Marketplace Middle East - Blog
10/16/09
“Rebalancing of the World”
Investors were excited about the rise above 10,000 on the Dow Industrials, while many western citizens felt downright embittered by the surge in profits for money center banks, some of which recovered on the back of handouts from the U.S. and UK governments.



Somewhat lost in that mixed bag of emotions was a one year high for crude prices above $75 a barrel. That is certainly quite a leap from December of last year when the mid-$30 range was the order of business at the height of uncertainty.



We know that this latest rally is a mixture of dollar weakness and anticipation of global demand recovering. What most pundits have missed in the rally is the real demand coming out of China, where there is discussion of eight percent growth being a base to build on in the next few years.



That continued optimism out East is a nice counterbalance to the lacklustre performance -- despite euphoric market gains -- in Europe and the United States. It has those who get excited about the new drivers of the world economy talking about “rebalancing of the world.”



One such kindred spirit is Ben Simpfendorfer. By day he is a China economist for Royal Bank of Scotland and he combined his years of experience in the Middle East and East Asia to pen the “New Silk Road”, the first comprehensive look at the re-emerging trade links between the two regions.



At the heart of this bond is what the Middle East is famous for: oil and gas. Saudi Arabia produces 13 percent of the world’s daily crude output. China currently consumes nine percent of world demand and the line on the chart is moving upwards.



Prior to the western led economic shock, Simpfendorfer talked of a “Holy Trinity” -- not a religious trinity -- but an economic bond between the Middle East, China and America. The Middle East supplies energy, China exports to the U.S. and America consumer demand supports both.



The author says that trinity has been broken -- not permanently -- but perhaps for long enough to mark global rebalancing. This is very convenient for Saudi Arabia which Simpfendorfer says is looking for a way to hedge its relationship with the U.S.



China, having looked at its track record in the Saudi and Iran, has taken a view, as it has in Africa, that it will limit its presence to business and not politics. How long Beijing can sustain that position, Simpfendorfer says, remains in question. Basically, with power comes attention.



In that context, many are starting to rumble about Washington’s long term sustainability as the world’s dominant military force, which in turn may undermine the dollar over time.



The U.S. currency came under intense pressure after rumors surfaced about back door talks between Chinese, Russian and Gulf central bankers on pricing oil in other currencies. If there is a retreat in either Iraq or Afghanistan, Simpfendorfer believes that will only accelerate the long-term trend.



While the U.S. in a post-9/11 world has been faced with skepticism, China filled the gap and has become the largest supplier to the Middle East. This is not a one way relationship. On our program, we like to think of the region as a large potential single market of more than 300 million consumers. China does too.



“We have to start thinking about the world in a different way and the commercial investment links between the Eastern economies themselves are growing and strengthening,” says Simpfendorfer.



This particularly applies to what he likes to call the Islamic Corridor, stretching from East Africa through the Middle East and down into Southeast Asia. Time and again we are witness to investments between Kuwait and Malaysia, Dubai and Djibouti and there is a common comfort zone within the Muslim world that Simpfendorfer says will only grow deeper with time.



The routes that supported trade centuries ago, the Silk Road and the Spice Route, may look different in the 21st century due to modern day transport, but the same spirit is alive and well.
ABOUT THIS BLOG
John Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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