Unfolding the Chinese strategy in the Middle East

Between cranes in the Haifa port

It can be agreed, that States operate at the global level and their international relations are regulated by what is called global economic governance, as the G20 dynamics of those last days clearly show. Taking this in consideration, the following paragraphs will offer an analysis of the Chinese investment strategy in the Middle East.

Further, taking as an example Chinese FDIs in Israel, two externalities will be considered: 1) The opportunity for the international community to start learning how to use Foreign Direct Investments as chirurgic tool to lower conflicts’ pressure points; and 2) Potential scenarios that can start setting the roadmap for multilateralism in the area.

Environmental politics teaches us that in any environment, resiliency is fundamental for ensuring stability against disturbance regimes. Landscape ecology demonstrates that resiliency grows proportionally direct to the growth of biodiversity. Bringing this to political economy, it is easy to see how, like in finance, diversifying the area of government investment is beneficial to ensure long term returns and less exposure to systemic risks. Focusing on few areas of investment makes the allocation of resources riskier and beneficial to only few actors in society, by fostering capital growth but really slow economic growth: in brief, a proxy for social inequalities, that can be interpreted as the root cause of disturbance regime in extractive kind of States. Those are the ones where the institutional framework fuels poverty, ethnic and sectarian marginalisation, youth unemployment and human right abuse. Adding to such structure, a context of resources’ exploitation, weapon trade, religious and colonial conflicts creates an environment where resiliency is barely present.

This is what is happening in the Middle East since the end of the two world wars. An area of rich resources, in which few actors dominate the political and economic scene with violence, sponsored by the international weapon industry, a situation exploited by greater powers to grant cheap energy import for economic production, supposing that economic boost in Europe and US in the past 50 years was not free. This kind of short-term exploiting approach created the social and political ground that is the cause of poor performing institutions and social conflict in the Middle East. This creates great instability and daily tragedies, answered to with sporadic, fragmented and short-term sighted relief actions, which at the end have little or no mitigating effect. This is only an example of what a certain economic mentality can lead to, when applied to international relations.

In such context the Chinese One Belt One Road project, specifically the Silk Road one, can be taken as an opportunity to diversify the global economic strategy in the Middle East. In fact, Beijing pushes for multipolarity in the area, which wishes to attain by developing bipolar economic agreements with all the Arab countries.

The strategy for establishing economic hegemony in the area has been dictated since 18 September 2017, when a set of rules outlined three types of investments: banned, restricted, and encouraged.

Military (directly at least), gambling and sex industries are all banned investments. Restricted ones include real estate and hotels, film and entertainment, sports, and the ones that do not comply with environmental standards. Meanwhile the government encourages investments on industries on which China bases its economic growth: technology, research and development, oil, mining, agriculture and fishing sectors. In brief, a recipe that would grant diversification in the government portfolio and offer the necessary assets to sustain economic growth.

Maintaining such policy represents the dilemma that China faces in the region since 2015: no military intervention coupled with economic incentives that might influence the balance of power in the region. Something that China wants to avoid at all cost because of the potential detrimental escalation for any kind of business. This is especially true in the case of Chinese high dependency on cheap energy imports for its economic development, key for legitimizing China’s political regime and international recognition as economic partner.

We can see an example of how such dynamics unfold by creating new scenarios of geopolitical balance, by looking at the relation between China and Israel.

Before the Oslo peace accord in 1992, Chinese dependency on Arab oil limited Sino-Israeli relations. But after full diplomatic relations were established, Chinese investments in Israel stood at US $50 million. By 2016, this figure had risen to US $16.5 billion and in the first half of this year, China’s import from Israel reached $2.77 billion, achieving a growth of 47.2% compared with the same period in 2017, placing China as the 3rd biggest trade partner with Israel. Chinese investments in Israeli high-tech venture capital passed $1billion, whereas Kuang Chi (a chinese conglomerates with a permanent local representation) set up a $300 million fund focused on smart city investments in Israel in 2016. This kind of relationship may seem odd, when considering Trump’s anti-Chinese rhetoric and tariff war, but it is a rather a consequence of the latter. In fact, Israeli Economic Minister Eli Cohen (Sept. 2017) said that Israeli companies welcome Chinese investment, due the concern that Trump’s tax reform would require Israeli start-ups to either register as US entities, or move some of their operations to the US in order to become eligible for tax rebates.

Such declaration from Israel and the Chinese presence in the country are a sign of how China is currently “filling up the vacuum”, following the crescent US retreat from key strategic geopolitical areas. The Middle East is indeed key to grant China access to trade with its main economic partner, the EU.  Israel, with its military presence in the area, facing the Mediterranean and presenting political stability, relatively to the other countries of the area, is then a lower investment area of The Silk Road Economic Belt (SREB) and the and the 21st Century Maritime Silk Road Initiative (MSRI). A specific project, the Israel-China corridor sees Chinese conglomerates leading major parts of Israel’s infrastructure plan including ports, railway lines and tunnels. The most relevant ongoing project is the Red-Med railway. The plan is to link Eilat in the Red Sea and Ashod in the Mediterranean, strategically, a new entry line to the Mediterranean that bypasses the Suez Canal. Piraeus, Greece largest port, owned by Chinese Ocean Shipping Company (COSCO) will receive the cargos more easily for then shipping them to the European Union. This is a scenario carefully built with a long term approach since 2014, when a subsidiary of China Harbour Engineering Company (Pan-Mediterranean Engineering Ltd.) won a US $950 million tender to build a port in southern Ashdod. A year later, the Shanghai International Port Group (SIPG) won a US $2 billion tender to manage the new Haifa Port for 25 years. The Chinese will begin to run the port in 2021.The China-Israel Free Trade Agreement (started in March 2016) is being curated for issues such as standardisation, the removal of trade barriers, and areas of bilateral cooperation in the technological and economic sectors. Moreover, on December 3rd Israel and China have expanded a protocol that helps  Israeli exports to China by offering $500 million in government guarantees.

To grant the stability of such project though, China needs to make sure that this new asset in the hands of Israel will not be used in as leverage in the bargain against Egypt in the Suez Canal, where it has a major stake and key bilateral accords with Egypt. Moreover, building such close relationship with Israel, might angry other actors in the Area such as Iran and add new risk factors in the current scenario in which the latter is being stressed to leave the Nuclear Deal.

The need for maintaining a certain equilibrium, fundamental in order to profit  in the area, can then be seen an opportunity from the international community to establish multilateral collaboration. To make this possible, international collaboration over economic sectors such as infrastructure, energy, technology agriculture and over political agreements may be used as a chirurgic tool to empower economic growth and political stability in the region. A mean to this end can be for example, the SPV (special purpose vehicle)– proposed by the EU to persuade Iran to stay inside the deal in the hope of rescuing its economy after the second round of sanctions issued by Trump. In this case, China, as being the main economic partner of Iran (especially after Total left the South Pars phase 11 project) would need to operate as mediator between the EU and Iran. This, even if possibly implying a worsening of the tariff war relations in the short term, but would play beneficial both to the EU and to China. The EU will be able to maintain Iran inside the deal that worries and creates much instability in the area by at the same time fostering economic growth following China’s model of investment. For China, such commitment will grant legitimacy in the long term by international recognition as a partner with enough economic power to change global equilibriums.

Gianluca Tomasello

Master in International Relations at IE Business School

Cover Image

Between cranes in the Haifa port by Shaula Haitner Pikiwiki Israel is licensed under CC BY 2.5


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