China's Policy in the Persian Gulf

Since 1996, China has become a net importer of crude oil, currently the second-largest consumer in the world after the United States and the third-largest importer of oil after the United States and Japan. Thus, it is natural that China should turn to the Persian Gulf region, with the world’s largest proven crude-oil and natural-gas reserves, to provide energy for the world’s most dynamic economy (average annual growth rate, more than 9 percent). To analyze China’s policy in the Persian Gulf, I start with an examination of China’s production and consumption of energy and the prospects for its future imports of crude oil and natural gas. This is followed by an examination of China’s relationships with the states of the region. Finally, Sino-American rivalry in the region is discussed.

BACKGROUND

At 3.73 million tons in 1959, China’s post-revolution oil production was very low. A century of dependence on imported oil and oil products ended in 1963. In that year, the Daqing oil field in northern China produced 4.3 million tons of crude oil out of a national total of 6.48 million. But this self-sufficiency did not serve the goal of economic and social development due to China’s relations with other countries. The Soviet petroleum and technological assistance that were critical for China’s oil industry were terminated in July 1960. Moreover, a U.S.-led embargo lasted from 1950 to the Sino-American rapprochement in 1971. China was self-suffi cient in energy, but the economy was on the verge of collapse. In the early 1970s, China’s international relations improved, leading to the expansion of the economy. Oil and coal became primary export commodities in exchange for industrial equipment and technology from developed countries. China took advantage of the 1973 oil crisis to export oil to Thailand, the Philippines, Japan and other Asian countries in order to cultivate a friendly regional environment for domestic modernization and development. The hard currency earned from oil exports was spent on the import of technology and equipment to develop an export-oriented economy critical for development. China’s crude-oil exports reached a peak of 30 million tons by 1985, but declined afterward due to growing domestic consumption and slower growth in production. China began to import crude oil from Oman in 1983 as a temporary measure to deal with the problems of transporting crude oil from northern China to refineries along the upper stretches of the Yangtze River. In 1988, Chinese imports of crude oil and oil products began to rise rapidly due to increased domestic demand. In 1993, China became a net importer of oil products and, in 1996, a net importer of crude oil.¹

ENERGY CONSUMPTION

China is the largest country in the world, with a population of 1.4 billion people. Its economy has grown at a pace unprecedented in modern history: more than 9 percent a year between 1978 and 2005. Energy is critical to service this growth, resulting in a rapid rise in demand across the fuel spectrum, including oil, natural gas, electricity, coal, nuclear and hydroelectric resources. Coal continues to account for two-thirds of total energy consumption. China is the world’s largest producer and consumer of coal, which accounts for over 80 percent of its electricity generation. Coal consumption is expected to double over the 2001-25 period, during which China is also expected to account for one quarter of the world’s carbon-dioxide emissions. Though now a modest net exporter of coal, China is likely to become a net importer as early as 2015. Despite adding 199,300 megawatts (MW) of electricity-generating capacity and increasing coal consumption by 21 percent over the last five years, China continues to be plagued by an electricity shortage. At present, nuclear-generated electricity accounts for only 1.4 percent of its total power supply, compared to an average 16 percent for developed countries. However, China plans to build two large nuclear plants per year over the next two decades, thus becoming the largest country that is planning nuclear-power plants. Extensive hydroelectric development plans and development of renewable energy sources such as solar and wind are also underway, but these will only service a small portion of electricity demand. China has been Asia’s largest oil producer since the mid-1960s, producing roughly 3.5 million barrels per day (b/d) in recent years. At present, China is self-sufficient in natural gas.²

China’s Oil Consumption (million b/d)

