New paths on Silk Road open up

China will become an increasingly dominant business partner for the GCC as economies in the West stall.

The container ship Xin Yan Tian, owned by China Shipping Container Lines, sits at Jebel Ali Port in Dubai. Charles Crowell / Bloomberg News

China will become an increasingly dominant business partner for the GCC in the next decade, a trend likely to speed up as economies in the West stall.

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The announcement yesterday of the Chinese premier Wen Jiabao's visit to Abu Dhabi for the World Future Energy Summit next year is the latest sign of the closer links between the two.

"The Silk Road is re-emerging," said Alessandro Magnoli Bocchi, the chief economist of Kuwait China Investment Company (KCIC). "The links are moving from oil to non-oil trade and investment."

China is expected to push ahead of India to become the region's biggest trading partner by 2020, according to the Economist Intelligence Unit.

The GCC already supplies about half of China's energy imports and more than a third of its crude oil needs. But the world's second-biggest economy and the GCC are already building business links in other areas.

Saudi Arabia overtook South Korea to become the largest petrochemical exporter to the Chinese textile industry in 2009.

China Railway Construction Corporation, a Chinese contractor, helped to build the US$1.8 billion (Dh6.6bn) railway in Saudi Arabia to transport pilgrim traffic during Haj.Several Chinese banks including Industrial and Commercial Bank of China, the country's largest, are setting up in Gulf states, helping to encourage greater trade and investment flows.

But GCC investment links have yet to develop at the same pace with China or the rest of Asia.

In the five years before the financial crisis of 2008, only 11 per cent of the Gulf's outward investment was directed to Asia, according to a recent KCIC report.

Instead, as much as 75 per cent of GCC savings are invested in the advanced economies of the US and Europe. Investors have considered such markets as safe destinations for their money, while fixed exchange rates to the US dollar have ensured predictability in the value of their oil revenues.

But stagnation in those economies and faster growth in Asia should encourage them to switch their investment focus eastwards, says KCIC. The structural deficits and low growth in the US and UK will in the long run dampen the returns of those investments, it said.

"There's a massive amount of money still being allocated to the West and with low GDP growth and deficits they will only provide low returns," said Francisco Quintana, an economist at KCIC and the author of the report. KCIC says the GCC should invest an additional 10 per cent or $600bn in Asia over the next decade to take advantage of higher returns.

Asia's share of the world's GDP will rise from 25 to 35 per cent by 2020, while the share of the US, Europe and Japan will decline from 48 to 38 per cent, according to KCIC.

"Enormous opportunities will arise for local and foreign companies catering to new Asian consumers in need of infrastructure, health care, education, consumer goods, financial services and leisure activities.

"These opportunities will materialise as the global macroeconomic uncertainty is left behind and fundamentals start playing again, and GCC investors can be part of it via portfolio rebalancing," the report said.

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