Shaping the Energy Transition: Gulf-China Collaboration

Overview

The growing influence of Chinese energy firms in the Persian Gulf is part of a deepening trade and geopolitical relationship as China takes a leading role in the energy transitions underway in the Gulf states and the surrounding region. Several joint ventures (JVs) have been formed between Chinese firms and state-linked Gulf entities, mainly in Saudi Arabia and the United Arab Emirates (UAE). These ventures are building huge renewable energy generation facilities and exploring investments across supply chains for energy storage, electric vehicles, carbon capture, and clean hydrogen. While cooperation in the energy transition has raised China’s profile in the Gulf, the clean energy JVs are not perceived by the United States as a political or security threat, even as U.S.-China relations elsewhere have become more adversarial. This issue brief examines the drivers of Gulf-China cooperation — are the motivations commercial, geopolitical, or a mix of both? — and how these investments are viewed in Washington.

It also summarizes a discussion — hosted by the Baker Institute Middle East Energy Roundtable in September 2024 — led by the following experts:

• Faris Al-Sulayman, nonresident scholar at the Middle East Institute, Ph.D. candidate at the London School of Economics, and coauthor of a paper on the subject.
• The Honorable David M. Satterfield, director of the Baker Institute and its Edward P. Djerejian Center for the Middle East.
• Jim Krane, Wallace S. Wilson Fellow for Energy Studies and codirector of the Middle East Energy Roundtable.
• Kristian Coates Ulrichsen, fellow for the Middle East and codirector of the Middle East Energy Roundtable.

The following key points emerged from the discussion:

• State capitalist and authoritarian governance in Gulf Cooperation Council (GCC) states and China provides institutional synergies that streamline cooperation and investment. Their joint diplomatic goals and long-term strategic aims may outweigh short-term financial returns, paving the way for projects in host countries otherwise perceived as risky.
• The state-led enterprises benefit from support from their heads of state, which makes them nimble and able to move quickly, even when investing in countries lacking institutional transparency.
• Venture firms from China, Saudi Arabia, and the UAE benefit from a glut of low-cost Chinese renewable energy and battery components that face tariff barriers in the U.S. and EU. Gulf partner firms are assisting Chinese national interests in creating investment pathways into the Gulf and wider region, while developing new markets for China’s renewable manufacturing base, which has exceeded the capacity of the Chinese domestic market.
• By involving U.S.-friendly Gulf firms in licensed manufacturing of Chinese technology, Chinese firms may eventually regain access for their exports into the U.S. and/or EU markets while avoiding border tariffs.
• U.S. concerns with Chinese investments in the GCC revolve around intelligence and surveillance issues associated with sales of technology, particularly through cellular and internet data networks, and military-military cooperation. There is less concern in Washington about Gulf-Chinese partnerships in renewable energy, which are seen as necessary for the transition to cleaner energy.

Gulf Cooperation Council Perspective

There are strategic reasons why ties between the six GCC states (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the UAE) and China have grown. Traditionally, the Gulf region looked to the U.S. and Europe for security and economic partnerships. However, over the past few decades, Gulf states have forged new alignments based on changing trade relations and the belief that U.S. interest in the region is waning. The shale revolution in the U.S. reduced its dependence on Middle East oil and recast the U.S. as a major competitor in oil and gas exports. Furthermore, Gulf perceptions of the U.S.’ strategic pivot to Asia and actions by successive presidential administrations (from Barack Obama to Joe Biden), have called into question the long-term dependability of U.S. security guarantees. This uncertainty has driven the GCC toward diversification in both diplomatic and economic relationships, with China emerging as a critical partner. The strategic value of China lies not only in its economic power but also in its growing political influence, which offers the Gulf states a way to balance their international relationships.

For the GCC states, deepening cooperation on renewable energy with China is part of a broader, long-term strategy related to economic diversification and the reduction of the region’s dependence on oil. This shift is being driven by domestic pressures to create more resilient economies, especially as global energy investment increasingly favors low-carbon technologies. Key GCC states — Saudi Arabia, the UAE, Qatar, and Oman — have embarked on ambitious national visions with major clean energy components. Examples include Saudi Arabia’s Vision 2030 and the UAE’s Net Zero 2050 strategy; both countries aim to decrease dependence on hydrocarbons while positioning themselves as clean energy leaders.

