Features | Diplomacy | South Asia

What CPEC Means for China’s Middle East Relations

CPEC will significantly enhance China’s capacity to expand her economic and strategic relations with energy-rich Middle Eastern countries.

By Nader Habibi and Hans Yue Zhu for
What CPEC Means for China’s Middle East Relations

A Pakistan Navy soldier stands guard while a loaded Chinese ship is readied for departure prior to a ceremony at Gwadar port, about 435 miles, 700 km, west of Karachi. Pakistan, Nov. 13, 2016.

Credit: AP Photo/Muhammad Yousuf

The China-Pakistan Economic Corridor (CPEC) is by far one of the most ambitious and expensive components of China’s Belt and Road Initiative (BRI). The economic corridor, a mix of transportation and energy infrastructure projects at an estimated cost of $60 billion, has been implemented with full dedication and support from the Chinese government since it was officially launched in 2015. In recent years, CPEC has received more international attention and scrutiny than the BRI projects in any other country and for a good reason — if it is completed as envisioned, it can have significant consequences for China’s geopolitical and economic interests.

Aside from its transformative impact on Pakistan, which has received extensive media coverage already, the global significance of CPEC is rooted in the construction of highways, railroads, and pipelines that will connect Pakistan’s Gwadar port (on the Arabian Sea) with the city of Kashgar in western China. This transportation corridor will substantially increase the capacity for bilateral trade and investment between China and the Middle East. The latter has recently emerged as China’s largest source of oil and natural gas imports. CPEC can also enhance China’s naval presence in the Indian Ocean and the Persian Gulf if and when China decides to project military power in this region.

In this article we look at how CPEC will affect China’s economic and geopolitical relations with the Middle Eastern countries, particularly the Gulf Cooperation Council members (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) and Iran. China is already the largest trade partner and a major buyer of oil and natural gas for most of these countries, which are also important investment partners for China because of their sizable oil revenues and financial capital.

CPEC has three important components: facilitating industrial and infrastructure development in Pakistan; developing a modern transportation and telecommunication network that promotes connectivity between western China and coastal seaports of Pakistan; and allowing China to develop a deep-water port and special economic zone in the Gwadar region with a 40-year lease. All three of these components will have implications for the Middle Eastern countries but in this article we will focus primarily on the last two.

CPEC Will Enhance Bilateral Trade Between China and the Middle East

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The Middle East region is the largest supplier of crude oil and natural gas to China. At present these resources are transported mainly by sea routes to eastern China, where most of its industrial activities are located. Once the CPEC railways and pipelines are constructed, it will be economical to transport commodities, such as oil and natural gas, to the Gwadar port and, from there to western China. The project is also compatible with the Chinese government’s Western China Development Strategy, which calls for relocating some energy-intensive industrial activities from the densely populated eastern regions to the western provinces (near Pakistan). The cost of transporting these energy products to China’s western regions through CPEC will be smaller than using the current sea route through the Indian Ocean to the east coast of China, followed by a ground transfer (by pipe and railway) to the western regions.

In the first phase of CPEC (2015-2020) the Karakoram highway renovation project in northern Pakistan was completed and since November 2016 it has become possible to transport goods by truck from Kashgar to Gwadar. This was no easy engineering task in light of the very challenging mountainous terrain in northern Pakistan. This highway is now actively used for bilateral trade and will undergo further expansion and modernization in the second (2020-25) and third (2025-30) phases of CPEC’s long-term plan. The CPEC railway and pipelines are currently in the planning stage but their construction is also scheduled for the second phase and they are expected to play an important role in China-Middle East energy trade.

To the extent that CPEC will create a new channel for the flow of goods (and eventually people) in both directions between the Middle East and China, it will increase their economic and geopolitical interdependence. By facilitating this China-Middle East connectivity, CPEC will strengthen China’s position relative to other industrial nations in the Middle Eastern economies.

