China and the Gulf Cooperation Council states are in the process of economic transformation. In China’s strategy, it is emphasizing growth that is consumption driven and service led. Meanwhile, the GCC countries face structural adjustments as they shift away from oil-based economies. Besides looking for non-oil growth drivers domestically, GCC countries also seek new trading partners and diversified investment portfolios so as to build buffers against geopolitical and financial shocks. With China’s strong and stable economy and large-scale domestic market, the GCC states are finding a promising opportunity in strengthening economic ties.

China is the GCC’s number one trading partner. In 2016, the trade volume between China and the GCC states reached $117.5 billion, increasing by $39.3 billion over the decade prior. China’s main imports from the region consist of energy resources: 30 percent of oil imports come from Saudi Arabia, Oman, Kuwait, and the United Arab Emirates. But imports of manufactured goods, machinery, transportation equipment, and high-tech products have increased as well. Saudi Arabia’s non-energy exports to China increased from 18 to 28 percent in a decade and the UAE’s non-energy exports increased from 10 to 33 percent. More importantly, such a change is a signal for more to come alongside diversified trade patterns between the two sides. Furthermore, high-skill and technology-intensive manufactured goods increased faster than low- and medium-skill goods between the two sides. This indicates that GCC countries are upgrading their position in global value chains as trade with China begins to encompass more sophisticated goods.

The Belt and Road Initiative reflects China’s approach to globalization. The blueprint is to enhance China’s involvement in the global market, push forward worldwide economic integration, and promote economic growth and development. The initiative has become a major catalyst for Chinese outbound direct investment and project financing. The major Chinese banks, including China Development Bank, the four biggest state-owned commercial banks, and the Export-Import Bank of China, are the most active players in funding the Belt and Road Initiative. Additionally, the Silk Road Fund is specifically designated for financing the initiative, with $4 billion loans already provided. Financing projects in the GCC states is becoming increasingly attractive for Chinese investors, and is encouraged by the Belt and Road Initiative. China is already the largest investor in the Middle East with investments worth $29.5 billion as of 2016, surpassing the United States by holding nearly a third of foreign direct investment.

In terms of financial inflows into the Chinese economy, China works to maintain a liquid, deep, and broad domestic financial market. China’s bond market is the third largest in the world. China’s regulatory approach has become more rule based rather than government directed. Capital flows are mainly managed through quotas granted to Qualified Foreign Institutional Investors. The UAE and Qatar have obtained 4.1 and 2.5 percent of overall granted quotas, respectively. Apart from that, there are also other channels for foreign capital to access the domestic financial market, such as through the Shanghai-HK, Shenzhen-HK Stock Connect, and Mainland China-HK Bond Connect. In November 2017, China opened its financial sector and allowed foreign banks, securities firms, fund managers, and life insurance companies to acquire ownership domestically. China made this important move to reaffirm its openness, in line with the country’s new economic reform agenda. A reformed and open financial market in China will certainly become more attractive for sovereign wealth funds and other financial sectors in the Gulf region.

China’s strategy of internationalizing its currency, the renminbi (also known as the yuan), provides additional opportunities for strengthening financial ties. For instance, under the Belt and Road Initiative, Chinese banks would prefer to provide loans in the renminbi for those who need to purchase equipment from Chinese companies. Companies can also issue renminbi bonds to raise funds. For that, the renminbi will be used in trade and investment. Particularly, for GCC countries, one key area is to use the renminbi in trade of energy and commodity products, where the U.S. dollar has dominated for decades. On March 26, China launched a crude oil futures contract priced in the renminbi, convertible into gold in Shanghai and Hong Kong. The crude oil futures contract is the most important Asia-based crude oil benchmark. The move raised the possibility for a change of the pricing model, as China is the world’s biggest oil importer.

Additionally, currency cooperation is a new area to explore between China and the Gulf states. China keeps looking to establish more offshore renminbi markets. Doha and Dubai have become the two renminbi centers in the GCC states, with the Industrial and Commercial Bank of China in Doha and the Agricultural Bank of China in Dubai – both designated Chinese clearing banks. It is an opportune time for GCC financial sectors to look for more business opportunities as they seek to strengthen the capacity of their own international financial centers.

Additionally, the renminbi as an international currency provides additional options for foreign exchange reserves. The renminbi has been included in the Special Drawing Rights currency basket used by the International Monetary Fund. There are over 60 central banks in the world holding the renminbi as a reserve currency. The renminbi’s payment function has increased dramatically. Closer cooperation between central banks in China and the GCC countries could be mutually beneficial, likely minimizing exchange rates and reducing other financial risks.

China appears to be deepening non-energy trade and financial ties to GCC states in multiple key areas, and these linkages are likely to grow stronger as the Belt and Road Initiative becomes a facet of the regional economic landscape.