The hydrocarbon foundation of the GCC’s economic and political systems is considered unsustainable over the long term due to fluctuating world oil prices, the growing competitiveness of alternative energy sources in transportation, and mounting pressure for climate action and meaningful energy transitions. While the Gulf region remains rich in oil and gas resources, GCC leadership recognizes that future prosperity depends on building diversified, resilient economies. Renewable energy has been identified as one of the focus areas for diversification, particularly since the Arabian Peninsula has high levels of solar radiation and vacant land which provide a competitive advantage in large-scale solar power projects, although consumption subsidies may erode these benefits. Although GCC states were initially slow to start on energy transitions, they are now making rapid progress, with Saudi Arabia and the UAE leading the region in wind and solar energy development, outpacing the other Gulf monarchies. By leveraging renewable electricity these countries can free up locally subsidized oil and natural gas resources for export at world prices, while also creating investment opportunities beyond their domestic markets. Pairing with China in foreign renewables ventures offers a way to pursue economic diversification alongside broader diplomatic goals.

The energy transition is central to this collaboration. China’s vast manufacturing capacity — especially in solar panels, wind turbines, and batteries — is highly complementary to the GCC’s renewable energy ambitions. Chinese firms are able to offer advanced technologies at competitive prices due partly to overcapacity in China’s domestic renewable energy sector. This overcapacity, coupled with U.S. and EU import tariffs on Chinese solar and wind components, batteries, and electric vehicles (EVs), has pushed component prices down, making Chinese equipment very attractive to the GCC. These competitively priced Chinese components appear well-timed to assist Gulf states in achieving the renewable energy targets declared in their vision goals. In other words, the Gulf states are acting on an opportunity provided by Western trade protectionism.

Although profitability of GCC-China JVs remains uncertain, higher retail electricity prices in destination markets compared to those in the Gulf suggests an opportunity for Gulf governments. By developing new capacity and selling solar-generated electricity in other countries they could secure higher returns, making international renewable ventures potentially more profitable than projects in their home markets.

State-Capitalist Cooperation

At the heart of the China-GCC relationship is a model of state capitalism, where state-owned enterprises (SOEs) lead major economic projects. In Saudi Arabia and the UAE, firms such as ACWA Power and Masdar that are largely state controlled (by the Public Investment Fund and Mubadala, respectively) have been instrumental in advancing national energy goals. China’s SOEs, similarly, dominate the country’s key industries and have led its global expansion. This shared governance model facilitates smoother collaboration, as both the Gulf states and China prioritize political stability and long-term strategic gains over short-term financial returns. The alignment of these models allows for faster decision-making, fewer bureaucratic hurdles, and the ability to pursue projects that in Western-led ventures would typically face greater scrutiny regarding human rights, environmental, and labor concerns.

Another factor in the GCC’s deepening ties with China is the benefit of “de-risking” against regional threats, specifically Iran. Saudi Arabia and the UAE are located in one of the world’s most geopolitically sensitive regions; reducing their vulnerability to regional conflict is crucial to their economic success. China’s strong economic ties with both the GCC and Iran have positioned it as a useful mediator, as seen in China’s involvement in the March 2023 agreement (signed in Beijing) to restore Saudi-Iranian diplomatic relations. The presence of Chinese companies in Gulf infrastructure projects helps to stabilize these relationships and ensures that the region’s energy and economic interests are aligned with a rising global power.

Finally, the partnership with China extends beyond the borders of the GCC. Gulf states are increasingly looking to expand their influence in neighboring regions, such as Central Asia (Uzbekistan, Tajikistan, Kazakhstan, etc.) and Africa, where Chinese firms have already established a strong presence through the Belt and Road Initiative (BRI). Joint ventures between the GCC and China are moving ahead in South Africa, Egypt, Jordan, and Morocco. In some cases, these are underserved locales where risk-averse Western renewables investors have yet to arrive. Chinese-Gulf cooperation appears to be opening new markets, strengthening the Gulf’s geopolitical ties with China, and expanding the global influence of the Gulf states.

Examples include:

• Saudi ACWA Power working with Chinese firms to finance and build a 1.5 gigawatt (GW) natural gas power plant and a 1.5 GW wind project in Uzbekistan.
• China’s Silk Road Fund bought a 49% stake in Saudi ACWA Power Renewable Energy Holding, which owns and operates 1.7 GW of renewable power capacity in the Middle East and Africa.
• A JV created between the Saudi Public Investment Fund and China’s LONGi Solar, to supply photovoltaic modules for further JVs.
• China’s Human Horizons preparing to build an electric vehicle assembly plant in Saudi Arabia.
• China’s Three Gorges company bought UAE’s Alcazar Energy Partners, a small developer.

