Despite Cheap Oil, There Is No Threat of a Chinese Debt Trap in the GCC

While low oil prices continue to squeeze Gulf finances, China is promising GCC states billions of dollars’ worth of investments in massive infrastructure projects through its Belt and Road initiative (BRI). Despite its economic potential, however, China’s trillion-dollar BRI has stoked the suspicions of its competitors over Beijing’s true intentions, leading critics to view it as an instrument of Chinese debt-trap diplomacy. In the GCC, however, these fears seem baseless. With sufficient scrutiny, Chinese investments in the GCC represent more of an opportunity than a threat.

Over the past few weeks, China has engaged intensively with the Gulf and the Arab world. On July 9, its president, Xi Jinping, received the emir of Kuwait, Sheikh Sabah Al Ahmed, for a two-day visit, during which the two leaders signed a “strategic partnership agreement.” As a signal of their growing ties, Kuwait and China agreed to develop the Silk City and Mubarak Al Kabeer Port projects in Kuwait’s northern islands.

The following day, the emir attended the opening of the China-Arab States Summit, which brought together Arab foreign ministers and senior diplomats, in Beijing. During the summit, Xi pledged to set up a $20 billion fund to provide loans for “economic reconstruction” and “industrial revitalization” in the Arab world.

Ten days later, Xi chose Abu Dhabi as his first overseas destination since his re-election to the presidency in March. Following an all-out welcome, the two sides signed the region’s first “comprehensive strategic partnership agreement.” In an open letter published by local newspapers, Xi detailed China’s investment ambitions in the UAE, citing the construction of the world’s largest solar power plant, the Hassyan clean-coal power plant, Khalifa Port’s container terminal two and Chinese stakes in Abu Dhabi’s onshore and offshore oil concessions.

For some, China’s diplomatic flurry in the Gulf simply reflects its growing economic interests in the region. Over the past 20 years, China-GCC bilateral trade has grown exponentially, rising to $114 billion in 2016 from $10 billion in 2000, according to the IMF. Saudi Arabia, Iran, Iraq and Oman are among China’s top sources of crude oil, even though Russia (1.2 million barrels per day) surpassed Saudi Arabia (1 million barrels per day) as China’s top supplier in 2016.

For others, however, China’s regional activity masks more sinister ambitions, mirroring its strategic ambitions elsewhere in South Asia, Southeast Asia, Central Asia and Africa. According to the Washington-based Center for Global Development, 23 of the Belt and Road initiative’s 68 partner countries were found to be “significantly or highly vulnerable to debt distress.” Encouraged by China, some of these poor nations have racked up large amounts of debt to fund expensive infrastructure projects, driving their indebtedness to China to unprecedented levels. According to the center, by 2016 China’s share of total debt had reached 80 percent in Djibouti, 49 percent in Cambodia, 41 percent in Tajikistan, 39 percent in Laos and 36 percent in the Kyrgyz Republic.

Even when China wrote off its claims against its debtors, it often did so in return for tough equity and territorial concessions. Sri Lanka, for example, agreed to a concession of 15,000 acres of land for 99 years and a transfer of control of Hambantota port to China in return for a second $757 million loan to fund the port’s development. Similarly, in return for Chinese debt forgiveness, Tajikistan made undisclosed territorial concessions to China relating to a disputed territory.

However, the possibility is remote that Gulf states would succumb to what some have termed China’s debt-trap diplomacy. Even with tighter state finances, the Gulf states can tap global and regional markets for debt and capital financing with much greater ease than many other nations that China is investing in. The credit ratings of GCC states range from Qatar’s Aa3 to Bahrain’s Ba2 score, according to Moody’s, placing them at an advantage compared to most of their Asian and African neighbors. Provided that the GCC states are able to prevent large-scale corruption at the top, their financial profiles mean they are far more immune from acceding to China’s predatory terms.

Despite the media hype, moreover, Chinese investments in the Gulf have proceeded at a much slower pace than anticipated. Although China emerged in 2016 as the largest investor in the Middle East, its footprint in the GCC has remained relatively small. In 2017, for instance, Dubai’s $7.4 billion of inward foreign direct investment flows originated primarily from the US, UK, France, India, Germany, Saudi Arabia and Austria, as China’s investor presence lagged. Talks over a China-GCC free-trade agreement, which would typically cover investments, have also stalled as China is said to be concerned over the effect of cheap petrochemical exports from the GCC on its local industry.

In short, neither Chinese investments nor the GCC states’ economic vulnerability are large enough for China to constitute a threat to Gulf states’ economic sovereignty. Instead, China’s investments in the region should be thought of as a component of an equitable economic partnership: low oil prices enable China to generate a greater economic surplus, a portion of which it invests into Gulf states whose reliability as oil and gas suppliers make such surpluses possible in the first place. As the GCC states upgrade their ties with China, they must emphasize a mutually beneficial economic arrangement among equals, one that entails transparency and reciprocal market access rather than the debtor-creditor relationship that China has cultivated with other countries in the region.

Hasan Alhasan is a PhD researcher at King’s College London and the National University of Singapore, where his work focuses on Indian foreign policy in the Middle East. Previously, he served as a senior analyst at the office of the first deputy prime minister of Bahrain.