China Oil & Commodity Demand Opens a New “Silk Road”

Rapidly growing Asian economies have, at least in part, driven demand for oil. Higher oil prices in recent years mean overflowing coffers in the GCC. They need to put that treasure to work. More and more, it is winding up in Asia. McKinsey reports: “Recent interviews with more than a dozen Gulf investors who collectively control more than $300 billion in assets revealed that they are set to shift their portfolio asset allocation toward Asia by 10-30%.”

It’s a feedback loop.
More growth in Asia means more China oil demand – with more and more coming from the Middle East. By 2030, estimates put half of China’s oil imports coming from the Middle East. Asia – including India – could account for half the increase in the world’s demand for oil. That means more cash for the GCC and more investment in Asia – in real estate development, in banking, in communications, in infrastructure. And on it goes.

In the meantime, Chinese, Indian and other Asian companies are active in the Middle East. They bring low-cost consumer goods (Dubai is already home to Chinamexmart, which McKinsey describes as a “mini-city of Chinese companies distributing their products throughout the region”). Asian companies also bid on major construction projects in the Middle East.

Another interesting barometer of economic activity: As late as 2000, there were only seven daily flights between the Gulf states and China. Today, there are more than 48.

Thubron notes on his trip how the influence of the old Silk Road flowed into even remote hamlets. “The nervous system of the Silk Road radiated into the poorest extremities,” he writes. “It traversed minor ecological divides, as well as empires.” Likewise, this new surging trade between these regions will have ripple effects in the patterns of world trade and in financial markets everywhere.

Daily Reckoning