But China’s two-plus decades of rapid growth in industry, trade, urbanization, population and per capita income have resulted in booming energy demand. Although these are characteristics of the rest of the developing nations of Asia, the size of China’s economy and population accounts for the sheer scale of its energy needs. Oil demand doubled between 1984 and 1995, from 1.7 million b/d to 3.4 million b/d, and doubled again to 6.8 million b/d in 2005. In that year, 43 percent of this consumption was derived from imports. In 2004, China’s annual growth in oil demand approached roughly 800,000 b/d, accounting for a demand growth of one third of the world, and 70 percent of the Asia-Pacific region. China became a net importer of oil in 1993 and, by 2003, surpassed Japan to become the second-largest consumer behind the Unites States and the third-largest oil importer behind the Unites States and Japan. It now imports more than 40 percent of its total oil needs. The International Energy Agency (IEA) predicts that China’s oil imports will grow fivefold, from slightly under 2 million b/d in 2002 to roughly 11 million b/d, by 2030. By then, oil imports will account for 80 percent of China’s total oil needs, of which more than half will come from the Persian Gulf. ³

China’s Natural-Gas Consumption (trillion cubic feet)

As noted above, China is now self-sufficient in gas production only because gas represents less than 3 percent of its total energy consumption, compared to the global average of 23 percent. However, the Chinese government has embarked on a policy to replace coal with gas for generating electricity in order to diversify overall commercial and household energy use and provide a clean fuel for environmental needs. Current plans call for the use of gas to make up 8-10 percent of total energy consumption by 2020. Therefore, beyond 2010, demand is likely to begin to outrun domestic production. The U.S. Energy Information Agency (EIA) has forecast that imports will account for 40 percent of China’s gas consumption by 2025.⁴ It shouldbe mentioned that large-scale production of private automobiles is partly responsible for the rapid growth of oil consumption in China. It is estimated that by 2010, China will have 90 times more cars than in 1990; the number is growing at a rate of 19 percent a year. By 2030, China could surpass the United States in total number of cars. ⁵

In short, despite significant efforts to stimulate domestic energy production, China will inevitably have to depend upon greater oil and gas imports to fuel its giant economy. To the country’s leadership, slow economic and job growth raise the real specter of social instability, which, in turn, calls into question the continued power and political control of the Communist party. Thus, for the leadership, there is a profound connection between reliable energy supplies, political and economic stability, and continued party control.⁶

CHINA’S ENERGY SOURCES

If China only needed two to three million b/d of oil, it might be able to purchase them from neighbors such as Russia, Kazakhstan and Asian countries such as Indonesia and Malaysia, supplemented by purchases from smaller Middle Eastern and African producers. But with the huge oil and gas imports predicted for the next decade and beyond, China is compelled to turn to the Persian Gulf. This region contains 728 billion barrels, or 55 percent, of the worlds proven crude oil and 2,509 trillion cubic feet, or 41 percent, of proven global natural-gas reserves.⁷ But oil is not the only reason behind China’s relations with the Persian Gulf states. The region is one of the key foreign sources of capital investment in China, particularly in oil and related industries, and a vast market for the Chinese goods, services and arms sales. In fact, China is trying hard to create economic interdependence with the region to guarantee the security of its oil supplies.

China sought to generate anti-colonial sentiments in the region in the 1950s and 1960s and to check the USSR in the 1970s. It was not until the late 1970s that it started becoming more seriously involved in the Middle East, particularly in the Persian Gulf, in conjunction with its broader political opening to the world. Before 1978, its diplomatic relations with the region were paralyzed by its rigid ideological (revolutionary and anti-imperialist) stand. Since 1978, the Chinese leadership, under the influence of Deng Xiaoping, has implemented a policy of modernization, downgrading the importance of traditional Marxist ideology. This has led to the normalization of relations between China and all the Middle Eastern countries. In the 1990s, China successfully cultivated good relations with all states of the Middle East, ranging from close U.S. allies (Israel and Saudi Arabia) to intensely anti-American states (Iran and Iraq).

Although China’s diplomacy in the Middle East, particularly in the Persian Gulf, is limited to a great extent to economic affairs and arms sales, China has sought to gain a foothold in the region in recent years.⁸ It contributed $200 million to construct a deep-sea port at Gwadar in the Baluchistan Province of Pakistan, at the Gulf of Oman. The first phase of the port, which opened in 2005, includes three multi-purpose ship berths. The second phase envisages nine or ten more berths, an approach channel, and oil, grain and bulk-cargo terminals. This is the fi rst such presence in the region and will provide China with a crucial economic and strategic foothold only 250 miles from the Strait of Hormuz. The advantage for China includes access to port facilities for commercial and naval vessels near the Persian Gulf and a new international trade route linking the remote western region of China to the ocean via road and rail links through Pakistan. In addition, the port strengthens China’s strategic influence in the Indian Ocean and the Persian Gulf, providing more security to its energy-related shipping along the existing routes. From Gwadar, China can also monitor U.S. naval activities in the Persian Gulf and future U.S.-Indian maritime cooperation in the Indian Ocean.⁹

