The Modern Silk Road

The most hard-boiled forms of human enterprise tend to be the most prolific. Thus commerce along the legendary Silk Road flourished as it did for some 1,600 years because it was negotiated between merchants, not ministers or politicians. Having predated the nation-state and the borders that define them, the world's main commercial artery was lightly taxed and regulated, and free of the political set-asides and subsidies that weigh on today's free-trade agreements. For better or for worse, there were no labor unions demanding living wages for workers, no environmental groups clamoring for high emission standards and no human-rights organizations calling for boycotts of authoritarian regimes.

History repeats itself. In just a few short years, a new generation of merchants have spontaneously revived the ancient spice trade and restored its centrality with a host of modern wares. As opportunities closed in the United States—its economy sluggish, its investment environment increasingly hostile to Arabs and Chinese—new ones have opened between Asia and the Gulf. Unlike China's emerging ties to Africa, which have been attacked as a form of resource imperialism, Beijing's renewed tie to the Middle East is a joining of equals—newly rich Chinese manufacturers cutting deals with flush petro-princes from a tradition of unfettered trade as rich and old as China's. The process began with the simple exchange of Arab oil for Chinese capital and it has since expanded into a web of two-way deals in banking, property development, industry and tourism.

The world's two most liquid economies are creating a new commercial bloc that is rebalancing the global economy. With much of the world teetering on the brink of recession, China and the Middle East continue to expand and converge at a brisk pace. The transatlantic route is still the richest of the world's major trade channels (worth $1.5 trillion in trade and investment last year), and the European Union and the United States remain the largest export markets for both China and much of the oil-rich Middle East. But the new Silk Road is growing at a faster rate. Trade between China and the Middle East has doubled since 2000, to $240 billion, according to the Dubai International Financial Centre, and is estimated to grow by several times that amount over the next decade. To take just one example, the United Arab Emirates projects that its two-way trade with China will grow by a factor of seven by 2015, to $100 million from $14.2 billion in 2006. "We see the world economy as revolving around us," David Rubenstein, cofounder of the U.S.-based-Carlyle private-equity giant, said at an investment forum recently. "But the economic center of the world is beginning to shift from the U.S. and Europe to the Middle East and Asia."

It's not only trade in goods and oil. Asia and the Middle East are home to the world's largest pools of surplus cash, much of which is managed by six of the top 10 sovereign wealth funds. That makes the new Silk Road a key nexus for the next generation of blockbuster financial deals. A report issued this month by JL McGregor & Co., a Beijing-based consultancy, estimates that the amount of Middle East money flowing into China could reach $250 billion over the next five years. The report compares that figure with the $200 billion it says Gulf investors have divested from the United States since 2003, a consequence of post-9/11 safeguards against suspect money flows and hostility to Arab investment.

In a world where trade is getting the rap for everything from global warming to food shortages, the new Silk Road is largely free from nagging NGOs. Here only money talks. While U.S. President George W. Bush struggles to gain congressional approval for minor free-trade agreements with countries like Colombia and Venezuela—deals, he argues, that are vital for both democracy and U.S. national security—Arab and Chinese businessmen are building a formidable economic bloc one laissez-faire transaction at a time. In part, business gravitates to the most receptive market. And America's cultish obsession with national security has created a backlash against foreign—in particular Arab and Chinese—investment. Since 2006, two high-profile Chinese companies, Cnooc and Huawei telecommunications, have been forced to abandon plans to buy stakes in U.S. companies amid politically charged security concerns. Dubai Ports World was forced to divest itself of its U.S. assets in a similar dust-up. It's no surprise that all three companies have since found a more receptive business environment on the new Silk Road. Earlier this year Dubai Ports World announced a plan to co-develop a container port in Tianjin, China. Just last month, Cnooc and Huawei signed major deals in Qatar and the United Arab Emirates, respectively. "Ask any businessman on the street about doing business in the U.S.," says Ashraf Hamdi Fouad, an adviser to Mubadala, Abu Dhabi's state-owned investment arm, "and he'll tell you: 'It's not worth it. Let's wait for the Americans to get over all this'."

In a striking vote of confidence in the future of Middle Eastern capital markets, Dubai International Capital and Hong Kong-based First Eastern Investment Group announced last month they were launching a $1 billion investment fund in part to prepare Chinese companies for listings on Arab stock markets.

The fund-raising offers benefits for both sides: Gulf capital markets get new listings and liquidity, while Chinese companies, frustrated at the red tape that delays public offerings at home, have new sources of money in an equally dynamic economy. "There are about a half-million Chinese companies waiting to list their shares on local markets, and it's taking too much time," First Eastern managing director Elizabeth Kan said between sessions at a conference hosted at the opulent Emirates Palace in Abu Dhabi. "If we can list some of these companies in the Persian Gulf, we can get higher multiples."

If developing countries are indeed maturing into a web of largely self-sustaining regional blocs, as some economists believe, then the epicenter of the process is the Sino-Arab convergence. While both sides have larger trading partners in Europe and the United States, the heat from those commercial links have given way to much lower rates of growth (two-way trade between the U.S and China is growing at its slowest rate since the late 1990s). Deals between China and Africa are robust and growing fast, but the money flows in one direction only. Resource rich Latin America is an increasingly important target for Beijing, but this trade channel is still minor, at $30 billion last year.

It's possible, of course, that the renaissance of Sino-Middle East trade will collapse if oil prices do, cutting off the funds that are making the Gulf states a serious partner for China. Financial accounting in China and the Middle East is notoriously murky, so no one really knows how much money is sloshing about the New East, which still lacks adequate debt markets to harness it. Inflation is reaching perilous heights, fueled by high spending levels and a weak dollar, to which the Chinese and Gulf currencies are fixed. And while the Asian-Middle East combine continues to hum, it may yet feel the undertow of a sharp plunge in U.S. consumption, still the bunker oil for global growth.

Fortunately for China and its partners in the Gulf, the emerging Sino-Arab bloc is largely protected from the global credit crunch because neither side is heavily in debt. Most private- and state-owned companies in China and the Arab world are debt-free, and the vast majority of consumers have no bank accounts, pension funds or stock positions, much less exposure to the exotic derivatives behind the credit crisis. A share-market crash in the GCC and China is harrowing for speculators: with relatively few players, price swings can be wild. Since 2006, Arab stock exchanges have plummeted from record highs to record lows—twice. But since the markets are small, they have had little impact on the real economy, which continues to grow strongly in both regions.

The tendency in post-9/11 America is to regard anything it can't control as a threat. Already, the commercial integration of China and the Middle East, two regions with which Washington has complex relations at best, is being looked upon with alarm in Washington. If anything, the United States should welcome the addition of a spare growth engine for a global economy that has relied for generations on the once irrepressible, now fatigued American consumer.