China recently marked a quiet but momentous milestone: it is now the biggest investor in the Middle East. According to the Arab Investment Export Credit Guarantee Corporation, China now holds nearly a third of the foreign direct investment (FDI) stock in the Arab world.
On a wider scale, trade between China and the Middle East is expected to rise to $500 billion by 2020, up from more than $300 billion today, according to US-based consultancy McKinsey.
“Right now, this [Middle East] trade relationship is still dominated by China’s energy demands to fuel its rapid growth with crude oil imports making up a significant portion of the trade relationship,” says Wes Schwalje, chief operating officer (COO) at UAE-based Tahseen Consulting, a research firm.
But oil economics have laid budding roots for a much wider relationship and the region’s technology and startup sector stand to benefit.
The Asian giant’s interest in the region’s tech sector is steadily developing beyond infrastructure projects and smartphone sales to e-commerce and venture capital (VC) curiosity.
“Chinese investors and companies began investing in South East Asia on a huge scale from 2015 and that’s when the money started coming in,” says Taraec Hussein, vice-president at Gobi Partners, a China-based VC firm. “Now, some of our Chinese [limited partners] see the Middle East as the next region.”
The GCC’s high gross domestic product (GDP) per capita and Dubai’s strategic location as a hub for the wider region have encouraged the likes of Alibaba and JollyChic to target consumers here.
“The Middle East is a key link between Asia, Africa, and Europe and offers opportunities to enhance global trade ties to create new markets for Chinese goods and services, as well as advance geopolitical interests,” says Schwalje.
The New Silk Road
A significant catalyst in the growing strategic partnership between the Middle East and China is the Belt and Road Initiative (BRI).
First outlined in two global speeches in 2013 by Chinese President Xi Jinping, BRI aims to build roads, ports, railways, and other infrastructure of connectivity across the Eurasian landmass, and into Africa and the Middle East, with up to $1 trillion of Chinese investment flowing in by the time the dust has settled.
“Even if China does not get anywhere near those ambitious numbers, the programme could be a game-changer for many countries in the Middle East,” says Schwalje.
A critical foundation of BRI is significant investments in web and telecommunications infrastructure to deepen and expand internet and mobile access in partner countries – a digital silk road.
As part of these investments, Chinese tech companies are building on the foundations built by the likes of Huawei and ZTE and introducing their goods and services.
For Gobi’s Hussein, there are strong parallels to be drawn from China’s experience in South East Asia and what is likely to play out in the Middle East.
“What you will see in the Middle East is some of these big Chinese tech companies will come and then the SMEs [small to medium-sized enterprises] will follow,” he says. “It brings validation. When Amazon came in and acquired Souq, it was a one off, it is not sustainable.”
Chinese investments are more sustainable than US investments according to Hussein since revenues and profits tends to stay in the country rather than be funnelled back into the Chinese economy.
“They have so much cash they’re not investing in China, they’re looking for new markets,” says Hussein. “So when they come in, they won’t build companies from ground zero, they will buy companies so you can expect more exits, more capital which validates the region.”
For Schwalje, Alibaba Group could emerge as a key player in the region as it has in other BRI countries such as Pakistan, where the tech giant acquired e-commerce site Daraz for a reported $200 million.
A One-Way Corridor
A growing number of businesses in the region have identified China as an important export market. UAE-based e-commerce site Noon recently announced its entry into the Far East, but so far, the digital economy cooperation between China and the Middle East has mostly benefitted China to date.
For example, Chinese e-commerce company JollyChic is now one of Middle East’s most popular platforms with 35 million registered users. Saudi-backed SoftBank is reportedly mulling a $1.5 billion investment in the Chinese social media giant Bytedance, which will bring the valuation to $75 billion surpassing Uber’s $72 billion and Didi Chuxing’s $56 billion valuations respectively.
AliExpress, Alibaba’s consumer shopping site launched in August 2018 in the region and amassed more than 150 million subscribers in one month.
“Users in the Middle East pay more attention to product quality and quality of service, rather than blindly seeking low prices,” says Matt Zhang, head of the Middle East at AliExpress. “For many Chinese companies, this land is very good as it helps the long-term health development of the company.”
The growth of Chinese tourists to the region has also pushed retailers to offer services familiar to them like mobile payment platforms WePay and AliPay both of which account for about 80 per cent of all payment transactions in China.
“AliPay is already expanding in the region to provide e-payments options to Chinese visitors which could be an initial foray into the fintech space that might evolve like Ant Financial’s investment in Pakistan’s Telenor Microfinance Bank,” says Schwalje.
As China’s largest trading partners in the region, the GCC countries have been a key focus of expanding trade and diplomatic ties. In 2016, on his first official visit to the region, President Xi Jinping met with Saudi King Salman which spurred nearly $70 billion in business deals, the creation of a $20 billion bilateral investment fund, and the formation of a joint committee to enhance trade and diplomatic cooperation.
Jinping also made a return visit to the region in July 2018 to the UAE – the first visit by a Chinese leader in 29 years – which led to a strategic agreement to cooperate on diplomatic and economic interests and the signature of several trade agreements.
Trust has begun to grow between the two regions in the ‘last 10 to 15 years’, according to Jue Wang, associate fellow on the Asia-Pacific Programme at London’s Chatham House think tank. “There is now a good foundation… it is mutually political, beneficial and strategic,” she says.
Wang says ‘synergy’ is one of the reasons the relationship between the two regions has grown so rapidly. “China needs oil and raw materials and the GCC needs investment and manufacturing,” she says.
Wang specifically foresees growth in the following sectors: energy and green energy; infrastructure; industrial/smart cities; technology and financial collaboration.
The China-Middle East relationship so far has run smoothly, in stark contrast to strained relations between the US and China, which is currently striven with trade wars, IP accusations and rivalry.
Wang says the Middle East and China have a ‘mutual understanding’, as well as a desire for collaborative business. This factor is not to be underestimated as a driver of the velocity of regional trade agreements, she says.
“It’s as if China says to the Middle East, ‘you do your business and I’ll do mine’. There is no interference in each other’s domestic affairs. There’s a mutual understanding that business is business."
And with such a mindset, startups in the region could benefit to turn farther East, than focus on traction and investment from the likes of Silicon Valley alone.
“We are seeing more Chinese learning Arabic and more Arabs learning Chinese. The flow of talent and interoperability means that exchanges between China and the Arab world are becoming more conducive to technological, economic and cultural exchanges,” says Zhang.