Balancing Act:

On the morning of 7 October, Hamas launched 5,000 rockets into Israel and instigated a ground attack into Israeli territory. This operation was met with a harsh response from Israel. More than 4,400 people have now been killed on both sides of the conflict. The world’s reactions to this war have varied from Western support for Tel Aviv to condemnation of Israeli bombings of civilian targets in Gaza across the Global South. For its part, China’s response to the recent events has been both strategic and farsighted.

Most experts say that China has adopted an "impartial" approach as a mediator in Gaza. The day after Hamas’s operation, China called for de-escalation without expressing support for or making reference to any of the parties to the conflict. Beijing urged everyone to remain calm and to prioritize protecting civilians.

China is playing a strategic game between the two sides of the war to portray itself as a potential mediator capable of maintaining a delicate balance and avoiding alienating any one side. Beijing hopes to establish itself as a proponent of justice and alternative to the US in international leadership.

China’s measured reaction is not unexpected. Beijing currently has bilateral relations with Palestine and Israel, and has consistently supported the Palestinian cause, due to its alignment with Maoism and liberation movements in the 1960s and 1970s. Mahmoud Abbas, the president of the Palestinian Authority, has visited Beijing five times in his nearly two decades in power. During his latest trip in June, Xi Jinping and Abbas announced that their bilateral relations would be upgraded to a "strategic partnership."

Meanwhile, economic relations between China and Israel have grown significantly over the past 31 years. Bilateral trade increased from $50 million USD in 1992 to $22.8 billion in 2021, while China has recently replaced the US as Israel’s largest source of imports. Between 2007 and 2020, China invested $19 billion USD in Israel, including $9 billion in technology. In the first three quarters of 2018 alone, China invested $325 million in Israeli tech startups.

However, Beijing has found it difficult to remain neutral on the war for very long. A week after the war began, Chinese Foreign Minister Wang Yi publicly criticized Israel for the first time and indicated that Israel’s actions in Gaza had moved "beyond the scope of self-defense." Yi stated that Israel "must cease its collective punishment of the people of Gaza" after making similar remarks the previous day in a phone call with the Saudi minister of foreign affairs.

China’s gradual shift in rhetoric away from more restrained criticism of Israel is the result of Beijing’s need to preserve its interests, mitigate damage, and maintain its global standing. China’s priority is its economy, and its main foreign policy strategy is to expand its economic influence across the world’s five continents, and especially in the Middle East as a link between Europe and Asia.

As the humanitarian situation in Gaza has deteriorated under Israeli bombings, public outrage in the Arab and Muslim world has grown. Arab and Muslim-majority countries in the Middle East are vital to China’s economy and play a significant role in China’s Belt and Road Initiative (BRI). There are currently 18 countries in West Asia and North Africa that are part of the BRI. China wants to maintain its standing as a leader for the Global South and is keen to present itself to the Arab world as an alternative to partnerships or alliances with the US.

In 2022, the trade volume between China and the Middle East was $507.15 billion, which attests to the region’s interest in China. Beijing has signed many agreements with countries in the Middle East—a total of twelve comprehensive strategic partnerships or strategic partnerships and 21 cooperation agreements with Arab League countries under the BRI framework. Meanwhile, seventeen Arab countries have supported President Xi Jinping’s Global Development Initiative, fifteen have joined the Asian Infrastructure Investment Bank, and fourteen are part of the China-Arab Cooperation Initiative for Data Security.

China needs to address the demands of the Arab people in light of recent events in Gaza. The volume of trade between China and Israel does not compare with the scope of Beijing’s trade with the entire Arab world. Beijing is also dependent on Arab oil reserves. In 2022, China’s direct foreign investment in Arab countries increased 13 percent, while Arab investment in China increased ninefold compared to the previous year.

There are concerns that the chaos in Israel and Gaza could spill over to the entire Middle East. On the one hand, Israel is threatening to expand its brutal attacks on Gaza into a ground offensive amidst global speculation about US involvement in the war. Meanwhile, Iran and groups belonging to its "axis of resistance" in Syria, Iraq, Yemen, and Lebanon could also become involved. This could threaten the economy of the region, including Chinese investments in Middle Eastern infrastructure. China considers this to be a red line and will act to defend its economic interests.

Rising oil prices since the Gaza war have set off another alarm for China, whose energy consumption is rapidly expanding. China is the world’s second-largest consumer of crude oil and in September, Chinese oil demand rose 6 percent to 15.82 million barrels per day (bpd), up 50,000 barrels from its August forecast. According to the International Energy Agency (IEA), China will account for more than 70 percent of demand growth in 2023, while US demand is expected to remain unchanged. 

In the case of an Israeli ground attack on Gaza or Iranian involvement in the war, oil prices are expected to rise as Iranian oil production falls. Iran was the eighth-largest oil producer last year and exported about 2 million barrels per day in August despite oil sanctions. According to a Bloomberg Economics forecast, if the Israel-Gaza conflict escalates into a direct confrontation between Israel and Iran, the price of oil would increase by about 70 percent, rising from less than $90 USD per barrel to $150 per barrel. This would reduce global growth by 1.7 percent, equivalent to a $1 trillion drop in global gross domestic product (GDP).

Bloomberg also predicts that even excess production by Saudi Arabia and the United Arab Emirates might not be able to effectively compensate for reduced Iranian oil production. Global flows of oil would be disrupted if Iran threatens to close the Strait of Hormuz, through which 20 to 30 percent of the world’s oil passes—about 17 million barrels per day. A regional spike in oil prices would be an economic disaster for China, which gets about half (47 percent) of its $176 billion of oil imports from the Middle East. Saudi Arabia alone supplies about 16 percent of China’s total oil.

An increase in global oil prices when China is facing an economic slowdown would be unacceptable for Beijing, and so it will do its best to prevent this from happening. The International Monetary Fund cut China’s growth forecast for this year to 5 percent, down from 5.2 percent in April, and warned that the Chinese property sector crisis could deepen with potential global spillover. The IMF projects that growth in China will slow to 4.2 percent next year.

In the Gaza conflict, China has tried to play a neutral role as mediator. However, the potential economic damage of a long-term war of attrition, concerns about preserving its reputation in the Arab world, and fears of rising oil prices will make this delicate balance increasingly difficult for Beijing to maintain.