CPEC and China’s Capacity to Project Power in the Middle East 

China is involved in several infrastructure projects in the Gwadar deep-water seaport and has signed a long-term lease for management of this port. This extensive and long-term involvement will enable China to use Gwadar as a supply and maintenance facility for its naval assets. Furthermore, the connectivity of Gwadar to the CPEC network will enhance China’s capability to transport both military hardware and military personnel to Gwadar through Pakistan if needed. Consequently, access to Gwadar port and CPEC-related ground transportation will allow China to substantially enhance its military capabilities in the Indian Ocean, the Arabian Sea, and the Persian Gulf.

If China seeks Pakistan’s approval to use Gwadar to support its naval presence in the Arabian Sea, it is unlikely that this request will be rejected. Military relations between China and Pakistan date back to the early 1960s and remain strong, as both countries view India as a regional rival. In recent years China has emerged as the main supplier of military hardware to Pakistan and the two countries have cooperated in development of several weapon systems, such as the JF-17 Thunder fighter jet.

So far there has been no formal announcement by the Chinese or the Pakistani government about establishment of a Chinese naval base in Gwadar but Pakistan’s military has increased its naval and ground force presence in Gwadar. According to a detailed 2018 investigative report in the Herald (a Pakistan-based newspaper), the Pakistani Navy (and to a lesser extent other branches of Pakistan’s armed forces,) have quietly but aggressively purchased several thousand of acres of land around Gwadar port since 2015. These land acquisitions and growing presence of armed forces around Gwadar offer strong support for the claim that the Pakistani military is developing a naval base near Gwadar. In the context of the close military partnership between China and Pakistan, and the strong commitment of China to the development of Gwadar port, it is highly probable that Pakistan’s naval assets near Gwadar will be either formally or informally available to China.

Consequently, China’s ability to use the CPEC network and Gwadar for military purposes will enhance China’s naval capabilities in the Indian Ocean and the Arabian Sea. This enhanced capability will have a strong impact on China’s strategic and geopolitical relations in the Middle East. China has maintained a policy of nonintervention and neutrality with regard to multiple conflicts among its Middle East trade partners so far. These include the decades-old Iran-Saudi proxy war and the tensions between Qatar and Saudi Arabia since 2017. Despite its heavy dependence on Middle East oil, China has not challenged the U.S. military dominance and its special role as the main external power that provides stability and maritime security in the Persian Gulf.

Instead of a direct naval presence in the Middle East to protect its economic interests, China has so far limited its military role to exporting arms to most Middle Eastern countries, including Iran and Saudi Arabia. This lack of direct military presence so far has been a result of China’s decision to project itself as an economic power rather than a military one, as well as a consequence of its limited military assets. The access to the CPEC transport network and Gwadar port, however, will significantly enhance China’s ability to project power in West Asia and Indian Ocean, if needed. The United States, Russia, and the regional powers will have to take these enhanced capacities into account as they formulate their Middle East policies.

Strategic Significance of Gwadar in China-Middle East Relations

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Among multiple CPEC infrastructure projects, China appears most committed to the Gwadar seaport. This strong commitment was demonstrated by China’s decision in 2015 to convert a $230 million loan for the development of Gwadar airport into a grant. Another $140 million loan for development of a 19 km expressway connecting Gwadar to Pakistan’s coastal highway was also converted to an interest-free loan. China has not shown this type of generosity for other CPEC projects.

If developed according to the CPEC long-term plan, Gwadar will emerge as a major trade hub for China’s economic relations with the Middle East and North Africa.

Under its 40-year lease China is involved in several projects for developing Gwadar into a modern commercial port and special economic zone. These projects include an international airport, an industrial zone, a water desalination plan, an oil terminal and petrochemical complex, a coal power generation plant, and other auxiliary facilities, all of which are currently under way. The coordinated China-Pakistan master plan for Gwadar relies heavily on public private partnership (PPP) for attraction of private and international investment for industrial and commercial activities in Gwadar. The Pakistani government has announced several investment and tax incentives for Gwadar economic zones for this purpose. As these major projects move forward, the Gwadar Seaport will make four important contributions to the China-Middle East economic relations.

First, once the transportation and shipment of goods through CPEC becomes more cost-effective than the current Indian Ocean sea route, Gwadar will serve as the major transit and transshipment port for China’s trade with the Middle East and Africa. As such, it will capture part of the port services that Dubai is currently providing for many Middle Eastern countries. Some of the Chinese products that arrive in Dubai port for re-export to other countries in smaller vessels will use Gwadar port for this purpose.

