Qatar courts China

The opening of the Middle East's first renminbi clearing centre in Qatar has highlighted the growing importance of Qatar's relationship with China.

Qatar courts China

The Qatar Renminbi Centre was launched on April 14th and is operated by the Industrial and Commercial Bank of China (ICBC) out of the Qatar Financial Centre. It was the result of an agreement between Qatar Central Bank and its counterpart, the People's Bank of China, during the visit of the emir, Sheikh Tamim bin Hamad al‑Thani, to China in November. The central banks also signed an Rmb35bn (US$5.7bn) three-year swap agreement. The clearance centre will, in theory, help facilitate trade flows with China not just from Qatar but elsewhere in the region.

The swing LNG customer

China has been rapidly growing in importance as a destination for Qatari LNG exports. The bilateral trade only began in 2009, when deliveries began under the first long-term sales and production agreement (SPA) with the state-owned China National Offshore Oil Company (CNOOC), since followed by another deal with PetroChina. By 2013 China had become the fourth-largest destination for Qatar's exports—after Japan, Korea and India—purchasing US$9bn of goods, a nearly tenfold increase since 2009. The expectation is that this trend will continue, as China boosts gas imports to fuel its economy, growing at 7% (although this is considered a slowdown), and gradually replaces the highly polluting coal-fired power generation that has blighted its air quality and carbon-emission record.

However, the competition to supply China with gas has been intensifying, with a major Russian pipeline deal in 2014 and new LNG capacity coming on stream or planned in various places, including Australia, East Africa and the US. This gives China, the main swing customer, considerable bargaining power. Qatargas's original deal with CNOOC was reportedly based on a 16.2% oil slope (meaning that oil priced at US$50/barrel would result in LNG at US$8.1/mBtu plus a fixed cost), which is one of the most expensive LNG SPAs that has ever been signed, with slopes of around 13% being more common, and many customers pushing in recent years to delink LNG from oil and use other formulas, such as indexing it against US Henry Hub gas prices (as is the case for Yemen LNG). Qatar has resolutely tried to stick with oil indexation and tries to persuade customers to pay a premium given the reliability of its wholly owned supply chain and close bilateral relations which, in the case of China, are between state-owned companies on both sides of the transaction. Hence, any Qatari efforts to support China can be seen, in part, as providing reasons for Chinese firms to continue choosing Qatari LNG supplies.

Investment and construction

The Qatar Investment Authority (QIA, the Qatari sovereign wealth fund) is in the process of diversifying its portfolio, which has long been heavily weighed to western Europe, and China is an obvious target of interest given its economic importance and growth dynamics. However, restrictions on foreign portfolio investment in China have limited the opportunities, although Qatar has put money into Hong Kong, where mainland limitations do not apply. Qatar was one of the investors in the initial public offerings in Hong Kong of ICBC in 2006 and the Agricultural Bank of China in 2010 (in which it is the largest foreign investor, with a US$2.8bn stake). It has also made direct investments, including taking a 22% stake in Citic Capital, a state-backed private-equity firm, in 2012, and then a 20% stake in Lifestyle International, a department store chain, for US$600m in 2014. Its investments in mainland Chinese equities are now increasing after the Chinese government quintupled its permitted investment limit to Rmb30bn in November, the highest for any investor.

Meanwhile, Chinese companies are increasingly active in Qatar. In the upstream sector, CNOOC and PetroChina are involved in exploring for new gas finds off Qatar's north coast. A number of Chinese construction firms are involved in Qatar's major public infrastructure projects. These include China Harbour Engineering Company, which is working on a US$1bn contract as part of Doha's new port, and Sinohydro, which has been involved in the port, Hamad International Airport and also Lusail City. China is also a major source of imports for Qatar, providing about US$3bn, or 7% off the total, in 2013.

A friend in the Middle East

Qatari efforts to woo China go well beyond the new renminbi clearance centre. Qatar was one of the first countries to enthusiastically sign up to the Asian Infrastructure Development Bank, China's rival to the Western-dominated multilateral banks. Meanwhile, in March, Qatar's deputy prime minister, Sheikh Ahmed bin Abdullah al‑Mahmoud, participated in the Boao Forum, China's answer to the World Economic Forum at Davos, the highest-ranking Arab official to attend the gathering of Asian political and business leaders. China also clearly sees the relationship as important, demonstrated by a visit to the Qatari capital, Doha, in 2012 by its then prime minister, Wen Jiabao.

Despite all the positive linkages, the two countries differ politically on a number of regional issues, including the Syrian conflict. China has repeatedly blocked attempts for opponents of the Assad regime at the UN Security Council to press the international community for military action in Syria, much to the collective dismay of Gulf Arab states.

Nonetheless, the Chinese-Qatari relationship is expected to continue to deepen in the coming years. Direct Qatar Airways flights to a growing number of Chinese cities will help practically facilitate links, and Doha's role (albeit eclipsed by Dubai), as a hub for Chinese links to Africa and Europe. Wooing China fits into Qatar's broader national strategy of developing mutually dependent relationships with global powers (the US, France and Japan are other key allies), which help provide something of an implicit political and security guarantee for a tiny country with vast wealth in a turbulent region.

Disclaimer: This article is not intended to constitute any advice or an offer. Any forecasts or projections are indicative only. HSBC or any of its affiliates accepts no liability, whether express or implied, arising out of or incidental to contents forming part of the article.

Key points

  • The Qatari Renminbi Centre was launched in April and should help facilitate trade flows with China in Qatar and the wider region
  • Bilateral trade between Qatar and China started in 2009, by 2013 China had become the fourth largest destination for Qatar's exports
  • The Chinese-Qatari relationship is expected to deepen in the coming years

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