The U.S. EIA predicts that global oil production will increasingly be concentrated in the Persian Gulf region. The area’s oil production, currently 24 million b/d, is predicted to reach 35 million b/d by 2020. Much of this growth will target Asian markets, which already receive a majority of their imports from the region. In 2004, 30 percent of China’s Middle East oil imports came from Saudi Arabia and 23 percent from Iran.¹⁰

China’s trade with the six countries of the Gulf Cooperation Council (GCC) — Saudi Arabia, Kuwait, the UAE, Oman, Qatar and Bahrain — surged from $1.5 billion in 1991 to $20 billion in 2004. In 2005, trade increased tremendously again to $33.8 billion, 36 percent more than the previous year. At the same time, China signed agreements with Iran worth more than $100 billion.¹¹ For perspective on China’s policy in the Persian Gulf, its relations with the states of the region are described below.

IRAN

In 1970, China and Iran reestablished official relations, which had been broken since the 1949 revolution in China; it was not until the early 1980s, however, that relations improved signifi cantly. The Iran-Iraq War (1980-88) resulted in high-level diplomatic interactions and arms sales. During the 1980s, arms sales were the main area of Sino-Iranian relations, an important part of a broader strategy in the region, providing China with hard currency and enhanced influence. During the Iran-Iraq War, China’s arms sales to the region amounted to $12 billion. In 1985, Iran and China signed agreements for the sale of missile technology, which included the designing, building and testing of missiles. The transfer of the Chinese technology, particularly the sale of Silkworm anti-ship missiles in 1986, was significant due to the importance of the Strait of Hormuz as the world’s oil chokepoint. Iran tripled the number of missiles deployed on its coast and began fi tting the Chinese-built cruise missiles on its naval boats in 1995-96. This was quite annoying to the United States. After the Iran-Iraq War, arms sales to the region fell by about 40 percent, but the Middle East remained the largest arms market for China. Although Iran and China signed a formal nuclear-research cooperation agreement in 1990 and had engaged in some cooperation as early as 1985, it was not until 1992 that China became Iran’s main supplier of conventional arms and got more seriously involved in its nuclear programs. The sale of missile-related technology continued throughout the 1990s, and Washington continued to challenge this arms relationship. The United States sanctioned one American and five Chinese companies in June 2006 for assisting Iran’s ballistic-missile program, in addition to 33 Chinese companies that had been sanctioned previously. Recently, with the aid of Chinese technology, Iran has developed the Noor radar-guided anti-ship missile. In fact, China’s arms sales in the region assist broader political and economic ties, not only enhancing China’s bargaining leverage at the global level, but also reaping hard currency.¹²

Sino-Iranian trade is 0.6 percent of China’s total. Through 2003, China was Iran’s sixth-largest trading partner, and China’s oil imports from Iran ranged between 200,000 and 300,000 b/d. In the 1990s, China expanded its economic relations with Iran in many areas. The Chinese National Petroleum Corporation (CNPC) and National Petroleum and Chemical Corporation (Sinopec) are involved in discussions around various pipeline and refinery projects.¹³

In October 2004, China and Iran signed a memorandum of understanding by which Iran allows Sinopec to develop Yadavaran, Iran’s largest undeveloped oil field, in exchange for 10 million tons of Iranian liquefied natural gas annually for a period of 25 years. This massive $100 billion deal has solidified Sino-Iranian energy relations. It was followed by several other gas and oil contracts in 2005 and 2006. Equally important as a part of the strategic cooperation between the two countries is the plan to deliver Iranian oil from the Caspian Sea, through another pipeline from Kazakhstan to China. ¹⁴

