At the start of 2023, optimism was high that China would see a rapid recovery in consumer spending and an acceleration in GDP growth. Since then, however, the world’s second-largest economy has been in the doldrums.
The fact that China has been unable to shake off its post-pandemic economic slump does not necessarily signify that the country’s growth model of the past several decades has reached its limits. Nor does it indicate either that the “Chinese century” might end before it has begun or that, in President Joe Biden’s words, the “ticking time bomb” is about to detonate.
Nevertheless, China’s ailing economy is a problem not just for China but for the entire world. The trajectory of its economy is of great concern to international leaders and investors, who are counting on it to drive global expansion and serve as the primary bulwark against crisis. A prolonged slowdown or a sudden financial crash, were it to occur, would ripple across global markets — including the countries of the Middle East, whose economies have become increasingly intertwined with that of China.
China’s faltering economic recovery
China’s $18 trillion economy has been struggling. It slowed markedly in the spring, dashing hopes of a robust expansion after the lifting of draconian COVID restrictions. Domestic manufacturing activity contracted for a fifth straight month in August. Growth in the country’s services sector, a major source of employment, has also weakened. Chinese consumers are spending less, placing downward pressure on the prices of goods and services and sparking deep anxiety about the state of the economy.
Amid deepening distress in China’s housing market — at the intersection of finance, construction, and household wealth — the country’s largest real estate developer, Country Garden, missed payments on its bonds and estimated it lost up to $7.6 billion in the first half of the year.
The spiraling property crisis has fueled concerns about contagion risks. Country Garden has $200 billion in unpaid bills. Embattled developer China Evergrande Group recently filed for U.S. bankruptcy protection.
Besides grappling with a weak economy and a property selloff, President Xi Jinping’s government has also to contend with the country’s large, highly troubled shadow-banking sector as well as with the huge debts owed by local governments.
Add to these woes the softening of global trade, which has intensified China’s growth challenge. Western central bank interest-rate hikes to curb inflation, coupled with weakening consumer demand in advanced markets, have caused Chinese exports to tumble, with the renminbi hitting a 16-year low against the dollar. Meanwhile, China’s consumer-led recovery proved to be shallow and short-lived. A lagging labor market and lower disposable income growth have eroded public confidence in the state of the economy, leading to high precautionary savings rates, sluggish retail sales, and a sharp contraction of imports.
New foreign investment in China slumped to the lowest level in 25 years in Q2 2023 as investors reduced their exposure amid economic uncertainty in the country and rising geopolitical tensions with the United States. The combination of Beijing’s own form of de-risking, crackdowns on big technology companies, and abrupt regulatory tightening have scared off foreign investors. So, too, have rising costs and supply chain concerns. In fact, foreign investment has continued on a downward slope throughout the summer.
Further contributing to the lack of confidence in China’s future growth is the reduced transparency of Beijing’s reporting on basic economic data. In early August, Beijing said it would stop publishing figures for youth unemployment, weeks after it hit a record high of 21.3% in June — part of a pattern of burying unflattering economic data. The National Bureau of Statistics (NBS) stopped publishing a consumer confidence index. A key Chinese data provider has begun limiting access for overseas users. National Energy Administration director Zhang Jianhua recently called upon officials “to actively cultivate a confidentiality culture that keeps secrets and is cautious.” The suppression and/or falsification of economic data has undermined global confidence and aggravated market concerns — a point underscored in recent comments by U.S. National Security Adviser Jake Sullivan.
Last February, the International Monetary Fund (IMF) stated that sustaining the recovery will require both monetary and fiscal support as well as accelerated structural reforms. Chinese authorities have recently taken steps to shore up the flagging economy. To date, however, their efforts have largely taken the form of a series of pledges and policy guidelines targeted at specific sectors or aimed at reassuring investors, some of which lack concrete details. The People’s Bank of China cut interest rates in June, a traditional tool to help growth. But policymakers appear reluctant to deliver a robust stimulus package to boost consumption.
Against the backdrop of a sputtering recovery and calls for Chinese policymakers to take bolder action, China’s economy has slipped into deflation, as consumer prices declined in July for the first time in two years. Chinese officials have sought to put a positive spin on the country’s economic malaise while denying that deflation poses any risks. Predictably, the official press has offered confident appraisals of Beijing’s efforts to buoy markets, emphasizing that “despite sluggish global growth, China has navigated economic headwinds with an effective policy mix.” However, foreign businesses and investors appear to view things differently. Reflecting uncertainty about China’s near-term economic trajectory, a string of Wall Street banks have cut their 2023 GDP growth forecasts for the country. The outlook on China has darkened considerably.
