Just five months ago, China, fresh from its success in brokering a Saudi-Iranian rapprochement, declared that a “wave of reconciliation” was sweeping through the Middle East. Today, that pronouncement looks like a distant dream, as war continues in Gaza and international shipping is threatened by Iran-backed Houthi militants in Yemen. These latest developments present a test for China’s regional approach of diplomacy-through-economics.
This week, The Wire looks at China’s economic interests in the Red Sea and examines whether its diplomatic influence in the region could help resolve a crisis that has driven up shipping costs globally.
A SPIRALING COST
Since October, the Iran-backed militant Houthi movement in Yemen has been targeting vessels transiting through the Red Sea with anti-ship ballistic missiles, drones and cruise missiles, actions the group says are in solidarity with the Palestinians under bombardment in Gaza. The deteriorating security situation has prompted shipping companies to halt or reroute their vessels, driving up sea freight costs globally, including on key routes to and from Chinese ports.
On January 18, the price of a 40-foot container traveling from Shanghai to the Italian port of Genoa stood at $6,282, a 21 percent increase from the week before and a 126 percent increase compared to January 2023, according to Drewry’s World Container Index.
China’s significant role in global trade means that it is exposed to international shipping disruption in the same way as other large economies, but China also has unique interests at stake that rely on stable shipping lanes through the Red Sea and into the Suez Canal.
“There are significant investments that China has in the Suez Canal, both equity investments and just in terms of having Chinese companies having built much of the port activity at both ends of the Suez Canal,” says David H. Shinn, adjunct professor of international affairs at George Washington University.
In March 2023, Hong Kong-based CK Hutchison Holdings announced a $700 million investment in several Egyptian ports, one of which is Ain Sokhna port located south of the Suez Canal. The investment includes the development of a new terminal with capacity for 1.7 million containers. Additionally, state-owned COSCO Shipping Ports has held a 20 percent stake in the Suez Canal container terminal of East Port Said at the northern entrance of the Suez Canal since 2007.
“Any Chinese company could withstand a slowdown or even a shutdown of any of its efforts in the Suez Canal zone for a period of a couple of months. What would happen over a period of many months is another matter,” says Shinn.
Others point to the effect that hostilities will have on the economies of countries in the region, which in turn could affect investments that Chinese entities have made under the Belt and Road Initiative.
“It’s going to be much harder for countries that are not as rich as Israel to repay their debts that are owed to China, and Chinese projects will be less profitable because of instability,” says Tuvia Gering, a researcher with the Guilford Glazer Israel-China Policy Center at the Institute for National Security Studies (INSS) in Tel Aviv.
On January 7, Israeli business newspaper Globes reported that Chinese state-owned shipping giant COSCO had stopped visiting Israeli ports, a report that the company has declined to confirm. In an Israeli transport ministry document dated January 18 obtained by The Wire, the Israeli government confirmed their understanding that COSCO had suspended operations to and from Israel, but added that COSCO subsidiary OOCL continues to serve Israeli ports.
“We would like to clarify that COSCO’s decision to suspend all operations to and from Israel was intended to avoid a confrontation with Houthi forces operating in the Red Sea region,” wrote Zadok Redker, director of the Administration of Shipping and Ports. “Although it may slightly disrupt the flow of goods to and from Israel and is undesirable, it is a commercial decision. As far as we know, it is not an official Chinese government position, nor can it be interpreted as the company’s policy or that of other shipping companies.”
COSCO did not respond to questions from The Wire about its current arrangements in shipping cargo to Israel.
Chinese oil imports from countries along the Red Sea coastline, like Egypt and Sudan, are negligible compared to its imports from countries along the Persian Gulf, so China’s energy needs face little threat from a prolonged crisis in the Red Sea. Imports from Sudan and Egypt to China amounted to $1.8 billion in 2022, compared to $77.8 billion from Saudi Arabia, according to International Monetary Fund statistics..
However, Chinese exports to Europe, particularly from its auto industry, would feel the impact of a Red Sea shipping closure much more acutely. Close to 44 percent of Chinese auto exports were bound for Europe in October 2023, according to financial research firm S&P Global.
China has made clear at the UN and elsewhere that it wants the waterway open and it does not like the attacks, but because of its non-interference principle it’s unwilling to do anything kinetic about it.
David H. Shinn, adjunct professor of international affairs at George Washington University
“The EU is China’s biggest trading partner and an estimated 60 percent of that trade flows through Suez by value,” says Isaac B. Kardon, senior fellow for China studies at the Carnegie Endowment for International Peace. “While their shipping per se is not directly affected, the cost of shipping has skyrocketed and insurance rates have skyrocketed.”
Given these stakes and China’s close relations with the Houthis’ patron, Iran, analysts debate why China isn’t taking a more active role in resolving the crisis, and has instead limited itself to expressions of concern and calls for calm and restraint.
“China has made clear at the United Nations and elsewhere that it wants the waterway open and it does not like the attacks, but because of its non-interference principle it’s unwilling to do anything kinetic about it,” says Shinn from GWU. “They’ve got three naval vessels right there that could do something about it if they were so inclined, but they’re not.”
Indeed, since 2008, China has regularly sent naval task forces to the Gulf of Aden close to Yemen’s coast to carry out escort missions and anti-piracy operations. China also maintains a military base in nearby Djibouti. Although the U.S. said they would welcome China playing a constructive role in stopping further Houthi attacks, China has signaled no interest in joining the U.S.-led multinational task force, Operation Prosperity Guardian, that was established in December.
“I don’t see Xi Jinping as a gambler, but he could gain more benefits by having the U.S. involved in a war here,” says Gering from INSS. “Every aircraft carrier that is here is potentially one less in the South China Sea.”
On the other hand, Chinese military analysts, like Zhao Jun from the Middle East Studies Institute at Shanghai International Studies University, have warned of the strategic advantages the U.S. could gain from seizing control of the shipping lanes in the Red Sea. Read the graphic below to learn more about Chinese interests in some of the world’s other major sea chokepoints.
Aaron Mc Nicholas is a staff writer at The Wire based in Washington DC. He was previously based in Hong Kong, where he worked at Bloomberg and at Storyful, a news agency dedicated to verifying newsworthy social media content. He earned a Master of Arts in Asian Studies at Georgetown University and a Bachelor of Arts in Journalism from Dublin City University in Ireland.