Zhuhai Zhenrong Oil Company signed a 25-year natural-gas deal with Iran in March 2004 worth $20 billion. In addition, CNPC bought the Iranian subsidiary of Sheer Energy Calgary, Alberta, giving it a 49 percent stake in the Masjed-e-Suleiman oil field in a seven-year deal worth $121 million.¹⁵

Oil and gas deals with Iran provide a tremendous opportunity for China. Due to U.S. sanctions on commercial trade with Iran and the prevention of U.S.-based companies from dealing with Iran, the presence of the major powers is weak. Iranian oil and gas reserves are largely untapped, and fields are unexplored because of a lack of adequate technology and capital. China can help Iran modernize its oil and gas industry and even its economy by providing technology, capital, engineering services and nuclear technology. In long-term economic relationships, Iran may invest in downstream facilities, building refineries in China, and the Chinese may invest in upstream facilities, exploration and development of oil and gas fields.¹⁶ According to the Iran-China Chamber of Commerce, established in 2000, trade between Iran and China was $5.6 billion in 2003 and $7 billion in 2004.¹⁷ In 2005, trade between the two countries reached $9 billion.¹⁸

China’s non-petroleum business in Iran is also important. Fiber Home Communication Technology has won a contract to build broadband fiber optics in Iran, and Hisense Electronic Company has built a factory to produce televisions. Cherry Automobile Company has signed an agreement to cooperate with Iran’s Sandbad Khodro Tus to produce 50,000 cars a year. The China North Industries Corporation (Norinco) has signed a $680 million contract to expand the Tehran subway system.¹⁹

Thus, Sino-Iranian economic relationships revolve fundamentally around Iran’s providing China with crude oil and strategic minerals, while China provides growing quantities of technology and engineering expertise to Iran’s industry, mining, transportation, construction and energy sectors. But the economic relationship is tied to a broader political relationship and goals. In July 2005, Iran (along with India and Pakistan) was granted observer status in the Shanghai Co-operation Organization, a regional-security arrangement to combat terrorism, extremism and separatism. Indeed, China and Russia see Iran as a quasi-ally in an effort to check American power and influence in the Middle East and Central Asia. For its part, Iran sought to join the organization to enhance its relations with China and Central Asia, increase its leverage with the United States and resist containment.

On the issue of Iranian nuclear activities, the Chinese Foreign Ministry spokesman asserted that “China’s position has been consistent on the Iranian nuclear issue. We stand for maintaining the rigor and effectiveness of the international nuclear nonproliferation regime and hope to solve the issue properly through negotiation.” On the one hand, China opposes the use of economic sanctions against Iran and has argued that signatories to the Nuclear Nonproliferation Treaty (NPT) are entitled to the peaceful use of nuclear technology, so long as they comply with the nonproliferation provisions. China has stressed repeatedly that the dispute should be resolved within the IAEA framework through negotiation. On the other hand, China has strongly encouraged Iran to accept the offer of the five permanent members of the UN Security Council plus Germany to suspend its uranium enrichment program and to satisfy international concerns about its nuclear activities.²⁰ Although this policy satisfies neither Iran nor the United States, it is a stand that serves Chinese economic and political purposes regarding Iran and the United States.

To conclude, China needs new allies and privileged access to the oil reserves of the Persian Gulf, and Iran appears to be the best target of such an approach. Iran’s position in the Middle East is stronger than ever; thus it can help China fi ght against the global influence of the United States. As for Iran, it needs a powerful ally to help develop its economy, especially its oil industry. Moreover, Iran also wants to improve its diplomatic and military status in the Middle East. China can provide Iran with much-needed civil and military technology. Finally, both countries are struggling against the supremacy of the United States in the world. The improvement in the relationship between the two countries does not mean that their long-term interests are the same, but in the medium term the two states do share common aims in the economic and geopolitical spheres.²¹

IRAQ

Sino-Iraqi relations were established in 1958 but remained poor until mid-1975. Thereafter, China became more concerned about Soviet relations with Iraq and Soviet designs on the region as a whole; this enhanced Iraq’s importance. During the Iran-Iraq War, China supplied arms and ammunition to Iraq. Afterward China also had significant trade and arms sales with Saddam’s regime. This trade was influenced greatly by Iraq’s political situation. After the Gulf War in 1991 and the UN sanctions against Iraq, Sino-Iraqi trade was minimal, but China continued to sell missile-related technology to Iraq throughout the 1990s. However, by the end of that decade, trade relations rose dramatically as a result of the UN oil-for-food program. In 1997, the CNPC signed a contract with Iraq to develop its al-Ahdab oil fi eld and in 1998 began negotiating for the Halfayad field. The second Gulf war in 2003, which resulted in the overthrow of the Baath regime, deflated Sino-Iraqi trade.

