Before all that, a brief introduction to the main theme behind Mr. Simpendorfer's theories. He does not doubt that the US will maintain its global hegemony over the decades to come, but he finds that US influence around the world "is being eroded at the margins." The common narrative in the media is that Beijing and the Party are actively directing this policy, but Mr. Simpendorfer instead has found that "individuals are driving the change" through trade and interaction. And this is as much true in China as it is in the Middle East.
Chinese Exports to the Middle East Are Soaring
Mr. Simpendorfer said that the increase in exports from China to the ME is due to events less than a decade ago, and to Chinese traders catering specifically to the ME. But he also suggests that comparing China's activity in the ME with China's activity in Africa is a useful exercise.
Until a few years ago, the US was the number one exporter of goods to the ME. Then China's exports surpassed the US. My initial was response was that makes perfect sense because China is a huge exporter everywhere. But that only explains half of the story. The other half is that ME traders appreciate the comparative ease with which they can travel to China instead of the US since the events of September 11, 2001. ME travelers to the US have declined significantly since then, and Chinese visas for ME travelers have become much easier to get. The exact figure eludes me, but the average time for a MErner to get a visa to the US was greater than 15 days, while it took a single day for MErner to get a visa to China. Thus ease of access to the supplier is very important.
Chinese traders have also played a significant role in bringing in ME business. One city in particular, Yiwu, has become a hub for ME traders in China with Islam being the prime draw. Yiwu has a robust Huizu (回族 - Han Muslim, not an ethnic minority) population. Some local business leaders speak Arabic fluently, and have encouraged students to learn Arabic to become translators. The city has built a mosque. There is a lot of halal food available. And orders are available at a smaller scale than in Guangzhou. In Guangzhou you typically order by the container, whereas in Yiwu traders can order by the box. Today Yiwu receives 200,000 ME visitors per year while there are only 680,000 ME to the entire US each year. By catering to their partners linguistic, cultural, religious, and more financially modest needs, Yiwu has turned itself into a ME export power.
But Mr. Simpendorfer says that we need to put this in perspective by comparing the ME to Africa. There are still a lot more Chinese in Africa than the ME, and there are still significant restrictions in ME countries on foreign traders operating domestically.
China imports ~50% of its oil from the ME, and the amount of oil that China plans on importing from the region should only increase. This suggests a warm relationship. This is not so much the case with Saudi Arabia. Although Mr. Simpendorfer thinks relations between between Saudi Arabia and China should warm, there are several major problems with the relationship:
- There is tension because Saudi Arabia is a religiously orthodox state and China is "an increasingly capitalist atheist state."
- China only has a functional relationship with Saudi Arabia of about 10 years whereas the US essentially built Saudi Arabia's oil industry.
- China has been publicly and aggressively hedging its exposure to Middle Eastern oil by investing heavily in Africa and by investing heavily in alternative energies. Chongqing's announcement that all cars in Chongqing will eventually be electric was not well received by the ME.
- China has yet to seriously independently analyze the US. Mr. Simpendorfer said that China has several journals dedicated to ME policy, but all the footnotes cite to American analysis. This means that China is largely analyzing the ME through US eyes. Mr. Simpendorfer told us that he has discussed this with John Altman and several of his ME friends, and they all get a big kick out of it.
Mr. Simpendorfer stressed that he did not see an inevitable upward trajectory for China-ME relations. He offered potential roadblock, a way to avoid that roadblock, and a reason why the next decade might work out well for the two.
The potential roadblock is that there have been several factory closures in the ME as the work goes to China. Textiles in particular have been hit hard in the ME. Unfortunately the reality in the ME is that the population is very young, unemployment is very high, and there is a strong possibility that this could result in anger being directed at China. Mr. Simpendorfer suggested that as oil prices and transport costs increase, Chinese manufacturers might find it advantageous to setup manufacturing facilities in the ME for goods that are destined for Europe which could potentially solve this problem.
Where China will really be of service to the ME is in its lessons for development. Mr. Simpendorfer said that the US and China basically offer the exact same lesson for reform, that the free market and adequate access to capital markets will bring peace, prosperity and stability, but that when MErners, such as the frequent China visitor President Mubarak, visit China they can see and feel what China has gone through to go from point A to point B, as opposed to when they visit Washington, D.C., and feel like America is trying to get them to move from point A to Point Z.
China's Foreign Policy Objectives in the Middle East
This part of the talk was worth the price of admission (a subway transfer and a walk in the rain). The US and China simply have the exact same ambitions in the Middle East: stability and a low oil price. There is plenty of room for cooperation between China and the US, but Mr. Simpendorfer, who has the access, has witnessed that bureaucratic inefficiencies in Washington are preventing the US State Department from working jointly with China in the Middle East.
The US government economic sectors understand the deep connection between the US, China, and the ME, but there are deep divisions and little intra-sector cooperation within the US political and security sectors that are preventing them from putting the pieces together that the US and China could achieve a lot in pursuing their ME goals together. Or at least this is what Mr. Simpendorfer's experiences have shown him.
China itself has been able to get away with not taking much of a position on anything in the ME. Mr. Simpendorfer says that this is for two reasons. The first has to do with Iran, with which China has had a close relationship. China defers to the US on everything Iran when Iran is at the top of the US list, and China does what it wants when Iran is low on US priority. Quite convenient. China has also had the advantage that most ME issues pit the US and the UK versus France and Russia. And again China is conveniently able to not take a position. Mr. Simpendorfer does not think that this convenient foreign policy will be sustainable, though, and China will need to start taking a position. Let's hope we can start working together in a meaningful way. China would be a useful ally because they have a long history of having a well integrated Islamic minority, the Huizu.
Islamic Finance and China
I always find Islamic finance interesting, so I asked Mr. Simpendorfer, "To what extent have you seen the Hong Kong financial industry embracing Islamic financial products in investment, offerings, or the creation of derivatives?" I had no idea what to expect, but I got a good answer.
Hong Kong is very enthusiastic about Islamic finance with Donald Tsang and the Arab Chamber of Commerce as the leading cheerleaders. Hang Seng Bank offers an Islamic fund, but as far as Mr. Simpendorfer knows, it is simply indexed to the Dow Jones Islamic Fund. Hong Kong's current goal is not to compete with Bahrain as a center for Islamic finance, but to offer Islamic bonds.
The problem with Hong Kong is that, unlike in Yiwu, it does not cater to Muslims. Mr. Simpendorfer said that 3 mosques and not a single halal restaurant in Hong Kong are serious barriers to Islamic finance.
There has been an interesting development for investors who want an Islamic option for investing in China. Previously Islamic banks have tried opening up shop in China, but the combination of religion and no interest rates prevented the Chinese authorities from granting a license. But Mr. Simpendorfer noted that a foreign bank may have recently setup shop in China that offers Islamic investment and lending without calling itself such.
At the core of this relationship is Islam, and the Chinese entrepreneurs catering to the religion. A strong lesson that cultural accommodation or at least respect can be a powerful tool in building a strong economic relationship.
The talk was good, and I think I might have another book to read.