The Rise of a New Silk Road

In early 2009, China overtook the United States as the world’s largest exporter to the Middle East, having already raced passed the United Kingdom and Germany. It was the first time in over 60-years that the number one ranking had changed. The event marked an important milestone in what is a rapidly strengthening relationship between China and the Middle East.

But it is not Arab-style Wal-Marts who are responsible for the flood of “made-in-China” imports. It is instead individual Arab traders. Many of the traders can be found in Yiwu, a small Chinese city four-hours south of Shanghai. The city claims the world’s largest wholesale consumer goods market selling the type of cheap gifts and household goods that sell in low-cost retail stores across the world.

Yiwu receives 200,000 Arab visitors annually. It is a virtual Arab market town with over a dozen Arabic restaurants lining its main street. However, the number of Arab visitors only started rising after 2001. Higher oil prices helped explain the increase, as they left Arab governments, and ultimately, Arab households with more money to spend on consumer goods.

However, visa restrictions were also important. How so? Western governments made it tougher for Arab traders to visit the West after September 2001 even as the Chinese government unofficially relaxed its visa policy. A few years ago, an Egyptian national might have taken 18 days or more to receive a visa to visit the United States. The same Egyptian could receive one to China in less than a day.

The number of Arab visitors to China surged as a result, filling up flights between Dubai and the main Chinese cities of Guangzhou, Shanghai, and Beijing.

The economic crisis has only intensified the trend. It’s no wonder. The Middle East’s imports from China are still growing, albeit in low single-digit figures, even as the United States imports from China collapse at near twenty percent rates relative to last year’s levels. And Chinese manufactures are searching for new markets in the Middle East as a result. It is just one more sign of the change in demand.

Take Yang Linshan, for example, a fabrics manufacturer in the coastal province of Zhejiang. The Middle East now accounts for almost twenty percent of his exports. He is looking to set up a branch office in Dubai. Other manufacturers like Yang are meanwhile scouting for locations in the Middle East to build factories even as production costs at home rise. Egypt, with its low-cost workforce, is a particularly attractive investment destination.

There are other signs of the growing strength in trade relations. Wang Weishang, a local entrepreneur, also from the coastal province of Zhejiang, has set up Asia Business TV, a cable television channel. The channel broadcasts throughout the Middle East via Nilesat. It runs regular English-language promotional spots for Chinese products and services to the Middle East’s traders.

It is individual stories such as these that help to underscore the depth of trade relations between China and the Middle East. And while the Middle East’s $58 billion worth of purchases from China annually will grab headlines, it is the efforts of individuals like Yang Linshan and Wang Weishang that provide a more complete picture of strengthening economic relations between the two regions.

Yet economics is not the only area where relations are strengthening fast. China and the Middle East are also finding reasons to turn to each whether through culture, politics, or religion.

Take the Chinese author Song Hongbing. He believes the West is using its currency policy to prevent the East’s rise. His best-selling Chinese-language book, Currency Wars, is being read by senior officials across China. The book includes such chapters as “Nuclear Finance: Target Tokyo” describing how the Plaza Accords, signed in 1985 between Japan and four Western nations, contributed to the collapse in the Japanese economy.

The book’s ideas are not just popular in China. They are also popular in the Middle East.

I was reminded of this while recently watching Al Jazeera. Ahmed Mansour the anchor of No Limits, was interviewing the same Song Hongbing through a translator. Here was a Chinese author speaking on an Arabic-language TV program to an audience in the Middle East about how the West’s currency policy has been used to suppress the East’s rise. It was a remarkable exchange of ideas.

It was also a reminder that the Middle East no longer looks only to the West for inspiration. Egyptian President Hosni Mubarak has visited China nine times in the past two decades. The Syrian leadership has also long looked to China for inspiration hoping to learn from what President Bashar Assad called the ‘Chinese experiment’ on his visit to China in 2004.

Indeed, he is not the only Syrian official to visit China. Mohammad Dawood Al Sattam a member of the Baath Party Central Committee, visited Changsha, the capital of Hunan province, in late March. He was there on a study trip with fifteen other officials. Hunan is a major agricultural hub, land-locked, and famous for exporting labor to the country’s coastal cities. Its economic reform experience was immediately relevant to the conditions that Al Sattam faces in his own province.

There is even talk in the Middle East of learning from China during the current economic crisis. An article on Islam Online in late April described how Chinese traders are increasingly common in Cairo and its outlying districts. The article, quoting several local professors, argued that Egypt’s youth, or “shabab”, should copy the work ethic of these Chinese traders as a solution to dealing with the economic crisis.

Certainly the relationship has its frictions. A flood of Chinese imports has resulted in the closure of many of Aleppo’s traditional textile factories. The Syrian government has responded by imposing duties on select foreign textile imports rightly worried about the implications of job closures in a country where unofficial unemployment rates are estimated at upwards of twenty percent.

But there is hope. Production costs in China are rising. Land and labor are all increasingly expensive. The Chinese currency is also appreciating in value. Nearly 10,000 factories have closed down in the southern Guangdong province, neighboring Hong Kong, during the past year. More factories will close as the government is no longer willing to prop up low-value added manufacturers.

This is perhaps Syria’s chance to emerge as an export manufacturing hub. It lies not far from Europe, one of the world’s largest consumer markets. It may yet sign a trade agreement with the European Union. More Chinese manufacturers will invest in Syria if this permits them easy access to the European market. Chinese textiles manufacturers are, after all, already investing in Egypt.

Syria will never replace China. But it only has to capture a small share of China’s trade with Europe to benefit. Consider this. China’s exports to Europe have risen $225bn in the past decade. If Syria had captured just 1% of this trade it would have added 0.5 percentage points to the country’s GDP growth annually, not to mention reduced chronic unemployment rates.

The upshot is that relations between China and the Middle East might be flourishing. Yet they are also delicately poised. The fact China has pushed the United States aside as the Middle East’s largest supplier will rattle doors in Washington. But it is important to look beyond the trade figures to the social and political implications of this increasingly complex relationship.

Regards,

Ben Simpfendorfer
for The Daily Reckoning