Nevertheless, China has shown an interest in helping to reconstruct Iraq and made efforts to restore its investment position there. In late 2003, the interim government’s trade minister, Ali Allawi, was invited by the Chinese Ministry of Commerce to visit Beijing to promote Sino-Iraqi economic relations, and China pledged $25 million in humanitarian assistance to Iraq. China has attempted to lay the political groundwork for strong relations with post-Saddam Iraq by supporting measures to participate in Iraq’s reconstruction. Gaining a foothold in Iraq can enhance China’s energy security and promises major business opportunities for China. To this end, China has stressed repeatedly that the United Nations should play a crucial role in Iraq. In March 2004, when the president of the Iraqi Interim Governing Council, Bhr Ul-Uloum, visited China, Chinese president Hu Jintao emphasized that China will consolidate and develop bilateral cooperation with Iraq and that Iraq should be governed by the Iraqis. In March 2006, in the fourth session of the Tenth Chinese National People’s Congress, Minister of Foreign Affairs Li Zhaoxing stated three principles regarding the reconstruction of Iraq: independence, sovereignty and territorial integrity. He also called for a greater role for the United Nations and the international community in reconstruction.²² This is in line with China’s earlier submission of a document to the Security Council in May 2004 proposing that U.S.-led forces withdraw from Iraq. A diminished American role would increase China’s ability to penetrate postwar Iraq.²³ Trade and investment can be expected to grow with the new regime if it manages to stabilize the country, especially after U.S. forces withdraw.

THE GCC STATES

Kuwait and Oman established ties with China before the formation of the GCC in 1981. Kuwait established diplomatic relations with China on March 22, 1971; Oman on May 25, 1978; the UAE on November 1, 1984; Qatar on July 9, 1988; and Bahrain on April 18, 1989. Saudi Arabia was the last GCC country to establish ties with China, in July 1990. Sino-GCC relations were not impressive until recently, but in the past few years economic relations have flourished. The Arab countries are currently China’s eighth-largest trading partner, with the GCC having the main share. Most of the GCC trade lies in Chinese imports of oil and exports of cheap textiles. In 2004, China and the GCC started negotiations on a Free Trade Agreement (FTA), coinciding with the new China Arab Forum of the 22 states of the Arab League. The Chinese Ministry of Commerce expects Sino-Arab trade to reach $100 billion by 2010. According to the Chinese Ministry of Commerce, by the end of 2005, Chinese investment in Arab countries had reached $5 billion, while the Arab investment in China was $700 million. ²⁴

The agreement to seek an FTA represented an important advance on economic, trade, investment and technological cooperation. It committed the parties to establish a joint economic and trade cooperation commission and officially launch a bilateral consultative mechanism. China sought to establish the FTA as a national strategy because its economic modernization is export oriented. The GCC is the second organization, after ASEAN, willing to have FTA talks with China. In April 2005, the first round of negotiations on an FTA was held in Riyadh, setting up a working outline. The second round, held in Beijing in July 2005, focused on market access and rules guiding the interaction, and it yielded an agreement on tariff reductions on goods traded. The third round was held in Beijing in June 2006. Sino-GCC trade volume increased from $1.5 billion in 1991 to $33.4 billion in 2005. By 2004, the GCC was China’s eighth-largest trading partner, the eighth-largest export destination and the ninth-largest source of imports.²⁵

