Fear of long war hits China’s Gulf investors hard

The US is mired in conflicts in the Middle East. While this creates strategic opportunities and room for manoeuvre for China, it also exposes its regional investments to disruption. Academics interviewed say the deteriorating security situation in the Middle East is likely to dampen Chinese firms’ appetite for further investment, with existing projects facing delays. Whether investor confidence recovers will depend on US-Iran negotiations — “now is the critical period”.

US-Israeli strikes on Iran — and Tehran’s retaliation against American targets across the Gulf — have drawn all six Gulf states — Bahrain, Kuwait, Qatar, Saudi Arabia, the United Arab Emirates (UAE) and Oman — into the conflict, leaving them caught in the crossfire.

Missiles rained down, and it was not only the US facilities targeted by Iran that were struck — Chinese-funded infrastructure is also said to have been hit.

Bloomberg, citing AidData, a research lab at the College of William & Mary, reported that Iranian strikes have already hit at least three Chinese-funded infrastructure projects in Dubai, Qatar and Oman, with a further 12 in high-risk areas — placing roughly US$4.66 billion in financing commitments at risk.

Over the past decade, China has gone beyond importing Gulf oil, channelling substantial investment into infrastructure and technology through its Belt and Road Initiative to build strategic footholds in the region. Data from the American Enterprise Institute’s China Global Investment Tracker show that over the past 20 years, China has amassed roughly US$270 billion in investment and construction projects across the Middle East.

China’s central and state-owned enterprises form the backbone of its overseas expansion and partnerships with Gulf states, focusing chiefly on infrastructure, energy and industrial capacity cooperation.

China’s three oil majors — China National Petroleum Corporation, China Petrochemical Corporation and China National Offshore Oil Corporation — are deeply involved in oil and gas exploration and development, as well as downstream refining and petrochemical cooperation in countries such as Saudi Arabia, the UAE and Iraq. 

Meanwhile, China Harbour Engineering Company is engaged in the UAE’s Khalifa Port project; Power Construction Corporation of China is working on large-scale desalination projects in Saudi Arabia; and China Energy Engineering Corporation, with Saudi Arabia as its core hub, focuses on new energy, upgrading conventional energy, infrastructure and water projects.

Private enterprises, meanwhile, play a supplementary role in areas such as the digital economy, e-commerce, fintech and new energy. For example, Huawei has been involved in deploying 5G networks and cloud computing projects in countries such as the UAE and Saudi Arabia. Alibaba Group and Tencent have also partnered with local Middle Eastern conglomerates to advance cloud computing, artificial intelligence and data centre infrastructure.

According to official Chinese statistics, the UAE is China’s largest export market and investment destination in the Arab world. Saudi Arabia has been China’s largest trading partner in West Asia and North Africa for several consecutive years. Qatar, meanwhile, is a key supplier of liquefied natural gas to China.

Associate Professor Zhang Chuchu, deputy director of Fudan University’s Center for Middle Eastern Studies, told Lianhe Zaobao that the latest wave of conflict will “certainly have multifaceted impacts” on China’s economy.

Firstly, Chinese projects in the Middle East are facing delays in delivery and other disruptions. More importantly, with international security risk assessments of Middle Eastern countries remaining high and investors’ assets under pressure, appetite for further investment in the region is likely to weaken. Taking real estate as an example, many Chinese investors previously bought property in the UAE. However, with recent sharp declines in property prices, it suggests that “its investment appeal is waning”.

Zhang further analysed that whether investor sentiment can recover depends on whether the war is short or becomes protracted. “Now is the critical period, and it largely hinges on whether US-Iran negotiations can de-escalate the conflict.”

She noted, “The first indicator is timing — whether an agreement can be reached within the two-week ceasefire window. The second is actions on the ground: if the US deploys limited ground forces, investors are likely to conclude that the conflict is unlikely to end soon and carries long-term risks, which would further depress investment sentiment.”

Jin Liangxiang, director of the Center for Middle East Studies at the Shanghai Institutes for International Studies, noted that some Chinese companies importing oil and gas could be hit by contract breaches. For example, Sinopec has a 27-year LNG import agreement with Qatar; if war in the Middle East prevents Qatar’s oil and LNG from being shipped, China risks supply shortfalls and financial losses.

However, Jin assessed that Gulf economies remain resilient, underpinned by strong service sectors and sovereign wealth funds that provide crucial support. “The key is whether the Gulf states can build a more reliable security framework to restore investor confidence.”

He argued that the Gulf’s past development and prosperity was built on “the assumption that the US could provide security”, an assumption now revealed to be “completely illusory”. He added that the Gulf Cooperation Council should pursue strategic autonomy and take security into its own hands.

Yang, who has worked in the UAE for more than 20 years, told Lianhe Zaobao that instability in the Middle East has affected almost every sector, including Chinese firms. Tourism, shipping and hospitality have been hit particularly hard, although he noted that some Chinese construction projects have continued.

He observed that many Chinese nationals had at one point returned home via Oman, mainly stranded tourists in the UAE, as well as small business owners and employees’ families. However, more chose to remain and hold on. He believed the war would not last long, but admitted that “the period of disruption has indeed gone beyond what I imagined”.

After nearly seven weeks of fighting in Iran and the closure of the Strait of Hormuz, crude shipments and trade were severely disrupted. Beyond the direct impact on global energy markets, a shortage of raw materials has also pushed up prices along industrial supply chains.

According to official Chinese data released on 10 April, the producer price index (PPI) for industrial products showed a notable turning point: in March it rose by 0.5% year-on-year, the first such increase after 41 consecutive months of negative year-on-year growth.

The Financial Times quoted Cameron Johnson, a senior partner at Shanghai supply chain consultancy Tidalwave Solutions, who said that prices for some polyethylene products in China have doubled, disrupting the market for materials needed to make everything from plastic bags and bottles to clothing and toys, and warned that the supply disruptions could be worse than during the Covid-19 pandemic.

Lin Dawei, a merchant at Yiwu International Trade City who exports personal protective equipment, told Lianhe Zaobao that since the Iran war broke out, material costs have risen by roughly 30%, including polyurethane for safety shoe soles and plastic pellets, pushing up product prices by 30% as well. “A tonne of PU used to cost just over 11,000 RMB (US$1,600). Now it’s gone up to more than 16,000 RMB. Plastic pellets were about 7,000 RMB a tonne; now they’re at 8,000 or 9,000 RMB”.

Lin’s goods were mainly sold to the Middle East, Africa and South America. As Middle Eastern buyers can no longer travel to China to inspect products, and they dislike purchasing via video calls, his orders have fallen by about 30%. At one point, shipments transiting through ports at Dubai were delayed for up to 20 days.

Lin did not hesitate to say that the scope of the oil crisis is much wider than the Covid-19 pandemic. “Back then, only epidemic-prevention supplies were affected. Now, it’s everything in daily life — anything linked to oil and plastics have been hit, including the synthetic fibres in our clothes, which are also derived from plastic.”

Even so, he remains optimistic, analysing that as long as raw material supplies are not cut off, even with the increased shipping costs, “I can still do business as per normal — it just means fewer orders.”

This article was first published in Lianhe Zaobao as “战火冲击中国在中东投资 美伊谈判很关键”.

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