In the Gulf, China plays to win but US has upper hand

Saudi Vision 2030 — Crown Prince Mohammad bin Salman’s bid to diversify his nation’s oil-dependent economy — is one of the most consequential development plans in modern history. So it was no surprise to see MbS, as he is known, grinning with Chinese leaders during his Asian investment trip last month. As Chinese officials raved about the “enormous potential” of the Saudi economy, Saudi officials praised the compatibility of Chinese and Saudi cultures, and MbS even defended China’s maltreatment of Muslim Uighurs.

A surge of U.S. oil production has reduced Washington’s need for imports, leaving China as the world’s largest purchaser of crude in global markets. Meanwhile, Beijing has become the largest trading partner of Saudi Arabia, the United Arab Emirates, Kuwait and Oman, as well as Iraq, Iran, Egypt and Lebanon. Now, with synergy between Xi Jinping’s One Belt, One Road and Vision 2030, the stars seem aligned for a Saudi-Sino alliance to displace American influence in the Gulf.

{mosads}Look past the photo ops, however, and a deeper economic reality comes into focus. Despite all the negative public relations in the wake of the killing of journalist Jamal Khashoggi, and despite Washington’s myriad foreign policy distractions, Saudi Arabia is more financially intertwined with, and reliant upon, the Western world than ever before. When it looks to its future, not its past, the Gulf still mainly faces West, not East.

MbS’s personal credibility is on the line in Vision 2030. A disappointing outcome will not bode well for his standing in the royal family. So far, the bulk of Vision 2030’s investments, along with the expansion of Saudi public debt, have shown a remarkable preference for U.S. capital markets, even post-Khashoggi. Despite the passage of the Justice Against Sponsors of Terrorism Act and Magnitsky sanctions against the Kingdom, 54 percent of its sovereign debt is now denominated in dollars. The start of the year saw $27 billion in orders, broken up into a $4 billion, 10-year and $3.5 billion, 31-year component. U.S.-based buyers snapped up 40 percent of the 10-year and 45 percent of the 31-year issuance, compared to Middle Eastern buyers’ mere 3 percent and 2 percent, respectively.

Such strong economic demand in the face of political headwinds assure Riyadh of the strength of its Western partnerships. While U.S. CEOs were wary of attending the Future Investment Initiative conference last October because of Khashoggi’s murder, Western investors seem more than happy to continue working on projects, accepting PIF investment, and buying Saudi government bonds.

This year, Aramco is planning a debut bond issuance to cover the $70 billion price tag of its proposed SABIC acquisition. It selected JPMorgan, Morgan Stanley, Citi and HSBC as its deal managers. In this bond sale, Aramco will need to provide investors with significant disclosures — the price of doing business in Western markets — but company officials seem much less reluctant than in the past. With the IPO slated for completion by 2021, at this point, Aramco has wedded itself to U.S. markets.

While Aramco’s Chinese refinery deals no doubt are significant, these fit within a broader strategy of expanding into the downstream petrochemicals and refining businesses, not in a China-specific investment strategy. Back in 2017, Aramco assumed full control of its joint venture with Shell and Motiva. In doing so, it took control of the largest refinery in the United States.

Even if the Saudis remain as reliant on oil as they are today, Beijing will find it hard to please the Saudis in the same ways as Washington. Though Washington has allied with Saudi Arabia against Iranian expansionism, Beijing is Tehran’s most important economic lifeline. Further, the ongoing Gulf Cooperation Council dispute between Qatar and Saudi Arabia will test Chinese firms’ ability to manage political sensitivities. In the aftermath of the crisis, Riyadh pressured U.S. banks to choose sides in the conflict. While some banks towed the Saudi line, executive teams soon realized the cost of lost opportunities in Qatar.

For Chinese banks, the largest of which are directly owned by the state and have opaque Party Committees embedded in their corporate structures, it will be tough for Beijing to divorce business decisions from political decisions in the region. Riyadh, eager to demonstrate its strength, can pounce on this fact to pressure Chinese firms with ties to the state.

With U.S. demand for Saudi bonds still strong and its American partners remaining invested in their projects, Riyadh will hold the upper hand should China force a geoeconomic race for the Gulf. Unlike in many other corners of the globe today, this may be one arena where Washington is winning.

Michael B. Greenwald is a fellow at Harvard Kennedy School’s Belfer Center for Science and International Affairs and adjunct professor at Boston University Pardee School of Global Studies. From 2015-2017, Greenwald served as the US Treasury attaché to Qatar and Kuwait.