Saudi Arabia

Of the GCC states, it is not surprising that Saudi Arabia, the world largest oil-producing country, has the closest relations with China. In 2006, China was Saudi Arabia’s fourth-largest importer and fifth largest exporter; Saudi Arabia was China’s tenth-largest importer and largest oil supplier. Saudi Arabia accounts for 17 percent of China’s total oil imports. According to China’s Ministry of Commerce, trade between the two countries exceeded $15 billion in 2005, with an average growth of 41 percent a year since 1999.²⁶

In 1999, President Jiang Zemin visited Saudi Arabia, and at the conclusion of his stay announced the inauguration of a “strategic partnership” with the kingdom. The partnership established a cross-investment environment in which Saudi Arabia agreed to open selected portions of its upstream market (excluding equity oil) to China, in return for China’s opening its downstream market to the Saudis. In 2001, Saudi Aramco signed an agreement with Sinopec for a 25 percent share in a $3.5 billion expansion of an existing refi nery in Fujian Province, coupled with a large new ethylene-production facility. Moreover, China agreed to allow the partners in this deal to open and manage 600 gas stations in the province. In return, China received a 30-year supply contract for 30,000 b/d of Saudi crude oil. Saudi Aramco is negotiating to build a second refinery in Qingdao. It will be the largest in China, with an initial capacity of 200,000 b/d, to be expanded to 400,000 b/d. The refinery will be operated by Saudi Aramco, but Sinopec will have an ownership interest. The two projects require more than a $6 billion investment. As a concession, the Saudis granted Sinopec $300 million to explore and produce natural gas in Saudi Arabia. Under this agreement, Sinopec will own 80 percent and Saudi Aramco 20 percent of a special-purpose company. The advantage for Saudi Arabia is a market for its sour crude oil, access to China’s refinery and petrochemical industry, and a reduced reliance on the United States. China gains long-term contracts for crude oil, greater economic interdependence, greater security of supply, and a fl ow of investment dollars. It also gains limited access to certain Saudi upstream markets. China recognizes that its reliance on Persian Gulf oil, particularly Saudi oil, will grow. Saudi Arabia also realizes that the growth in world demand is shifting to Asia, with China as the largest market. While oil trade is the core of this partnership, China has been careful to expand the relationships to include a range of goods and services as well as opening its downstream petroleum sector to significant Saudi investment.²⁷

Saudi Arabia’s oil exports to China increased to 500,000 b/d in 2005, from 440,000 b/d in 2004. Saudi Aramco also agreed to provide Sinopec with one million b/d of crude oil by 2010. The China and Saudi Arabian deals were described by the president of Saudi Aramco “as among the most important energy relationships on the planet.” In 2006, Sino-Saudi relations reached a zenith when King Abdullah visited China. It was the first visit of a Saudi king to China and the king’s first trip outside the Middle East since assuming the throne in 2005. Five major agreements were signed. President Hu Jintao asserted that this cooperation would “write a new chapter of friendly cooperation between China and Saudi Arabia in the new century.” The agreement included a landmark pact for cooperation in oil, gas and minerals as well as in economic, trade and technical assistance. Taxation agreements were also signed, and Saudi Arabia granted China a loan to improve infrastructure in Aksu in the oil-rich Xingjiang province. The Saudis also offered the Chinese companies investment opportunities in the enormous Saudi infrastructure in the petrochemical, gas, desalination, power-generation and railway sectors. In part, China gains Saudi money and expertise to help upgrade its refineries to handle its growing oil imports, while Saudi Arabia gains a dominant presence in China by investing heavily in a Chinese refinery. Indeed, their bilateral energy agreements create interdependence, which will increase future cooperation. In the next 10 years, a dramatic expansion in bilateral trade and investment in each other’s upstream-downstream energy and oil sectors is expected.²⁸

Chinese arms sales to Saudi Arabia started in the mid-1980s, when China sold Saudi Arabia CSS-2 “East Wind” intermediate-range missiles. China has also offered to sell intercontinental ballistic missiles to Saudi Arabia, but so far the Saudis have turned down the proposals and limited their purchases from China in order to maintain their special relationship with the Americans. ²⁹

Kuwait

Among the GCC states, Kuwait has the longest relationship with China, and it has been China’s largest supplier of preferential official loans. From 1982 to the end of 2001, the Kuwait Fund for Arab Economic Development provided China with $620 million loans on favorable terms.³⁰

