office, helps Arab investors get to know the Chinese market. But Dr Kohamed A El Saket, chief of the mission, notes one difference: "The Chinese are not inclined to exploit existing differences between Arab League nations. They stress the importance of unity among Arab countries."

This contrasts with China's attitude towards the European Union, where differences are used to try to divide the member states. One example is the recent diplomatic row over a Dutch-Danish motion in Geneva, critical of China's human rights situation. France refused to support the motion and was soon rewarded with multi-million dollar contracts during the visit of President Chirac in May. According to one Middle East diplomat in Beijing, political differences between Arab countries would never be exploited by China in such a way. Likewise, most Arab countries take the position of being reluctant to interfere in China's internal affairs.

China has been careful not to make enemies among the Arab countries, while at the same time nurturing its recently established ties with Israel ? a country with much more to offer in terms of technology transfer. China always strongly supported the Palestine Liberation Organisation, receiving Yasser Arafat with full military honours and being one of the first nations to recognise the Palestine State after it was announced. But it weighs its judgement carefully when it comes to voicing an opinion on Middle East problems, preferring to remain neutral.

Gulf War losses
This balanced approach was tested to the limit during the Gulf War. China abstained from supporting crucial UN bills on the use of force against Iraq, even trying to soften the wording of some, but refraining too from using veto power when it came to the declaration of war. Until the last moment, Chinese diplomats made efforts to try to find a peaceful solution following Iraq's invasion of Kuwait. One year later, when the war
was over, Chinese premier Li Peng was one of the first international leaders to visit the region with a delegation of 100 businessmen.

Today, six years after the Gulf War, Beijing is lobbying to get UN sanctions on Iraq lifted, giving hope to vice-premier Tarek Aziz who visited Beijing in April. China is now discussing the exploitation of Iraqi oilfields, and could be one of the first countries to move in when the sanctions are lifted. On May 9, Iraqi oil minister Amir Muhammad Rasheed said that, "Iraq will soon sign deals with China … to develop huge oilfields in southern Iraq". Chinese state-run oil companies are interested in developing the Ahdab and Halfaya oilfields.

A resumption of business links would help China to recoup lost revenues. In 1990, after the implementation of the UN Security Council trade embargo against Iraq, China claimed losses of US$2bn in the fields of trade, transport and civil aviation. This figure seems highly inflated. Specialists at the time estimated China's losses at US$25m, mostly in the form of the frozen assets of some 10,000 Chinese workers stationed at the time in Iraq and Kuwait? all of whom have since quit` their jobs. A Reuters report last month said that Kuwait was actively considering buying US$300m-worth of Chinese self-propelled guns thought to be partly a reward to China for its Gulf War stance.

Xinjiang worries
Despite the economic loss, the Gulf War was as a blessing in disguise for Beijing which was suffering from diplomatic isolation imposed by all Western, and many developing countries after the events of June 4, 1989. World attention shifted to Iraq after its invasion, giving Beijing a chance to show its diplomatic skills as a mediator between the different Arab nations. The war also demonstrated to Chinese generals the clear superiority of the sophisticated weaponry deployed by the US and its allies. Iraq's dependence on the sheer numbers of military personnel was no match for the high-tech weaponry deployed against them.

The careful handling of its relations with the Middle East countries reflects Beijing's fear that invoking hostility might affect the already volatile situation in China's far western Xinjiang Uighur autonomous region with its predominantly Moslem population. This area, especially the western parts bordering the Moslem states of the former Soviet Union, has been the focus of unrest over the past few months. In March, demonstrations by disgruntled labourers in Yining resulted in a police crackdown and virtual martial law in the city. Responsibility for a series of homemade bombs in buses in Xinjiang's capital Urumqi was claimed by Kazakhstan-based separatist groups ? exacerbating Chinese worries.

In a crackdown that started late last year, Beijing decided to close down hundreds of Quran schools, suspecting that they were breeding places of Moslem activism supporting the establishment an independent Moslem state of East Turkestan. Many Moslem schools and mosques are funded by Middle East countries, albeit indirectly: money funnelled to China with the aim of supporting these institutions goes through the Religious Affairs Commission's Beijing head office that takes care of the distribution. Authorities are tight-lipped about the exact amounts of donations; it is known however that Arab countries fund some 6,000 Chinese Moslems doing the hajj, a pilgrimage to Mecca which every devoted Moslem seeks to make once in a lifetime.

Xinjiang is starting to attract the attention of Middle East businessmen as well. The United Arab Emirates has two joint ventures in Yining, both involving investments over US$10m. Iran is currently operating a US$300,000 joint venture in the field of real estate in a development zone in Urumqi.

The most spectacular development between Xinjiang and the Middle East is probably the opening of a Xinjiang trade office in Jeddah, where a permanent exhibition of Xinjiang goods will be established. Kuwait, one of the richest Arab countries, last year lent China US$33m. The loan, to be paid back over 30 years with interest of 2.5 per cent, was granted by the Kuwaiti Economic Development Fund. While it is intended mainly for poverty alleviation programmes in mountainous areas of Ningxia autonomous region, (predominantly populated by Moslem Hui) some US$12m of this fund went to projects in Xinjiang.