China’s slump won’t stop the GCC good times

Fang Dongxu/VCG via Reuters Connect

China and the GCC have been inching closer economically and politically in recent years, bolstered by the Brics inclusion of Saudi Arabia and the UAE. 

Ongoing negotiations around a China-GCC free trade deal are also helping to focus bilateral ties.

When China flung open its borders post-Covid, there was a palpable sense of positive global economic anticipation.

• Growing ‘dark fleet’ carries sanctioned oil to China
• GCC chief predicts China free trade deal ‘soon’
• Mubadala’s Beijing office to deepen UAE-China ties

But as the hype fades, it is becoming increasingly apparent that structural weakness will weigh on China’s near and medium-term growth prospects. Does this looming spectre pose a material threat to GCC growth?

The answer is “yes” and “no”. Here’s why…

The Gulf certainly has important connections with the Chinese economy. Firstly, it’s a key export market accounting for 12.6 percent of GCC total goods exports – mainly crude oil. However, China is also viewed as a major growth market for non-oil exports.

Secondly, China is an important source market for tourism. So far in 2023, China is the seventh most important market for international visitors to Dubai, even allowing for the delayed easing of Covid restrictions in China.

Thirdly, China has been a major driver of global hydrocarbons demand growth – so a slow recovery in its oil demand could contribute to delays in unwinding Opec’s supply cuts if oil prices start to ease. 

Although Oxford Economics expects the Chinese economy to expand by 5.2 percent in 2023, its growth is being artificially supported by a mix of fiscal and monetary measures.

The combined large shocks from years of regulatory uncertainty, its prolonged zero-Covid policy, and a housing correction, have undermined China’s supply-side potential more than we previously anticipated.

Our latest forecasts anticipate China’s potential growth now slipping to 4.4 percent next year and to 3.5 percent by 2030.

There’s no mistaking that China’s role in the world economy remains substantial. It accounts for around 10 percent of world trade and stock market capitalisation; around 18 percent of GDP (at market exchange rates); around 16 percent of world oil demand; and over a quarter of world broad money. 

However, the impact of a weaker China is mostly felt via real economy channels as its global financial links are relatively modest. The biggest hits are to economies with deep trade links to China, followed by exporters of China-sensitive commodities.

This means commodity exporters like Saudi Arabia, the UAE, Russia and Brazil will see GDP falls of around 0.5 percent, compared to our baseline. The GDP of countries like South Korea, Taiwan and Vietnam will be reduced by around 1 percent.

Foreign direct investment (FDI) assets still comprise the bulk of China’s foreign financial liabilities, even though debt and equity markets exposures have risen somewhat since 2010.

However, China is not yet a major provider of FDI to most of the GCC. For example, Chinese investments account for just 2.5 percent of the FDI stock in Abu Dhabi. It is similarly not a top source market for FDI into Dubai and Saudi Arabia, although it is the third largest investor in Oman.

Overall, a sharp slowdown in the Chinese economy should not derail the current strong performance of the GCC economy. Yet regional economies may become more dependent on China as they strive to achieve ambitious targets for trade, tourism and FDI.

Despite slowing, we still expect China’s economy to converge eventually with the US in GDP size by the mid-2030s. However, the current slowdown should highlight to policymakers the importance of continuing to make sure growth is diversified in terms of sectors and partners.

Scott Livermore is chief economist at Oxford Economics Middle East