In 1983, the CNPC began to move into Kuwait with limited contracts to provide labor and other services. China’s abstention from the UN resolution condemning Iraq’s invasion of Kuwait paralyzed bilateral trade. After the war, Kuwait signed defense and security pacts with all five permanent members of the UN Security Council and bought $186 million worth of 155-mm howitzers from China rather than Britain or America. Later, a senior Kuwaiti offi cial asserted that China had coerced Kuwait, threatening to vote against continuation of UN sanctions on Iraq in 1997 if Kuwait did not engage in the $300 million purchase. On the other hand, Kuwait might have been seeking to improve ties with an important UN member.³¹

Bilateral trade between the two countries was $727 million in 2002 and has expanded rapidly since then. In 2005, the state-owned Kuwait Petroleum Corporation and Sinopec signed an agreement to develop a petrochemical industry in Guangdong Province in south China. The deal, worth $5 billion, is said to be the biggest joint venture between China and another country in the petrochemical industry. Kuwait provides China with 200,000 b/d of oil, which is set to double in the next few years. Sinopec has a 10 percent stake in a Chevron-led international consortium bidding for an $8.5 billion project in Kuwait. In September 2006, China announced an initial public offering of the Industrial and Commercial Bank of China. The Kuwait Investment Authority intended to buy $720 million worth of shares. ³²

Other GCC States

The trade volume between China and Oman in 2002 was $1.506 billion. According to the International Monetary Fund (IMF), it increased to $4.4 billion in 2004. Oman is the third-largest supplier of oil to China after Saudi Arabia and Iran. The trade volume with the UAE amounted to $3.895 billion. Trade between China and Qatar has been relatively small: $90 million in 1999, $390 million in 2004 and $890 million in 2005. But China has sought to capitalize on rapid growth in Qatar, especially in the booming construction industry. Qatar has also sought to invest in China, planning to purchase $209 million shares of the Industrial and Commercial Bank of China, which was offered in September 2006. Bahrain is the least wealthy state of the GCC, as it lacks oil resources. The trade volume between the two countries was only $110 million in 2005. ³³

In sum, the GCC states invest in the Chinese oil-refining and petrochemical industries and upstream offshore oil exploration. In turn, China invests in the region’s oil exploration and production. China believes that the close upstream-downstream mutual investments create an interdependence that can help secure a more stable oil supply from the region.³⁴

SINO-AMERICAN RIVALRY

China is becoming a major U.S. competitor for political influence in the Persian Gulf, and the United States is trying to check the growing Chinese diplomatic and political ties with key states of the region, such as Iran and Saudi Arabia. For their part, these states are increasingly turning to burgeoning relationships with Asia as the locus of oil exports. Already two thirds of the oil from the region is exported to Asia, and this is expected to grow. The states of the Persian Gulf are increasingly trying to balance their relations with the United States and China.³⁵

While there is no overt Sino-U.S. competition as yet, it is not difficult to envision the region as an emerging stage for future rivalry. Both are dependent on the region’s energy resources while offering competing models for international conduct. The Chinese model is becoming increasingly popular, as China emphasizes non-intervention, state sovereignty and territorial integrity, while the United States is more willing to engage in intervention, preemptive action and regime change. Since 9/11 and the U.S.-led war against terrorism and the initiative to spread democracy in the Greater Middle East, even those countries that have traditionally close relations with the United States, such as Saudi Arabia, have deepened their relations with China.³⁶

At least in the near future, the dominant American position in the region is not threatened by China. Trade between the United States and Saudi Arabia alone was $22 billion in 2003, up from $18 billion in 2002.³⁷ But China and Saudi Arabia have been wary of outside intervention and pressure and in this respect have a common interest. Saudi Arabia tends to believe that China’s pragmatic foreign policy does not aim at changing its political system or way of life, in contrast to American foreign policy, which sometimes does so, even if indirectly. Thus, Saudi Arabia has reason to look to China for markets and for political ties. Although both seek to cooperate with the United States for economic and strategic reasons, they believe this cooperation may help to check America’s regional influence. ³⁸

