What Happened to the New Silk Road?
In 2007, the “new Silk Road” was born. It was headline-making vision for how the Middle East and Asia would reconnect after 700 years of political and economic separation. It was a grand vision – a historic re-opening of ties that would be a game-changing new geopolitical axis.
And the economics of this vision were both simple and powerful. Oil-rich GCC countries would integrate with rapidly rising and energy hungry Asia. The new Silk Road was to be the beginning of massive movements of oil, capital, infrastructure projects and people.
It is now five years later and things didn’t quite go as grandly envisioned. The envisioned New Silk Road is, for the most part, nowhere to be found. And those who were most optimistic five years ago are among the most pessimistic today.
Certainly, oil is moving from the GCC to Asia. China currently imports 50% of its oil and this percentage is growing along with their GDP (i.e., Chinese demand grows but domestic supply does not). The Middle East is today the largest supplier of oil to China so Middle East relations could not be more important in Beijing. The one piece of the new Silk Road that does exist is the high priority relationships between Riyadh, Abu Dhabi and Beijing. This puts members of the GCC Royal Families in a unique position within the Chinese state capitalist system. The oil and political relationships have developed more or less as envisioned.
You can also now hear Chinese spoken in Dubai and Riyadh. Business people are flying back and forth on a weekly basis. That is a change from five years ago. And cheap Chinese goods such as toys and basic building materials are now available virtually everywhere in the Middle East. Saudi households are increasingly preparing their dinners with Chinese kitchen appliances and eating them on Chinese plates while sitting in Chinese furniture. There are even ChinaMex Mart’s in Dubai and Riyadh distributing only Chinese goods. So basic, simple trading is happening.
And finally, there have been a series of high profile deals such as the China-constructed Mekkah railway, the Saudi Aramco-Sinopec joint venture, the new Sabic R&D facility in Shanghai and the spectacular Saudi pavilion at the Shanghai expo. These high-profile deals are primarily SOE-SOE (state enterprise to state enterprise) and tend to have a mix of financial, political and strategic objectives.
But what you don’t see today is conspicuous.
- You don’t see Chinese companies winning many infrastructure projects in the GCC. Chinese SOEs have not transformed the Middle Eastern infrastructure situation as envisioned – and as they have in China.
- You don’t see large capital flows from the GCC into China. GCC capital continues to flow into New York and London (and a little Hong Kong) – but Middle Eastern investors by and large avoid China.
- You don’t see many private deals. Outside of high-profile SOE deals, you do not see many (any?) of the major MENA family offices and companies partnering with Chinese companies. While every family office is comfortable flying to London to do a deal, very few are comfortable doing China deals.
Five years into the new Silk Road, the Middle East-China relationship consists of oil, high priority political relationships, trade in simple goods and some large high-profile joint ventures (mostly in the energy space).
We assert that the new Silk Road is fundamentally the wrong framework for thinking about MENA-China. It mis-characterized the situation and therefore inaccurately identified the opportunities.
The entire white paper can be found here.