THE BLOG
07/20/2015 03:19 pm ET Updated Jul 17, 2016

The UAE and China's Thriving Partnership

Throughout the 21st century, China's ties with the Gulf Cooperation Council (GCC) have strengthened in various domains. China and the UAE's growing relationship is a case in point. Since Beijing and Abu Dhabi established a diplomatic partnership in 1984, China and the UAE have become major economic partners and the bilateral relationship is well poised to flourish in the future.

China Daily recently reported that China-UAE trade is expected to reach USD 16 billion in 2015, making China the UAE's second biggest import partner behind India. At the same time, the UAE is responsible for one-third of China-GCC trade and one-fifth of Sino-Arab trade. China exports primarily electronic appliances, mechanical tools, and devices; the UAE exports mainly copper, plastic, and iron.

A Financial and Commercial Hub

Eyeing promising potential in the UAE, several Chinese banks have made their way into the emirates. Industrial and Commercial Bank of China, China's largest lender, established an office in the Dubai International Financial Centre (DIFC) in 2008. DIFC is also home to branches of Bank of China Middle East, the Agricultural Bank of China, and China Construction Bank. Other banks, including China Development Bank, also plan to open branches in the UAE.

At the same time, the UAE has been very active in China's banking sector, establishing branches and representative offices on the Chinese mainland. Union National Bank was the first Emirati lender to enter China in 2007, setting up an office in Shanghai, followed in 2012 by National Bank of Abu Dhabi (NBAD) and Emirates NBD. Optimistic about the emerging power's growth, the Commercial Bank of Dubai launched a Chinese banking platform called TianLong in late 2012 to support the business and personal banking requirements of China's small and medium businesses. Services include a Chinese speaking staff, Chinese language documentation, and renminbi accounts.

Several major Chinese companies outside the banking sector have also begun to see encouraging opportunities in the UAE. The Emiratis' state-of-the-art port, customs services, free zone facility, and logistics park have made the UAE a strategic point from which to conduct business throughout the greater Middle East. Over 2,400 Chinese enterprises are members of Dubai Chamber. Most of these companies sell electronics, machinery, building materials, gifts, garments, and novelty items. Over 1,400 Chinese firms are reported to be located elsewhere in the country. These companies view the UAE as an important hub, facilitating expansion across the wider Middle East. Many Chinese companies have started to use the Dubai International Financial Centre as a bridge to access wider markets in the region. China's largest petroleum firm Petro China and the Industrial and Commercial Bank of China have also established footholds in the emirates.

Dragon Mart, China's largest trading hub outside the mainland, was built in Dubai during 2004. The complex is expected to undergo a massive expansion (and name change) to include retail, residential and leisure developments. The new Dragon City will eventually cover 11 million square feet.

These growing economic ties have facilitated more than China's access to untapped consumer markets and lucrative investment opportunities. The UAE, with its 'Look East' policy, has been interested in luring Asian investment. Attracting Chinese investors and promoting the UAE to China has been an increasingly important priority of officials in Abu Dhabi.

The Dubai Week, for example, was an event held in Beijing by DIFC to showcase Dubai as a competitive global business destination for investment opportunities. Another recent initiative was the agreement signed by China's New Silk Road Investment Association in May of this year to promote the Emirati-hosted event Global Trade Development Week to Chinese businesses and investors.

The UAE has also been making inroads in China. It is reported that the UAE's investments in China stood at USD 1.5 billion in 2013. Emirati enterprises and businesses have around 650 projects in China. Several institutions, such as UAE stock exchanges and the Dubai Pearl Project, have exerted efforts to increase their profiles in China and to attract potential investors.

Petroleum

Although not to such an extent as the Qataris and Saudi Arabians have done so, the Emiratis have made energy cooperation an increasingly important aspect of their relationship with China. China imports around 15 percent of the Emirates' petroleum compared to 12 percent by South Korea. In recent years, this energy partnership has gone beyond buying and selling. In mid-2015, China Petroleum Engineering and Construction Cooperation (CPEEC) signed a USD 330 million agreement with Abu Dhabi Company for Onshore Oil Operations (ADCO) for a development project at the UAE's southern Mender oilfield.

Under the contract, the CPEEC will be responsible for the building of pipelines, oil gathering stations, sewage systems, and power transmission lines. The deal is expected to increase ADCO's daily production from 1.4 million barrels to 1.8 million within two years. Since early 2015, CPECC, which is affiliated with China's largest petroleum and liquefied natural gas company, China National Petroleum Corporation (CNPC), has been involved in several other projects in the UAE, including the development of the country's crude pipeline and Asab oilfield.

The company has a history of partnering with its Emirati counterparts. In 2008, for instance, the company secured a USD 3.29 billion deal with the Emirates International Investment Company on the Habshan-Fujairah pipeline project. To complement this, Abu Dhabi National Oil Company (ADNOC) has established an office in Beijing. As China's energy needs grow, so will its interests in the UAE's natural resource wealth.

