China forges Arab ties, hedging bets in the Gulf

[February 07, 2012]  DUBAI, United Arab Emirates (AP) -- To celebrate Chinese New Year last month, Dubai's swankiest hotel bathed its sail-shaped facade in red lighting accented with an image of a twisting golden dragon.

The gesture by the $2,300-a-night Burj al-Arab was a not-so-subtle nod to the tightening bonds Beijing is forging with the kings and sheiks who rule the oil-rich Arab Gulf states, even as it stands firm in support for their regional rival Iran.

In many ways, China is following a course of keeping its business options open as it rolls ahead with securing the energy it needs to fuel its rapid growth. That complicates U.S.-led efforts to force Tehran to abandon its suspected nuclear weapons program, but it also allows China to expand its influence in Saudi Arabia and other Gulf states long allied to the West.

"If you were to look at the Iran-China relationship in a vacuum, you'd say China imports fairly large quantities of oil" from Iran, said Afshin Molavi, a senior fellow at the New America Foundation specializing in the Middle East.

But "when you zoom out and look at it, (you see) the Saudi-China relationship is a strategic relationship. The China-Iran relationship is a transactional one," Molavi said. "The China-Iran relationship is going to be really tested" as the U.S. and Europe ramp up efforts to isolate Tehran.

As the world's biggest energy consumer, China's roaring appetite for stable oil and gas supplies is driving its Gulf push -- a relationship made clearer last month when Premier Wen Jiabao traveled to Saudi Arabia, the United Arab Emirates and Qatar. In Saudi Arabia, Wen specifically called for the two countries to "deepen their energy partnership" and increase trade in oil and gas.

State oil giant Saudi Aramco and Chinese refiner Sinopec just finalized plans to jointly build a refinery in the Red Sea city of Yanbu capable of handling 400,000 barrels of oil a day. The two companies and Exxon Mobil Corp. are already partners in a refinery in eastern China.

Aramco last year signed a deal with PetroChina, China's biggest oil and gas company, to supply 200,000 barrels of oil a day to a refinery planned for southern Yunnan province. Aramco CEO Khalid al-Falih said at the time: "We don't consider ourselves simply sellers of oil to China, but rather strategic partners."

Nearby Iran was not on Wen's January itinerary even though China remains Iran's trop crude oil buyer and its powerful state energy companies have rights to exploit untapped Iranian oil reserves.

The Chinese Ministry of Commerce's most recent figures show $43 billion in Sino-Saudi trade in 2010, and a combined $49 billion more with the other five Gulf Cooperation Council countries. That compares with just over $29 billion in trade with Iran over the same period.

"China has been attaching greater importance to ... the Gulf countries, and there is bigger room for both to develop trade and economic cooperation," said Ma Lirong, a professor at Shanghai International Studies University. "To maximize its interests, China will maintain the current relations with Iran, but in the meantime explore more sources for energy supply."

Saudi Arabia's smaller Gulf neighbors are getting in on the action too.

Kuwait and China recently began work on a $9 billion oil refinery and petrochemical complex in the southeastern Chinese city of Zhanjiang that will rely solely on Kuwaiti crude. Qatar is shipping liquefied natural gas to a new PetroChina terminal under a long-term supply deal.

China South Locomotive & Rolling Stock Corp. won a contract in September to build 240 freight cars for the UAE's new national train network. That deal followed China Railway Construction Corp.'s completion of the first phase of the so-called Mecca Metro, which opened in 2010 to ferry pilgrims between holy sites outside the Saudi city.

Gulf nations are also betting big on China.

The Qatar Investment Authority pumped $2.8 billion into Agricultural Bank of China's 2010 initial public offering, while the Kuwait Investment Authority bought in for $800 million.

The Kuwait sovereign wealth fund has also snapped up stakes in Industrial & Commercial Bank of China and government-backed brokerage Citic Securities Co. In October, it opened a representative office in Beijing -- its first overseas outpost in nearly six decades.

Chinese visitors, meanwhile, are flooding through the Arab side of the Gulf.

Dubai's Emirates airline now flies 35 times a week to mainland China. It employs 350 Chinese staff and offers Chinese food and movies on some flights, said Richard Jewsbury, senior vice president for commercial operations in the Far East. Its smaller Gulf rivals are adding China routes too.

Colm McLoughlin, executive vice chairman of Dubai's massive airport duty-free operation, said his best-sellers are not locally produced dates or camel-milk chocolates, but cartons of Chinese-made Chunghwa cigarettes. Sales of the smokes brought in $8.5 million last year, and more than $1 million just in January.

Dubai Duty Free is responding by doubling to more than 400 the number of Chinese staff it employs. Other employees are being issued Mandarin phrase books, and cashiers now accept Chinese currency and credit cards.

"We would be silly if we didn't take advantage of it and try to serve them," he said of the increased Chinese customers.

Perhaps nowhere are the flourishing China-Gulf links more evident than in the serpentine halls of Dubai's DragonMart. Described as the largest dedicated trading center for Chinese projects outside China, the 3/4 mile (1.2 kilometer-long) mall houses nearly 4,000 shops selling an impossibly diverse range of products -- from clothing and electronics to plaques inscribed with Quranic verses. One shop even sells forklifts.

Moneychangers and ATMs abound, though merchants like Mohammed Alamgir, a salesman at a Chinese-owned store selling industrial-strength air compressors from Shanghai, say they are happy to take just about any currency. Many of his customers travel from as far as South Africa and Libya. They often buy in bulk for resale back home, he said.

Not far away, Bangladeshi tailors sit hunched over a row of sewing machines at Feilong Trading, stitching curtains made to customers' orders.

Jiamin Xia, the store's manager, said products are fast to move -- "cargo easy come, easy go," he quips -- and the opportunities are better than back home in Guangzhou.

"Here you have many customers, and they are very good" he said. "They have much money."

From Iran's point of view, China remains a crucial business partner.

Bilateral trade is on the rise, with everything from cheap made-in-China clothes to sport-utility vehicles pouring in. Iranian newspapers are full of ads touting business tours and pleasure trips to Chinese cities.

Chinese companies have rights to develop the prized Azadegan and Yadavaran fields, two of the most promising Iranian oil finds in decades. Tehran needs outside expertise to unlock the oil because its petroleum industry has been weakened by decades of U.S.-led sanctions.

China's stance on Iran is hardly based on altruism, however. With Iranian oil exports under pressure from tightening U.S. sanctions and a new European Union embargo, China could be looking to lock in cheaper fuel prices as Iran tries to find a home for its crude.

"Clearly they see an opportunity to put pressure on Iran. They know Iran's hands are tied, so why shouldn't they benefit from this?" said Samuel Ciszuk, a consultant at KBC Energy Economics. "Iran has suddenly been forced to rely on a very, very small number" of oil customers, he added.

[Associated Press; By ADAM SCHRECK]

AP Business Writer Joe McDonald and researcher Yu Bing in Beijing, and reporter Nasser Karimi in Tehran, Iran, contributed to this report.

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