There are serious differences, however, between China and the United States regarding Iran. Extensive economic relations with Iran are seen as a roadblock to American efforts to contain the Islamic Republic. For instance, in 2005, the Bush administration supported India’s pursuit of nuclear technology while maintaining sanctions against acquisition of the same technology by China. In September 2007, the United States held joint naval exercises in the Indian Ocean with India, Japan and Australia. Such actions may give weight to those in China who argue that politically motivated diplomacy is the ultimate instrument for securing China’s oil supplies.³⁹

More disturbing for Washington are Chinese arms sales to Iran. These are seen as an attempt to gain a foothold in the region by building up long-term strategic links. These arms sales could threaten U.S. military forces in the Persian Gulf, particularly the anti-ship cruise missiles, which pose a threat to American naval vessels and oil-tanker traffic.⁴⁰

A still more important strategic issue for the United States is the Chinese stand regarding Iran’s nuclear activities. China has opposed the use of economic sanctions against Iran, stressing repeatedly that the dispute should be resolved within the IAEA through negotiations.⁴¹ Nevertheless, China has good reason to temper its position. China’s economic growth depends not only on American support in international institutions, but especially on

U.S. markets, technology and investment. China is acutely aware that oil and gas can come from many sources, but it is very hard to substitute the massive growth benefits derived from its relations with America.⁴² So China seems to be trying hard to balance its relations with the United States and Iran, pursuing policies that best serve its national interest (economic growth) by not moving so close to one side that it alienates the other.

China’s policy in the Persian Gulf is a microcosm of its global policy. There has been a role reversal for the United States and China. In the previous century, China encouraged revolutionary change through sponsoring anti-colonial struggle and communist insurgencies such as the rebellion in the Dhofar Province of Oman in the mid1970s. It is now the United States that is attempting to initiate changes in the international system. While the United States traditionally favored stability, even at the cost of supporting unpopular regimes, it is now China that increasingly supports stability in the international system.⁴³ In the long term, Chinese and U.S. interests in the region, as in the global arena, are not identical.

CONCLUSION

It seems that China will seek to play an increasingly salient role in the Persian Gulf, in sharp contrast to past behavior. Indeed, China has a variety of reasons to enhance its power and position in the region: income from trade and arms sales, a secure supply of energy and the geopolitical benefits of playing a role in a critical region, including the potential for checking the United States and other major powers.

China has shown a sophisticated understanding of the states of the region. It looks at these states in terms of a strategic partnership built around needs and interests. This is likely to create stronger bonds than a strategy based only on securing oil. China also realizes that, for many countries in the region, it is becoming politically uncomfortable to be too reliant on the United States. Engaging in new partnerships with China will provide them with greater independence. Although China cannot replace the United States in the region, it is focusing on shifts at the margin. Inevitably, as oil and gas exports to Asia, particularly China, continue to grow, relations between the two regions will increase signifi cantly.

China realizes that it has a large stake in fostering stability and not provoking unrest in the region. Although Iran could play a very important role in its long-term energy strategy, China has been careful not to provoke the United States by pursuing huge oil and gas arrangements with Tehran. In this regard, China has also been careful not to endanger its growing relationships with other states of the Persian Gulf, particularly Saudi Arabia.

China has important reasons not to challenge U.S. interests in the Persian Gulf too much. In an interdependent world, China increasingly needs the United States for various economic benefits. As was the case in the 1990-91 Gulf War, China did not jeopardize its relations with the United States by opposing the 2003 U.S. invasion of Iraq. Its position was much more moderate than those of France and Russia, which threatened to wield their Security Council veto. Even regarding Iran’s nuclear activities, China has joined Russia in promoting negotiations with Iran over the use of economic sanctions or force, though it has been careful not to assert itself too strongly.

A newcomer in the Persian Gulf, China has to be content to be a secondary power like Britain or France, in light of the entrenched presence and unparalleled power of the United States. By using quiet diplomacy and by promoting trade relationships and interdependence, China has sought to present itself as a benign power with global reach. If China can secure energy, expand its own exports to the region, and present itself as a reasonable alternative power, time is on China’s side.