Stifled progress or a “silver lining” for the Middle East?
China’s economic slowdown poses a challenge for global growth. The IMF has previously forecast that China would account for 35% of global growth this year, but that is looking less likely. Yet, it is important to note that the impact of Beijing’s slumping economy will vary by country and sector.
The effects on economies in the Middle East and North Africa will depend on a variety of factors, including the severity and duration of China’s economic downturn, the specific trade and investment relationships between China and individual Middle East countries, and the overall resilience of the regional economies to external shocks. Nevertheless, it is possible to offer some general observations regarding how, at this current juncture, China’s economic slowdown has affected Sino-Mideast economic relations in the areas of trade, tourism, and engagement with the Belt and Road Initiative (BRI), Beijing’s massive global infrastructure development strategy.
China’s sputtering economy might have dented its Middle Eastern partners’ enthusiasm and dimmed their immediate prospects for reaping rapid and enduring economic gains. But over the past two decades, Beijing’s economic engagement with the region has become deeply rooted. China is the leading trading partner for most MENA countries, and among the top three sources of imports for all of them.
Chinese demand for hydrocarbons is central to Sino-Middle East trade relations. In fact, China has consistently been one of the leading destinations for Middle East crude oil. Saudi Arabia exports more of its crude to China than to any other country. China is also a key market for Iraqi, Iranian, Omani, Emirati, and Kuwaiti crude oil exports as well as for Qatari liquefied natural gas exports.
Chinese oil demand staged a strong recovery in the first half of 2023, as refiners imported near-record monthly volumes. Yet, while the headline numbers for crude imports pointed to robust oil demand, much of that supply was stockpiled rather than turned into gasoline and diesel. In fact, Chinese refiners, led by Sinopec and PetroChina, have built a supply buffer using massive storage capacity. More recently, facing higher prices from top suppliers Saudi Arabia and Russia, China has been looking to smaller suppliers such as Brazil and Iran to secure cheaper shipments, while also drawing down its high inventories.
Poorer-than-expected economic data in the coming months could further curb Chinese oil and gas demand growth. Industry analysts expect China’s Saudi crude oil imports are likely to remain on a slight downward trajectory through Q3 2023. The International Energy Agency (IEA) forecasts demand growth in China to slow markedly from 2024 onwards.
For Saudi Arabia — whose top crude oil export destination is China — these projections cannot be welcome news. To date, Saudi Arabia has done most of the heavy lifting to support prices while Russia has enjoyed the benefits of a tight market. The kingdom shouldered the burden of the seven-week oil price rally earlier this summer, taking in less revenue despite increased demand. A drop in prices below $80 per barrel, precipitated by a steeper slide in Chinese demand and/or other adverse circumstances, could hamper the Saudi government’s ability to balance the budget and fund its economic diversification projects.
Yet, despite the dip in in July and projected muted growth of China’s oil imports, the country still consumes roughly 16 million barrels per day (bpd) and will account for around 60% of all demand growth this year. As the new supply contract with Rongsheng Petrochemical takes effect, China will source 40% more crude from Saudi Arabia in September than in August. Importantly, energy giant Saudi Aramco remains committed to expanding its footprint in China. For China is not just the biggest market for Saudi crude, but also increasingly important for Aramco’s ambitions to convert a significant portion of its oil production into petrochemicals as well as strengthen its market position in the context of competition with Russia.
Perhaps more comforting prospects can be found in Middle Eastern imports from China. Many MENA countries run trade deficits with China. Even in the case of Egypt, whose exports to China have lately increased, their volume is dwarfed by goods flowing in the opposite direction. To varying degrees, the same is true elsewhere, whether in the Maghreb and Levant (e.g., Morocco, Jordan, Algeria, and Israel), Turkey, or the Gulf (e.g., Iran, the UAE). In cases where oil and gas exports to China have enabled Middle East producers to enjoy a positive trade balance (e.g., Iraq, Kuwait, Oman, Qatar, and Saudi Arabia) Chinese goods account for a substantial portion of their imports and encompass a wide range of merchandise, including machinery, electronics, textiles, plastics, and more.
