China: A Powerful New Trading Partner

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The Custodian of the Two Holy Mosques and Chinese President attend agreements' signing ceremony (SPA) February 10, 2009 ITEM OF INTEREST
February 14, 2009

China: A Powerful New Trading Partner

Editor's Note:

This week's visit of Chinese President Hu Jintao to Riyadh underscored the importance Riyadh and Beijing attach to the relationship. It has been less than 20 years since Saudi Arabia opened relations with China, but as John Sfakianakis notes in this article, trade between them is booming. Sfakianakis is Chief Economist at SABB (Saudi British Bank). His article on the economic relationship between Saudi Arabia and China appeared in Arab News on February 10, 2009.

China: A Powerful New Trading Partner
John Sfakianakis

Diplomatic relations between Saudi Arabia and China were first established in 1990. Yet, without substantial trade or the growth of the Chinese economy, ties between the Kingdom and China would have been far less visible.

In many ways, links between the two have grown so dramatically because of each countryï¿½s strengths. China is an exporter of goods and Saudi Arabia is a significant importer, while Chinaï¿½s growth and thirst for oil imports has been largely supplied by Saudi Arabia. China is second largest source of imports to the Kingdom (2007 data) and is ranked fifth as a destination for Saudi exports. Indeed, Saudi Arabia is Chinaï¿½s biggest trading partner in the West Asia and North Africa region.

Both countriesï¿½ exports and, as a result, overall trade rankings have dramatically improved over the decade. In 1988, China was ranked ninth in exports to the Kingdom, while in the same year Saudi Arabia was ranked 20th among exporters to China.

Appetites satisfied

For a decade after the establishment of diplomatic ties, trade flows increased. Chinese exports rose by 167 percent from SR1.66 billion in 1990 to SR4.44 billion in 2000. During the same period Saudi Arabiaï¿½s exports to China increased by 3,463 percent from SR158 million to SR5.63 billion. Chinaï¿½s main exports to Saudi Arabia are garments, mechanical and electronic products, air-conditioning units and textiles, while its main imports from the Kingdom are crude oil, liquefied petroleum gas and primary plastics.

A substantial boost in Chinese exports occurred after 2000 as Chinese products became much more price-competitive globally. Saudi Arabiaï¿½s third oil boom (2003-2008) increased the countryï¿½s appetite for Chinese imports, which satisfied Chinaï¿½s desire to acquire market share for its products. Between 2002 and 2004, Saudi imports from China jumped by 160 percent ï¿½ a growth rate not matched by any other country during this period in value terms. In percentage terms, only the growth of Argentinaï¿½s exports to the Kingdom during the same period (353 percent) surpassed Chinaï¿½s.

If we consider the value of Chinese exports over the past eight years, the story is staggering. In 2000, Chinese exports stood at SR4.48 billion, and by 2008 (preliminary data) had risen to SR40.13 billion. In April 2006, Chinese President Hu Jintao announced his countryï¿½s intention that bilateral trade volume between the two countries should reach SR150 billion by 2010. It seems that this was already achieved by 2008, as we estimate that Saudi Arabiaï¿½s exports reached SR116.25 billion and imports from China reached SR40.12 billion. Also in 2008, the Saudi trade surplus witnessed an increase of 180 percent due to the rise in oil prices, as well as an increase in oil export volumes as the Kingdom exported to China the equivalent of 720,000 barrels per day.

Oil consumption

Saudi exports to China were negligible for the most part of the 1980s (with the exception of 1988). Up until 1994, the Kingdom exported SR451 million worth of goods to China, but a noticeable increase was observed in 1997 when exports jumped to SR1.58 billion, and again in 1999 when they reached SR2.35 billion.

The reason for these increases was that China had become, since 1993, a net importer of oil. Yet the dramatic leap in Saudi exports occurred in 2000 when the year-on-year figure rose by 139 percent to SR5.63 billion. From that year onward, Saudi exports to China continued to rise on an annual basis. In 2001 exports reached SR8.15 billion and by 2008 exports had achieved SR116.25 billion. Indeed, over the last nine years Saudi exports to China have grown by 963 percent.

The rise in Saudi Arabiaï¿½s oil exports was spurred by the growing energy demand in China that outstripped domestic supply. Between 2000 and 2005 Chinaï¿½s oil consumption increased from 4.7 million barrels per day to almost 7 million barrels, 43 percent of which was derived from imports. It should be of no surprise that since 2000, China has become far less efficient in energy use per incremental dollar of GDP. China is the worldï¿½s second largest net importer of oil behind the US, having surpassed Japan in 2008. Within the energy sector, in contrast to a decade ago, China today is importing massive quantities of oil and, following the modification and augmentation of its refining capacity, is able to absorb increasing amounts of Saudi (heavy) oil. This has catapulted Saudi Arabia into the position of Chinaï¿½s leading foreign source of oil, while at the same time making China the Kingdomï¿½s leading crude oil customer. At the heart of all developments, however, is Chinaï¿½s economic growth -- which reached more than 9 percent per annum between 1978 and 2005.

Along with Angola, Saudi Arabia has vied to be number one oil exporter to China over the past few years. In 2007, the Kingdom secured that position, supplying the equivalent of 527,000 barrels per day and in 2008 it reached 720,000 barrels per day, in line with Saudi Aramcoï¿½s agreement in June to increase crude supply to China Petroleum and Chemical Corp. (Sinopec) to 1.5 million barrels per day by 2015. The current export volume was achieved due to Chinaï¿½s acknowledgment that access to Saudi crude was vital for its growth, while for the Kingdom it became evident that its heavier crude could only be refined if either China or Saudi Arabia increased its domestic refining capacity of heavier crude.

The Kingdomï¿½s target for increasing value-added refined products for China is based on two major refinery projects. Saudi Aramco has been in long-running talks to take a 25 percent stake in the 200,000-barrels-per-day Qingdao refinery. The refinery would be operated by Saudi Aramco, but Sinopec will have an ownership interest. The Quanzhou refinery (Fujian province), a refining capacity of 240,000 barrels per day, will also rely on Saudi crude and be a joint-venture between Saudi Aramco, ExxonMobil and Sinopec; and an 800,000-tons-per-year ethylene cracker and associated chemical units is also planned. In addition, a separate contract was signed by the partners covering 750 petrol stations and a network of terminals in Fujian. Finally, Saudi Arabia has since 2006 been using its experience and knowledge to help China build its own 30 million-barrel strategic reserve.

John Sfakianakis is chief economist at the Riyadh-based SABB (Saudi British Bank).

Source: Arab News

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