Infrastructure, Trade, Currency, and Travel

Reciprocity in the infrastructure sector is also on the rise. In recent years, China and the UAE have signed agreements for construction projects worth billions of dollars. Dubai's DP World, for instance, has invested in several Chinese ports and logistics centres in Hong Kong, Tianjin, Qingdao, and Yantai. In the meantime, it was reported in 2013 by Chinese Ministry of Commerce that between 2011 and 2013, Beijing firms have won more than USD 4.8 billion worth of construction projects in the emirates. This has led many Chinese infrastructure companies to make their way to the UAE.

Chinese companies have done well in the UAE's automobile sector, previously dominated by European, Japanese, Korean, and American brands. Chinese firms, including Foton, Cherry, Dongfeng and GAC Motors, have now entered the Emirati market. As UAE consumers seek more affordable cars, Chinese manufacturers eye the lower end of the market. Eight Chinese car manufacturers took part in the last Dubai International Motor Show. Chinese car sales are predicted to increase 100 percent each year in the country and their market share is expected to reach double-digits by 2020.

In further efforts to facilitate the economic partnership, China and the UAE signed a currency swap agreement worth 35 billion yuan in 2012. Expected to be activated soon, this agreement will not only ease trade between China and the UAE, it will also help China globalise its currency. The agreement aims to boost trade and investment between the two countries by using the Yuan in the trade of petroleum. By taking part in the currency swap, at a period when the Chinese currency enjoys increasing global use, the UAE is asserting its commitment to strengthen economic ties with the world's second largest economy.

Travel between the two countries is burgeoning. Presently, there are 21 daily flights from Dubai to China (Beijing, Guangzhou, Hong Kong, and Shanghai), including eight operated by Emirates. Chinese nationals reportedly constitute around four percent of passengers at Dubai International Airport and they are responsible for 12 percent of sales at Dubai Duty Free outlets. To improve the experience for Chinese consumers, the retailer has hired more than 500 Chinese employees at its Dubai Airport outlets. Many stores and hotels in the UAE now have Cantonese and Mandarin-speaking staff. Remarkably, some also accept renminbi as a form of payment.

Another important initiative was the agreement between the Central Bank of the United Arab Emirates with UnionPay International of China for connecting with UAE-Switch, a service that links ATMs across the GCC. The deal aims to allow the use of UnionPay at all ATMs connected to the service, which would ease Chinese investors' ability to conduct transactions in the country. The most recent measure came when the Dubai Gold & Commodities Exchange (DGCX) and the Bank of China signed a Memorandum of Understanding, which aims for both countries to exchange market information and industry practices between both institutions.

Beyond Energy and Trade

Perhaps the strongest area of China-UAE cooperation is education. The first Chinese international school in Dubai will open in about two years' time. Breaking down linguistic and cultural barriers will contribute to even deeper political and economic relations in the future. Importance has been placed on cultural events as well. In 2015, the annual Chinese Spring Festival in Dubai attracted an unprecedented number of Chinese tourists and locals.

The Emiratis have also concerned themselves with humanitarian aid, having offered USD 50 million in assistance to finance reconstruction after the Sichuan earthquake in 2008.

The Road Ahead

The ties between China and the UAE are expected to grow in the coming years. On an official visit in February, Chinese Foreign Minister Wang Yi and Sheikh Abdullah Bin Zayed al Nahyan pledged to expand the China-UAE partnership.

Beijing sees great potential in the emirates. In addition to its natural resources and strategic position, the UAE is viewed as a gateway to access untapped consumer markets and lucrative investment opportunities. China's growing interests in the UAE and the other Gulf Arab monarchies must also be analysed within a geopolitical context.

As China gains leverage on the international stage, particularly with its recent Silk Road Initiatives and the Asian Investment Infrastructure Bank (AIIB), Beijing cannot afford to ignore the strategically located and resource-rich Persian Gulf nations. As a vibrant trading and commerce center, the UAE is viewed as an important member of the AIIB. At the same time, the UAE serves as a strategic hub for the realisation of Silk Road initiatives. It is important to note that approximately sixty percent of Beijing's total trade passes through the UAE, where it is then delivered to Europe and Africa.

This is probably why the UAE has already asserted its willingness to support and participate in China's Silk Road Initiatives and has become the AIIB's founding member. Engaging in a new partnership with China, an economic power that has no aggressive history in the region since the Mao era, offers the UAE a bargaining chip with Washington. From an economic viewpoint, China, the world's most populous nation with the second largest economy, offers much to the UAE. In spite of the world's financial turmoil, the Chinese economy is still expanding at an impressive rate and is expected to surpass the U.S. by the end of the next decade to become the world's largest economy. Given China's rise as an economic power, it is difficult to imagine the UAE and China's relationship not deepening in the coming years.


Muhammad Zulfikar Rakhmat is a Middle East analyst based in Qatar. His areas of expertise include China-Middle East relations, Indonesia-Gulf ties, and Muslim affairs.

This article was originally published by Gulf State Analytics.