Second, Gwadar special economic zones and re-export zones that are currently under development will attract a significant amount of direct investment from Arab countries. Qatar, which is currently under an economic blockade by the United Arab Emirates and has lost access to Dubai port facilities, has expressed interest in development of food storage facilities in Gwadar. The government of the United Arab Emirates is also actively promoting investments by UAE-based businesses in Gwadar economic zone.

Third, China and Pakistan are developing a major oil and petrochemical investment zone in Gwadar, which will attract significant investment from Middle Eastern oil exporting countries. The Gwadar Oil Terminal City will include large terminal and storage facilities for crude oil and associated petrochemical industries. These units will produce refined oil products for both Pakistani and Chinese markets. Several oil exporting Arab countries have already announced major investments in this initiative. In February 2019 Saudi Arabia announced a $10 billion petrochemical investment in Gwadar during an official visit by Crown Prince Mohammed bin Salman to Pakistan. In October of the same year the UAE announced that it was close to finalizing a $5 billion joint venture agreement with Pakistan for construction of an oil refinery in Gwadar. It is likely that many other Arab oil exporting countries will follow the lead of Saudi Arabia and the UAE for investment in Gwadar Oil Terminal City.

Fourth, the development of Gwadar seaport will affect Iran’s relations with China and India. When China and Pakistan announced CPEC, India responded by approaching Iran to develop the Chabahar port in the Oman Sea in order to create an alternative north-south corridor for India’s trade with Afghanistan and Central Asia. But growing strategic ties between the United States and India have increased India’s sensitivity to the U.S. economic sanctions against Iran, and as a result, India has cut back her economic relations and oil purchases from Iran.

In response to this development, Iranian officials have expressed an interest in linking Chabahar port to Gwadar by highway and natural gas pipeline. This interest was articulated by Iran’s foreign minister, Mohammed Javad Zarif, during a May 2019 visit to Pakistan: “We believe that Chabahar — one of Iran’s developing seaports on the Oman Sea — and Gwadar — a port city on the southwestern coast of Baluchistan, Pakistan, also on the Oman sea — can complement each other.”

Linking Chabahar to Gwadar will serve several objectives for Iran. First, it will allow Iran to export natural gas to Pakistan and China via Gwadar. Iran has already completed a natural gas pipeline to the Pakistan border under an earlier Iran-Pakistan agreement but the portion in Pakistan has not been constructed due to pressure from the United States and Saudi Arabia. Now Iran has pinned its hopes on China’s support to save the project and to balance the growing Saudi Arabian influence in CPEC by its own participation. So far there has been no official response by Pakistan and China to Iran’s request but government officials in both countries have expressed positive reactions to the potential for Iran’s participation in CPEC.

Final Words

China’s massive financial commitment to CPEC cannot be justified by its impact on China-Pakistan bilateral relations alone. The connectivity and transport capacity that CPEC will create between western China and the Arabian Sea can prove even more valuable to China than the direct gains in China-Pakistan relations. CPEC will significantly enhance China’s capacity to expand her economic and strategic relations with energy-rich Middle Eastern countries. CPEC will also allow China to connect the Arab countries to the Belt and Road network in Central Asia and Eurasia. Due to their rivalries with Iran, many of these countries were reluctant to use Iran’s transit routes for that purpose.

While China is likely to continue its policy of neutrality and avoiding direct military intervention in the Middle East, development of CPEC will enhance its capacity to project military and naval power in the region if and when it decides to do so. This enhanced capacity will now be taken into account by Middle Eastern counties and external powers that are currently projecting power in the region.

Despite many challenges and risks that have not been addressed in this article, Pakistan and China both seem committed to CPEC and as the second and third phases of this initiative become operational in the next 10 years, most Middle Eastern countries are likely to participate and take advantage of its transportation network.

Nader Habibi is a professor of practice in economics of the Middle East, Crown Center for Middle East Studies and Department of Economics, Brandeis University (U.S.).

Hans Yue Zhu is a graduate student at Yale University’s Economics Department and a research assistant at the Yale Jackson Institute of Global Affairs.