While the eurozone debt crisis hangs like a dark cloud over the global economy, a grey cloud is emerging in China with deep consequences for the states of the Gulf Cooperation Council: the prospect of a hard landing.
If there is one word to describe China's economy today, it would be "slowdown". We are witnessing a slowdown in key economic variables such as exports, domestic demand, foreign investment and manufacturing.
Still, a slowdown to what China predicts will be 7.5 per cent growth for 2012 would keep the cloud grey rather than black. Even if Beijing's figure is too ambitious and growth only achieves 6.5 per cent to 7 per cent, as forecasted by Pimco, the world's leading bond trader, the cloud would not come bearing a storm.
To be sure, even the smallest percentage decline in China's growth has a psychological effect on an already wounded global economy, and the world should hope that China can steady its growth at around 7 per cent. The GCC countries, in particular, should be watching China's growth numbers closely.
That's because the IMF and economists are warning about the effect of a hard landing in China on the GCC states. In fact, Jean-Michel Saliba of Bank of America Merrill Lynch calls a significant China decline "the biggest risk in the GCC" above the risk of the eurozone crisis.
China and Asia as a whole are the largest buyers of the GCC's most important commodities: oil and gas. In many ways, GCC economic growth over the past decade has been intertwined with China's growth. As China grows, its appetite for energy grows. Like the panda that needs to eat 14 hours a day, the Chinese economy needs to "eat energy" constantly to keep pace with rising urbanisation and to maintain the growth needed to satisfy a population showing increasing signs of restiveness.
How did this happen? Why is the GCC region so dependent on Asia and vice versa?
The year 1993 is critical. That is the year that China's domestic production of oil could no longer keep pace with domestic consumption. In short, the lines on the graph intersected. Ever since, the consumption graph has been shooting up and to the right, while the production has stayed steady.
As China's economy grew, it fed the growth of emerging markets around the world, including among neighbours in Asia. In turn, those Asian economies began to demand more oil and the New Silk Road of energy between the Middle East and Asia deepened and grew.
That is the reason why King Abdullah of Saudi Arabia chose to visit China on his first official state visit after ascending the throne in 2005. Riyadh had seen the writing on the wall.
Over the past decade, the Sino-Saudi energy relationship has only deepened. Saudi Aramco has invested alongside Chinese state energy companies in building refineries, a sign of strategic engagement rather than just a transactional relationship. Saudi Arabian Basic Industries (SABIC) has built its future growth strategy on demand from China and broader Asia. Chinese state-owned company Sinopec has been busy exploring for gas in the Saudi desert.
Saudi Arabia is not alone. Other GCC oil and gas exporters are heavily reliant on Asia for their future demand growth. Six to seven out of every 10 barrels of GCC oil goes to Asia. Qatari liquid natural gas goes mainly to Asia.
So, what happens if the coming cloud goes dark and a storm rises in China? What if China's growth collapses? What if its much-discussed housing bubble or its less-discussed infrastructure bubble pops?
What if the country faces a severe banking crisis?
Given China's massive cash reserves, the prospect of a meltdown seem unlikely but the "what ifs" should concern GCC leaders, and should accelerate efforts at economic diversification away from oil and gas.
A recent study by the Arab Petroleum Investment Corporation noted that the GCC has been too slow to implement diversification plans. "Most countries still have a long way to go," the report noted.
The problem is not a lack of planning, but a lack of implementation. On the other hand, the IMF recently lauded the UAE for its efforts at diversification, saying that it has been "reaping benefits" from its early efforts.
There is no shortage of strategic plans for diversification sitting on shelves in GCC capitals. And time is on the side of governments. Despite the headlines about renewable energy, we will be living in a fossil fuelled-world for the next two decades at least, most analysts say. Now is the time to implement those plans, because they will require a long time to materialise.
Meanwhile, keep an eye on China's growth. It matters more to the fate of the GCC states than the Arab uprisings that continue to capture most of the media attention.
Afshin Molavi is a senior adviser at Oxford Analytica and a senior fellow at the New America Foundation
On Twitter @afshinmolavi