Indeed, a growing share of China’s exports are heading to emerging markets, including the Middle East. Falling prices in China may help ease inflationary pressure, as its exports become cheaper. China is finding success in exporting inexpensive electric cars and smartphones. With consumer demand at home weakening, Chinese electric vehicles (EV) makers likely feel an increasing urgency to expand overseas. The tumbling costs in China for EVs could make Chinese models more competitively priced, affordable options in the Middle East — a nascent market with a wealth of growth potential.
After a three-year hiatus from overseas travel, there has been a promising revival in outbound Chinese tourism. Although first-half 2023 numbers were far below expectations after the reopening of borders, the recent resumption of group tours and travel packages could be prelude to Chinese travelers once again becoming a significant force driving global tourism.
Middle Eastern, especially Gulf countries, are gaining popularity as long-haul destinations. When Saudi Arabia opened to tourism in 2019, the maximum number of tourist visas issued were to Chinese tourists. That year, China was Dubai’s fifth-largest source market.
Recent data from travel analytics firm ForwardKeys reveals that the UAE’s Chinese arrivals in 2023 are 6% ahead of the numbers from 2019. Despite household belt-tightening in China, MENA countries could see a fresh wave of Chinese visitors, particularly high-net-worth individuals and business travelers. The expansion of e-visas by Saudi Arabia and the UAE might help boost such prospects. So, too, might the Chinese government’s recent addition of Israel and Morocco to the list of countries with approved destination status (ADS) for outbound group travel, as well as the restoration of pre-pandemic flight operations by regional carriers.
Even before China’s economic slowdown, the number and value of new foreign contracted projects signed in BRI countries had decreased. After a decade of massive lending and investment, the BRI has come under pressure, as many of its partner countries have experienced financial distress. Chinese creditors have responded by reducing new overseas lending flows to developing countries and by negotiating dozens of sovereign debt restructurings. Beijing’s response has also entailed a reorientation away from infrastructure mega-projects. In 2021, Middle Eastern countries were the exception to these trends, with BRI investment and construction activity there sharply increasing. Only a very small number of BRI projects in the MENA region have been discontinued. China’s BRI engagement with Iraq in particular has grown, mostly in energy and transport infrastructure.
As a result of China’s domestic economic downturn, Beijing has sought to exert greater central control over the BRI, focus on completing projects already underway, and transition from “hard”- to digital-infrastructure projects. MENA countries have yet to fully exploit opportunities and synergies afforded by China’s Digital Silk Road (DSR), the IT and technology component of the BRI, which is still in its infancy. Looking ahead, geopolitical tensions and technological competition between China and the United States might prove to be more of a hindrance to progress on this front than whatever constraints may be imposed by China’s economic slump.
But China’s domestic economic woes have not tempered its ambitions. Over the past year, Beijing has stepped up efforts on multiple fronts to strengthen ties with and enlist the support of countries across the Global South, including those in the Middle East. President Xi’s historic visit to Saudi Arabia last December as well as the investment conference held in Riyadh in June to which Chinese entrepreneurs and investors flocked underscore the importance to Beijing and its regional partners of strengthening ties even as concerns about China’s future economic growth have spread.
China’s economy is facing headwinds, and the trouble could spill over globally. The country’s economic performance in the second quarter of the year fell short of investor expectations amid a slowdown in consumer spending, sinking property prices, and weakening global demand. Recent modest rate cuts appear to have been insufficient to alter the pessimistic outlook on China’s economy. Policy errors might well persist, and as a result the country’s economy could continue to stumble.
To date, China’s economic distress has had a mixed impact on the Middle East. China’s current malaise may not portend a far more serious long-term problem and thus merely push the time horizon for more extensive and profitable Sino-Middle East economic engagement outward. Nevertheless, the flashing warning signals of a weakening Chinese economy warrant the close attention of MENA policymakers and will undoubtedly receive it given the high stakes involved.
Dr. John Calabrese teaches U.S. foreign policy at American University in Washington, D.C. He is a senior fellow at MEI, the book review editor of The Middle East Journal, and previously served as the director of MEI's Middle East-Asia Project (MAP).
Photo by Qilai Shen/Bloomberg via Getty Images
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