GCC states’ partnership in renewable energy with China goes beyond mere technological cooperation. It forms part of a larger strategy to achieve economic, geopolitical, and security goals in a rapidly changing global environment. As long as the Gulf states continue to invest in renewable energy (and other green technologies), their relationship with China is likely to deepen.

American Perspective

The U.S. view of China’s involvement in the Middle East’s energy sector is best placed within the context of the broader U.S. perspective on China. During both the George W. Bush and Obama administrations, Washington focused on integrating China into the global system through a strategy of friendly cooperation. A prime example of this was U.S. support for China’s accession into the World Trade Organization in 2001. During this period, the U.S. aimed to moderate China’s international behavior and align it with U.S.-led global interests through increased trade and engagement. However, over the past decade, this engagement approach began to sour. The shift began toward the end of the Obama administration, continued under the first Donald Trump administration, and remains ongoing in the Biden administration.

Following accusations over unfair trade and investment practices, the U.S. developed a more confrontational stance toward China, including shifting strategic supply chains outside of China and reducing reliance on Chinese-made components and materials. This strategy proved to be unfruitful, paving the way for the current era of U.S.-China relations motivated by the U.S. strategy of selective cooperation and confrontation. Although the U.S. still challenges China in key nonnegotiable strategic sectors like military technology, critical infrastructure, and telecommunications, it is now seeking cooperation with China on global challenges, including climate change. That cooperation appeared to be fading as new trade restrictions by both sides materialized in late 2024, as Trump prepared to take office for the second time.

The hands off U.S. approach to China’s recent involvement in the Middle East’s energy transition reflects this nuanced strategy. U.S. policymakers recognize that Chinese involvement is needed in the developing world to meet global climate goals and Washington generally does not perceive Chinese investments in renewable energy as a significant national security concern. U.S. firms have largely been content to allow China to take the lead in renewable energy investments due to their low profitability. The low returns in renewables have long served as an investment deterrent to U.S. energy firms and the heightened political risk that prevails in developing countries acts as a further constraint.

However, Washington remains concerned about China’s growing presence in other economic sectors in America’s Gulf partner countries, especially telecommunications and security technology and infrastructure. A notable example is the involvement of Huawei, China’s leading telecommunications company. The U.S. has long been wary that Huawei’s technologies could be used by the Chinese government for espionage and surveillance. This includes building networks in the Gulf states, which could potentially be used to hack critical national infrastructure such as energy systems. The U.S. asked GCC countries to use European Nokia or Ericsson networks instead, but Gulf states rejected that request based on Huawei’s competitive pricing. Concerns over the use of Chinese technologies caused significant tensions between the U.S. and the UAE over Abu Dhabi’s anticipated use of Huawei infrastructure, leading the U.S. to put a hold on UAE participation in the F-35 fighter jet program.

Washington has also expressed alarm over Chinese attempts to expand its military and intelligence presence in the Gulf. A key example of this was China’s efforts to establish a People’s Liberation Army (PLA) base in Abu Dhabi. The U.S.’ strong opposition was successful in pressuring the UAE to halt construction of the base in 2021, emphasizing Washington’s determination to prevent China from gaining a military foothold on the Arabian Peninsula. Despite yielding to U.S. demands in this instance, the UAE and other Gulf countries remain concerned about the reliability of U.S. security cooperation. During the Obama, Trump, and Biden administrations, the U.S. refrained from responding militarily to attacks by Iranian proxies on critical infrastructure in the UAE as well as Saudi Arabia, leading to frustration in the Gulf. This inaction caused serious strain in U.S.-UAE relations, leading Abu Dhabi to seek greater diversity in its security partnerships.

U.S. policy toward Saudi Arabia has aimed to prevent a similar rupture in security cooperation. Washington requires Saudi alignment with American interests to maintain U.S. strategic dominance in the region and mitigate risks posed by Iran. U.S. efforts to secure a Saudi-Israel normalization deal are part of these efforts. Although the normalization deal is often framed as a purely diplomatic pursuit to improve relations between two important American partners in the Middle East, the U.S.’ primary objective actually lies in bolstering its strategic relationship with Saudi Arabia.

