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China’s reopening may have negative effects on Arab countries that import energy resources, as it could lead to a rise in oil and gas prices.
This article was translated from Arabic.
Arab governments are preparing for the next stage of China’s economic liberalization, following the lifting of restrictions implemented under the “Zero COVID” policy at the start of 2023.
The impact of these developments is expected to differ among Arab countries, with nations that export energy sources likely to benefit, particularly those with strategic economic ties to China in the oil and gas sector such as the Gulf Cooperation Council, Iraq and Libya.
However, countries that import energy resources may face challenges due to rising prices and increased Chinese demand for these materials.
The repercussions of the “Zero COVID” policy on the global economy
In 2022, China implemented a strict “Zero COVID” policy to combat the outbreak of the Coronavirus pandemic.
The policy included comprehensive closures in certain regions of the country, restrictions on production and tourism activities, and limitations on the movement of individuals. It also contrasted with the policies adopted by the overwhelming majority of other countries, which since 2021 have begun to gradually ease the restrictions imposed on their economic sectors.
While these measures were effective in controlling the spread of the virus, they also had a significant impact on the Chinese economy. Studies by Goldman Sachs show that the cities affected by the closures represented 35 per cent of China’s GDP, resulting in an economic growth rate of only 3 per cent for the year.
The Chinese economy suffered greatly under this policy, as the comprehensive closures caused economic growth to decline to its lowest level in nearly half a century, with a recorded zero per cent growth during the last quarter of 2022. Additionally, the GDP growth rate for the year fell sharply from the 8.4 per cent growth rate achieved in 2021.
As China is the second-largest global economy after the United States, these developments contributed to a further slowdown in the growth of the global economy, along with other factors such as the war in Ukraine and a slowdown in growth in the United States.
According to International Monetary Fund figures, the growth rate of the global economy hovered around 3.2 per cent in 2022, a significant decline from the previous year’s growth rate of nearly 6 per cent.
Economic optimism about the reopening of the Chinese economy
Today, China has begun taking steps to reopen its economy following the implementation of a gradual lifting of restrictions put in place as part of its “Zero COVID” policy. The decision is in response to the significant economic pressures caused by the strict policy, as well as widespread labor and popular protests calling for an end to the restrictions on movement and economic activity.
On the health level, the decision to reopen the Chinese economy raises concerns about the potential emergence of new variants of the virus, given the recent outbreak. However, economists have expressed optimism about the economic impact of these developments, which they believe will boost global economic growth in 2023.
According to Bloomberg, economists predict that China’s economic growth rate will reach 5 per cent in 2023 following the reopening of the economy. As China accounts for 18.5 per cent of the global economy and has contributed to 30 per cent of global economic growth since 2013, this is expected to have a positive impact on international trade.
One of the most significant expectations among economists is that Chinese demand for raw materials and energy sources will increase as economic activity picks up. This has already been reflected in the rising prices of energy sources in the first weeks of 2023 due to optimism about the reopening of the Chinese economy.
Benefits for Arab oil exporting countries
The majority of oil-exporting countries adhere to a specific ceiling for daily production, as determined by the OPEC+ alliance, which currently dominates the global oil trade.
In October 2022, members of the alliance decided to reduce daily oil production by 2 million barrels per day until the end of the year in order to ward off a decrease in the price of oil in the medium term. This decision angered the United States and other oil-importing industrial countries.
According to the head of Aramco, Amin Nasser, the reopening of the Chinese economy is expected to lead to an increase in global demand for oil, causing the production ceiling agreed upon by OPEC+ countries to be exhausted.
When this happens, global oil prices will return to record highs. Nasser also indicates that the Kingdom of Saudi Arabia will not assume the responsibility of providing the additional oil needed by the market, referring to their refusal to increase oil production in the medium term.
As a result, oil-exporting Arab countries, led by Saudi Arabia, Iraq, Libya, Kuwait and Bahrain, will benefit financially if Chinese demand for energy sources leads to an increase in the price of oil. These countries have already seen their revenues from oil sales more than double, with the average annual barrel price increasing from $41.96 in 2020 to $70.68 in 2021, reaching $103.71 in 2022.
It is apparent that Saudi Arabia’s refusal to raise oil output, despite an increase in Chinese demand, is a reflection of their expectation of the possible profits they may realize once the price of oil rises. Furthermore, additional elements including price inflation and Western sanctions against Russia may also lead to an increase in global oil prices in 2023.
Qatar and available opportunities
For Qatar, the world’s top producer and exporter of liquefied gas at the moment, the reopening of the Chinese economy offers new chances. After making sizable investments in the expansion and improvement of its gas fields, Qatar has for years been actively striving to diversify and extend the markets to which it exports its goods.
China, on the other hand, is currently the world’s largest importer of natural gas and is expected to double its demand for liquefied gas once its economy fully reopens in 2023.
Having realized the opportunity at hand, Qatar signed agreements back in November 2022 to supply 4 million tons of liquefied gas to China annually. According to the agreements, these shipments will come from the North Field Expansion Project and will be delivered to China’s Sinopec facilities.
Qatar will undoubtedly profit from the surge in gas prices in international markets brought on by the increasing Chinese demand. This is especially noteworthy in light of the recent price rise brought on by the conflict in the Ukraine and the disruption of the supply chain in Europe.
Currently, Qatar is benefitting from the rise in European demand for liquefied gas due to the interruption of Russian supplies.
However, by diversifying its supply contracts with China, Qatar can ensure sustainable and stable long-term supply chains. Additionally, these new contracts will allow for the development of additional Qatari gas fields to meet the high external demand for gas.
Repercussions for countries importing energy sources
The reopening of the Chinese economy may have negative effects on Arab countries that import energy resources, as it could lead to a rise in oil and gas prices.
Countries like Lebanon, Syria, Sudan, and Tunisia have been suffering since the beginning of 2022 from the effects of price inflation on the world market and an increase in the price of imports. The high cost of importing energy resources will put additional pressure on the economies of these nations by raising the demand for hard currency and putting local currencies under further pressure.
Depending on how closely connected to energy markets each Arab nation is, the effects of the Chinese economy’s reopening will differ. The speed of the Chinese economy’s recovery and productivity growth, as well as the relaxation of restrictions imposed by the “Zero COVID” policy, will all have an impact on how severe the consequences are.
The condition of the health situation, however, remains to be seen as further viral outbreaks or a surge in new infections that may overwhelm the Chinese healthcare system and result in the reinstatement of restrictions.