<![CDATA[Oil is just the start of China's belt and road interest in the Gulf]>

The Gulf might not appear on the official map of China's Belt and Road Initiative, but Beijing's international infrastructure investment plan is being actively realised in the region. Since Chinese President Xi Jinping launched it in June 2014, various actors from China " including companies, banks, and financial institutions " have established a presence in the Gulf.

Securing oil and energy resources is an important component of the belt and road plan's regional aims, as is the construction of a framework to boost trade and investments between China and the Gulf. But there is another motivation behind Beijing's presence in the region " the pressing need to resolve its overcapacity problem.

China was not invulnerable to the 2008 financial crisis, and it was heavily exposed when exports to its major markets in the United States and Europe plummeted, leading to the largest stimulus package in history, equivalent to 14 per cent of its GDP.

This, nevertheless, only had a short-lived positive effect, and China has since been searching for an alternative solution to preserving its economic growth.

The US$570 billion stimulus package understated the real figure as China encouraged banks to raise loans to firms and local governments " resulting in overcapacity.

Only 20 per cent of the package was aimed at social spending, with most being directed to fixed asset investment in sectors already plagued by overcapacity, such as steel and concrete. And all this excess needed profitable and sound investment openings.

Aside from the need for infrastructure knowledge and labour, the Gulf also requires materials, such as the steel and cement that have accumulated in China. By taking part in infrastructure projects in the region, the belt and road plan is expected to resolve the issue of overcapacity in the Gulf's economy " and it has another objective for the long term.

In Xi's view, while China needs to pursue more balanced economic growth in which national consumption plays a crucial role, such a process would require some time to be realised. Xi sees that foreign direct investment and the export of "Made in China" products are still short-term solutions to stimulate Chinese economic growth, upgrade the country's industries, and protect employment.

The Gulf holds a crucial position in this respect, given its economic size, which accounts for about 50 per cent of the Arab states' overall economy. It also makes up 60 per cent of their foreign trade volume, and 70 per cent of related FDI.

Being a customs-free market with a population of 280 million, the region has considerable amounts of petrodollars. Its sovereign wealth funds have swollen to a cumulative US$2.3 trillion, which accounts for around 36 per cent of the world's total, according to the China Institute of International Studies think tank.

Sunset in Dubai, home of Beijng-backed projects such as Dubai Motor City and the China Business Hub. Photo: AFP

Despite the turmoil taking place in its neighbouring states, the Gulf continues to prosper. It is also considered to be a strategic location for regional and global trade.

As a result, many firms involved in the belt and road plan in the Gulf are not only working in projects that will achieve the initiative's short-term objective " which is to reduce its overcapacity issues " but also, in the long term, to facilitate China's future trade and investments in the region.

One example is the building of retail shops and business hubs. For instance, Chinamex " a Chinese real estate developer specialising in the design and management of malls and mixed-use developments " concluded a deal in 2013 with Diyar Al Muharraq, a complex of artificial lands in Bahrain, for a 120,000 square metre wholesale and shopping entertainment complex named Dragon City.

Opened in 2015, it was dubbed "Bahrain's Chinatown", with retail shops featuring Chinese industries and cultures. Other similar projects involving China include Dubai Motor City and China Business Hub in Dubai. While in the short term the construction of these projects will take some of China's excess capacity, in the long-term these retail shops and hubs are expected to facilitate the flow of Chinese capital in the region.

According to Li Lingbing, Chinese consulate general in Dubai, these projects are intended "for the long-term continued economic cooperation between China and the UAE".

The belt and road strategy in the Gulf also involves building ports and other facilities such as industrial estates that are important for its market expansion objective. To this end, Jiangsu Provincial Overseas Cooperation and Investment Company Limited signed an agreement with Abu Dhabi Ports in August 2017 to construct a manufacturing operation in the Khalifa Port free-trade zone.

Cosco chairman Xu Lirong says the shipping company's operations in the Gulf present a "unique geographical advantage". Photo: Reuters

That agreement came in the wake of another deal signed at the end of 2016, between the government-owned China Ocean Shipping Company (Cosco) and Khalifa Port, for the development and operation of a new container terminal at the port for the next 35 years at a cost of US$738 million. There is also an option to renew the agreement, and the possibility of expanding the 1,200 metres of quay wall and adjacent land that Cosco was given under the agreement.

Cosco chairman Xu Lirong asserted that the port presented a "unique geographical advantage for the development of terminal and logistics businesses" in the region, in line with the belt and road plan.

Jonathan Fulton, in an article for the South China Morning Post, reported that China has introduced an "industrial, park-port interconnection, two-wheel, and two-wing approach" plan, which would include Chinese-developed industrial estates in Oman, Saudi Arabia, and the UAE.

"Two wheel" refers to cooperation between the oil and gas and the low-carbon energy sectors, while "two wings" urges cooperation between the science and technology and the finance sectors.

Together, they offer a blueprint to direct China's overabundant capital, while building facilities for financial integration and deeper trade relations.

On the whole, it is clear the direction of Chinese capital into non-energy infrastructure projects across the Gulf is an important component of the belt and road strategy in the region. While in the short term these activities are expected to contribute to resolving the excess industrial capacity and other issues in the Chinese economy, the long term outcome is the easier, speedier flow of non-energy capital between Beijing and the Gulf.

Muhammad Zulfikar Rakhmat is a lecturer at the Islamic University of Indonesia and research associate at the Institute for Development of Economics and Finance in Jakarta

This article originally appeared on the South China Morning Post (SCMP).

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