The Middle East is pivoting eastward, and no state more so than Saudi Arabia. Saudi Investment Minister Khalid al-Falih’s presence at an investment conference in the southeastern Chinese city of Xiamen last week was part of a flurry of high-profile visits by Mideast leaders and senior officials to China. Riyadh’s wooing of Beijing comes as it pursues delicate negotiations to conclude a security pact with the US that would include greater investment and technology cooperation between the US and Saudi Arabia, along with civilian nuclear cooperation — in line with the US goal of countering China’s reach in the region. Also noteworthy is the fact this new Sino-Saudi relationship is being forged even as the most important thing about the current relationship — crude trade — is under pressure.

Boom Time?

For the past twenty years, Chinese crude appetite has been the engine of Saudi demand security, with imports posting strong gains virtually every year, even during the Covid-19 pandemic. But Ukraine and the growth of cheap sanctioned Russian (not to mention Iranian and Venezuelan) crude has triggered a shift in Chinese buying habits. In 2021-22, Chinese imports of Saudi crude flattened off, before dipping last year. January-April flows are the lowest since 2019. The smart money is that this is a structural change rather than a temporary aberration, given the intractable issues around lifting sanctions.

The energy relationship is nevertheless booming. It is not hard to see why — synergies are everywhere: Riyadh needs oil demand security; Beijing needs security of supply. Downstream ventures can be configured to optimize Saudi feedstock. In renewables, China’s unmatched clean energy supply chain mastery is a neat fit for Saudi capital, the kingdom’s plentiful solar resources and its interest in developing its mining sector. Both parties bring diplomatic capabilities to overseas investment that can complement each other, while prior to becoming China’s president, Xi Jinping as vice president oversaw the energy security portfolio.

Notably, Beijing has green-lighted multiple Aramco downstream joint ventures over the past two years. And momentum is being sustained. In April, Aramco signed a memorandum of understanding (MOU) to take a 10% stake in Hengli Petrochemical, which, among other things, owns a 400,000 barrel per day refinery and petchems complex in the northern Liaoning province. And in May, Aramco announced it was in talks with Rongsheng Petrochemical to take a 50% stake in its 305,000 b/d Sasref refinery in Jubail. Aramco is also exploring taking a similar-sized stake in Rongsheng’s Ningbo Zhongjin Petrochemical plant.

Aramco already has a 10% stake in Rongsheng, acquired last July. Aramco subsidiary Sabic has also joined the party, reporting earlier this year that it was going ahead with a planned $6.4 billion petchems complex in the southern Fujian province.

Soft Power Convergence

Perhaps the most innovative partnership involves the decision by China’s state-owned Silk Fund to take a 49% stake in Saudi firm Acwa Power’s international renewables arm back in 2020. Acwa had already demonstrated it was a leading low-cost renewables developer. But the Silk Fund investment appears to have turbo-charged expansion, making Acwa an invaluable asset for Saudi climate diplomacy and a key enabler of Beijing’s aim to green its economic vision, the Belt and Road Initiative (BRI). Central Asia is a key focus for Acwa, and in April, the Bank of China provided the first ever bridging loan in renminbi to a Saudi entity (Acwa) for two Uzbek solar projects.

In 2022, the Silk Road Fund and state-owned China Merchants contributed some $4.6 billion into the BlackRock-led consortium that that secured a $15.5 billion lease of Aramco’s gas pipeline system. Silk Road was also involved in an earlier infrastructure leasing deal covering Aramco’s oil pipeline network.

There is scope for more Chinese investment as Saudi Arabia’s broader Vision 2030 non-energy investment requirements become more pressing. In 2022, China ranked as only the 11th biggest source of foreign direct investment (FDI) into Saudi Arabia, with just 509 million riyals ($136 million) flowing in, according to a Saudi Investment Ministry presentation. Vision 2030 is targeting 5.7% of GDP to come from FDI by 2030, notes Justin Alexander of US-based consultancy Khalij Economics. This compares to 2.4% last year and would involve close to a fivefold increase in investment sums.

“There are many sectors of focus, but those getting particular emphasis are manufacturing and mining,” says Alexander. Riyadh is looking to attract some $32 billion into its mining sector, in addition to investing abroad for the critical raw materials needed for the energy transition. Chinese investors, meanwhile, see opportunity in “new economy” areas like renewables, sustainable building materials and artificial intelligence where the market is saturated in China, with close alignment between BRI and Vision 2030 easing the red tape.

Zero-Sum

Both Beijing and Washington increasingly see Gulf alignment through a zero-sum prism, even as Gulf states themselves seek to balance ties. China’s “desire to invest in Saudi is clear. What Beijing is unclear about, however, is that after the security deal with US is signed, to what extent is Saudi still open for Chinese investment?” says Yun Sun, of Washington-based think tank the Stimson Center. Chinese investment in the 5G networks of its allies has been a particular concern for the US in the past, she notes.

Chinese tech champion Huawei, a frequent Washington target, is active in the kingdom, opening a new data center last year and signing several MOUs for collaboration with Saudi universities. The initial signs are that Riyadh will continue to embrace Chinese tech, with Bloomberg reporting this week that Saudi Arabia’s sovereign wealth fund is in talks to buy $2 billion worth of bonds from Lenovo, in a deal that would see the Beijing-based computer giant establish a research and development center in Riyadh.

There has also been talk of Chinese involvement in Saudi Arabia’s nuclear program. And there have been several, as yet unsuccessful, attempts at electric vehicle collaboration. Vision 2030 might have been the brain child of US consultancy McKinsey, but for Saudi economic diversification to take off, there will be increasing demand for “Made in China” content, investment and supply chains. Yet, such is the scale of investment needed that there is likely to be room for all: US financial services behemoth Goldman Sachs this month became the first US bank to establish its regional headquarters in Riyadh.

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