I was speaking at the Emirates Towers in Dubai last week. A soft-spoken manager for a large Dubai company waited until the end of my presentation before speaking up. “The Chinese banks are hungrier than the Western banks these days”, he said. “They are prepared to lend when others are not”.
I wonder if they will still have the same appetite after Dubai World’s announcement this week that it will delay payment on its $37 billion worth of debt?
No doubt, there will be concerns, and I expect that Beijing’s bankers are scrambling to assess their exposure to Dubai World. But the Chinese banks aren’t lending to the Middle East for necessarily the same reasons as are the Western banks. The difference is important and will determine the response.
I have heard a number of stories in the past week, in both Dubai and Abu Dhabi, suggesting that Chinese banks prefer to lend to projects contracting Chinese companies. It’s part of a full service package in which China provides the cement, the workers, and the bank loans. A good deal for all.
It isn’t a surprise. True, Chinese banks are increasingly lending on the basis of commercial principles as a result of market reforms. But they are also still lending to sectors that are consistent with the country’s strategic priorities. In the Middle East, this means targeting energy and labor-intensive construction projects.
If, as a result of last week’s events, the Western banks retreat further from the Middle East, there’s a good chance the Chinese banks will try to fill the gap.
There’s certainly still reason to lend. The Middle East accounts for 36% of the world’s oil production. Of that, Dubai accounts for a small fraction. Unless the rest of the Middle East is planning to build more Dubai-style “Palm Islands”, and so long as energy prices remain high, the region is thus likely to be a decent credit.
China has also shown a growing tendency to use its vast savings to secure its strategic priorities in the past year. This includes extending bilateral swaps to other central banks, agreeing to buy bonds issued by the IMF, and providing Brazilian and Russian oil producers with finance, all in the past year.
So when the dust settles, I’m not expecting Dubai World’s problems will derail the Middle East’s strengthening relations with China. In fact, there’s a chance that the opposite takes place. Suited bankers from Beijing’s Jingrong Jie might just be an increasingly common sight in Doha and Abu Dhabi.
This is a point that’s often misunderstood. An employee of a Washington think tank once remarked to me that stronger relations between China and the Middle East is precluded by the fact the two both have vast savings. “They have no need for liquidity”, he said. “There’s no reason for investment between the two”.
Yet, this isn’t entirely true. The Middle East typically invests its vast savings abroad. Foreign banks, by contrast, are relied on to provide financing for the region’s construction roads, refineries, and airports. And thus the opportunity for Chinese banks to step up at a time when funds are scarce.
Events like the past week often are the reason for major changes in relations between China and the Middle East. It’s like shaking a bottle to see what floats to the top.
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