China pours money into Iraq as US retreats from Middle East

Iraq has become the biggest beneficiary of Xi Jinping’s Belt and Road Initiative, as China fills the void left by the US retreat from a conflict that cost hundreds of thousands of lives and American taxpayers trillions of dollars.

Beijing struck $10.5bn in new construction contracts in Iraq last year, part of a “strong shift” in its engagement towards the Middle East despite a broader downturn in Chinese outbound investment.

The findings were revealed in a report to be published on Wednesday by the Green Finance & Development Center at Fudan University in Shanghai, and reviewed by the Financial Times.

Beijing’s decision to foster deeper economic ties with Iraq, Opec’s second-largest oil producer, coincides with a growing perception that the US is disengaging from the Middle East.

China has cemented its position in the region in the same year that President Joe Biden formally ended the US combat mission in Iraq and the Taliban retook control of Afghanistan after the chaotic exit of coalition forces.

While Beijing relies on the Middle East for most of its energy imports, Arab states are trying to diversify the relationship, tapping into Chinese technology and extending trade relations with the world’s second-biggest economy.

Ties between Beijing and Baghdad, in particular, have strengthened in recent years.

Iraq is already the third-biggest exporter of oil to China, but officials in Baghdad have been keen to secure Chinese investment to help upgrade decaying infrastructure. Many western companies are reluctant to invest in the country.

New deals signed between Chinese and Iraqi groups include the big Al-Khairat heavy oil power plant in Karbala province, rebuilding the international airport in Nasiriyah and developing the Mansuriya gasfield near the Iran border.

In December, Iraq signed an agreement with Chinese companies Power Construction Corporation of China and Sinotech to build 1,000 schools, which will be paid for through oil products.

Xi launched the BRI in 2013. After years of rapid growth the pace of lending on the Belt and Road has recently slowed.

There was a total of $59.5bn in Chinese finance investments and contractual co-operation across the 144 BRI countries 2021, down from $60.5bn in 2020, according to the report. Contract values reached $45.6bn, down from $37bn, as investments shrank to $13.9bn from $23.4bn.

Total BRI engagement remains down about 48 per cent from pre-pandemic levels. Fudan University researchers did not expect the BRI to return to the heights of the late 2010s, owing to closer scrutiny of deals in many foreign capitals as well as tighter controls in Beijing over outbound investment.

The researchers noted that the Chinese Ministry of Commerce’s five-year plan to 2025 promised investment overseas, including non-BRI projects, of $550bn, down 25 per cent from $740bn in 2016-2021.

But in Middle Eastern and Arab countries, the level of construction investments and contracts rose 360 per cent and 116 per cent, respectively, mostly on energy and transport infrastructure.

While China continues to invest in oil and gas infrastructure abroad, Xi’s government appears to have kept its promise to end new coal investments and raise spending on cleaner energy alternatives.

According to the report, no new coal projects received financing or investments in 2021, while green energy deals increased slightly to a record $6.3bn. That also reflected a preference for smaller and more sustainable projects, the researchers said.

The latest BRI data came amid renewed international debate over whether China was pushing developing countries into so-called debt traps, under which Beijing could seize assets when it is owed money.

Many of the construction contracts announced last year were financed through loans provided by Chinese financial institutions or contractors with host country guarantees, the Fudan researchers noted.

Anxiety over China’s rising international dominance has prompted the US and EU over the past year to try to counter the BRI with new international development finance efforts.