By securing closer relations, the U.S. hopes to reduce risks emanating from Iran and cement its long-held role as the Saudis’ primary security partner. As part of the deal, the kingdom would refrain from seeking security guarantees or deeper partnerships with China. The U.S. has already convinced Saudi Arabia to avoid joining the expanded BRICS community and making any moves toward de-dollarization of oil sales.

In response to China’s growing influence in the GCC, the U.S. has implemented several counterbalancing strategies, including the intent to create a supply chain for critical minerals, including those used for EV batteries, that involves GCC countries and does not pass through China. As the world’s energy transition quickens, Washington sees the development of supply chains independent of China as a strategic priority, especially in regard to minerals and materials essential to EVs and renewable power. However, prior investments by China in these sectors in the Gulf make it challenging for the U.S. to establish alternative supply chains involving the GCC states.

Ultimately, the U.S. views China’s role in the global energy transition as acceptable, as long as it remains limited to solar and wind power development and other areas outside the security realm, which may be difficult to define in practice. Previously, Washington was concerned about Chinese development of coal-fired power plants, but in 2021 Beijing decided to forego new overseas coal projects. The primary focus for the U.S. now is the potential for deeper penetration of Chinese energy and information systems into key U.S. partner countries, which would give China a significant foothold in critical infrastructure. This raises concerns about China’s growing ability to influence regional security, prompting the U.S. to carefully monitor and counterbalance Chinese actions in the GCC.

Chinese Perspective

China’s rising role within the GCC’s energy transition reflects Beijing’s wider ambitions of challenging Western dominance in key global economy sectors, and among fast-growing economies in the developing world. China has already become the lead supplier in renewable and clean energy technology, along with the mineral commodities used in manufacturing related components. More recently, Chinese firms have become major developers of clean energy installations — renewable power generation, battery manufacturing, and EV assembly — in key markets around the developing world.

Dominance of clean tech value chains gives China not only economic leverage, but also a strengthening diplomatic role in the Gulf and surrounding regions. The Middle East, and especially the Gulf region, holds strategic relevance to China’s BRI — a development and connectivity initiative that seeks the integration of Asia, Africa, and Europe through infrastructure and trade. China’s clean tech investment push serves two long-term strategic objectives: 1) reducing Chinese dependence on conventional energy, and 2) positioning Beijing a leading proponent of — and supplier for — the energy transition.

As mentioned, participation in Gulf JVs allows China to offload surplus production from its clean energy supply chain, at times — like the present — when the Chinese domestic market is saturated. Providing low-cost components, in turn, allows Chinese firms to embed themselves into critical power generation infrastructure, a sector formerly dominated by big Western engineering and technology firms.

The overall process is accruing soft power for Beijing, enhancing its image as a responsible technology provider in climate-friendly power generation. If the Gulf states demonstrate seriousness in their pursuit of net zero goals, further amplification of Chinese partnerships can be expected.

Conclusion

China-Gulf cooperation on the energy transition takes advantage of numerous synergies in economic policies and industrial strategies, enabled by a big loophole in Washington’s strategic interests. Joint ventures in clean energy are being developed and promoted by state capitalist and authoritarian governance structures, receiving diplomatic priority from states that are willing to pursue long-term strategic and diplomatic gains over short-term financial returns.

The Gulf energy SOEs — and their Chinese partners — are thus far proving nimble and risk-averse, bringing investment capital into underserved markets. Cleantech JVs are benefiting from a glut of low-cost Chinese renewable energy and battery components that face tariff barriers in the U.S. and EU. Gulf firms are leveraging diplomatic ties to find new markets for Chinese solar panels and wind turbines.

Whether these ventures can remain profitable over the long run remains to be seen. Western international energy firms have invested little in the renewables sector in developing countries due to returns far below those associated with oil and gas. Investments in these regions have attracted few OECD-based firms, largely due to low profitability and high risk, stemming from issues of contractual integrity, rule of law and political stability. This reality has opened up new opportunities for SOEs in the Gulf states and China to take the lead.

Finally, this partnership is moving ahead without running afoul of Washington. U.S. strategic interests around Chinese investment in the GCC do not extend to thwarting partnerships in renewable energy, which dovetail with U.S. goals in furthering the energy transition and combating climate change. Washington’s bigger concerns have to do with military cooperation, imports of Chinese telecommunications hardware, and the potential for surveillance.

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