Wednesday, May 22, 2013

Regional trade for China awakens dragon

Executive magazine

From the archives - June 2007

In what is being dubbed “the New Silk Road,” trade and political ties between China and the Arab Gulf are growing stronger as both regions take an increasingly prominent role on the financial world stage. Politics is playing its part,with Saudi Arabia’s newly appointed King Abdullah opting for Beijing over Washington for his first trip overseas last year, and Chinese President Hu Jintao repaying the visit with trips to Riyadh and Dubai.

Bilateral trade between the United Arab Emirates and China is soaring as Emirati companies look eastward for investment opportunities to diversify away from oil, while Beijing secures energy sources and new export markets to keep its burgeoning economy afloat.

Strictly business

“Arabs see China purely as business, at least for the moment,” said Glen Osmond, managing partner for Middle East Strategy Advisors, a leading strategy consultant and investment advisory firm in the GCC.

“The Chinese don’t have problems such as political baggage or externalities like protecting the region, and are there for consumers—the GCC is not a major consumer of Chinese goods compared to the EU or US—but for raw materials,” he added.

China has been quietly taking advantage of its negligible political history in the Middle East and Africa over the last five years, investing billions of dollars in infrastructure projects, signing energy deals, and attracting Gulf money, estimated as high as $20 billion in the past year from the GCC countries alone.

Although Saudi Arabia, the Middle East’s largest economy,has attracted the lion’s share of Chinese investment to the region and been more active in entering the Chinese market,the UAE is slowly catching up.

Since 2001, trade has grown by 30% per annum and the UAE is now China’s top export market in Western Asia and North Africa, according to Global Sources, with exports reaching$14.2 billion in 2006, up from $8.7 billion in 2005. Trade is likely to double by 2010 if targets projected by the Chinese government prove correct. Based on past trade growth, surging 45.5% in 2004 alone, this figure doesn’t seem to be overly optimistic.

“The UAE is a trading centre for the Middle East, so I think this year, or next, trade will grow at high speed,” said Han Xi, Vice Commercial Consul at the Consulate General of China in Dubai.

Dubai’s rulers are certainly aware of the potential. “We want to be number one, and not second. If we join forces together (China and the UAE), we will be number one,” the UAE’s Vice President and Prime Minister Sheikh Mohammed Bin Rashid Al Makhtoum said at a recent press conference.

But Dubai’s ruler is also aware that China is not the only game in town. Trade between the UAE and Malaysia soared20.7% last year to $3.4 billion while UAE-India trade not far behind China at an estimated $11 billion in 2006. India has emerged as Dubai’s largest export destination ahead of Pakistan, Iran and Kuwait, Indian investment in the UAE has doubled in the past four years and trade is expected to surge to $20 billion by 2010.

Indeed, in a seeming about face on the growing UAE-China relationship, Sheikh Mohammed also called for raising India-UAE bilateral trade to the ‘number one’ spot in the region.

But Sheikh Mohammed’s statement is perhaps more about pragmatism, realizing the UAE’s need to have its fingers in many pies. As Osmond pointed out, “the more buyers the better. It’s a souk mentality, and they have a huge machine and it needs to be fed.”

India certainly has a more established connection with the UAE, bolstered by approximately 1.4 million expatriate Indians working in the Emirates versus an estimated 50,000Chinese expatriates.

India however lacks the political and military position of China on the world stage (China is widely seen as a potential counterbalance to the US that Middle Eastern states are keen to develop), and is not a manufacturing powerhouse on par with China. Indeed, in terms of trade with Dubai the statistics speak for themselves: 36.6% of textile imports, 40.7% of furniture, toys and sports products, and48% of all footwear, headgear, umbrellas and flowers came from China in 2005. And according to the Dubai’s Department of Ports and Customs, 17% of all of Dubai’s imports came from China in 2005, making China Dubai’s top supplier of imported goods.

“Dubai is the third largest re-export market in the world,after Hong Kong and Singapore—that is a very impressive statement,” said Bill Janeri, the Middle East general manager of Global Sources, a Hong Kong-based publisher and trade show organizer.

Enter the Dragon

There are now more than 1,000 Chinese companies operating in the UAE, according to Standard Chartered, and that figure is expected to grow as investment floods in.

“China’s first export markets have traditionally been the US or Europe, but everyone wants to sell to these established markets,” said Janeri. “So over the years Chinese companies have either sold to there or been creative and looked for new markets when demand is equally strong—markets where they can be the number 1, 2, 3 player in their segment. Dubai has shown that it is a good location where these companies can ‘plant their flag,’ win new customers, and build market share where demand is strong.”

Global Sources will hold its first trade fair in the region, the China Source Fair, in Dubai in June—with over500 exhibitor booths, it will be the largest ever exhibition of Chinese products in the Emirate, according to the Dubai Trade Center.

Although only $200 million was invested by private Chinese companies in the UAE in 2005, that figure surged to $800million last year and UAE financial institutions are scrambling to procure a slice of the growing trade between the UAE and China.

Standard Chartered have recently rolled out a UAE-China ‘trade corridor’ to cater to small and medium-sized enterprises (SME’s) in the UAE and China.

“We felt this need as China kept the heat turned up on its Gulf marketing blitz to overtake such industrial giants as the US and Japan to become the top exporter to the UAE since2004,” said Sandeep Bose, Regional Head of SME Banking at Standard Chartered in Dubai. “This is expected to continue as the most populous nation on earth is stepping up its export offensive, aided by the fact that its products are more competitive than the products of most other industrial nations.”

But the investment deals and joint ventures the Chinese government is most interested in are Abu Dhabi’s gas,petrochemicals, and aluminum nuggets.

“I wouldn’t be surprised if China makes strategic investments in the region to develop the relationship in all the energy rich countries… Britain has been in the UAE for how long? China wants a piece of that,” said Osmond.

Non-energy imports from the UAE are steadily growing however, up from $2 billion in 2005 to $2.8 billion last year. Investment in China’s booming economy, the fourth largest in the world, is also increasing, spurred on by high liquidity in the UAE and Gulf markets.

“Because oil prices are high there is more interest by UAE businessmen in worthwhile markets, and China has the economic and social elements for attracting such business,”said Han.

Dubai’s mammoth construction companies Emaar and Dubai Holdings, both responsible for tens of billions of dollars in real estate projects throughout the MENA region, have also opened offices in Shanghai. DP World, the world’s fourth largest port operator, also has a corporate division in the North-Eastern Chinese city of Tsingtao.

“I think this is the beginning of Dubai real estate coming to China,” said Han.

But it is not just real estate that is attracting Arab businessmen.

“I went to a trade show in Yiwu recently and part of the town is all Middle Eastern restaurants and businesses,”recalled Janeri. “It doesn’t surprise me that other marketsare looking to invest in China. There is gaping wide demand for certain products—in fact, everything you can imagine,”he added.

Interest in China is certainly growing, with the consulate in Dubai China’s busiest worldwide.

“Everyday we receive more than 300 visa applications—you can see more people want to go to China,” said Han.

An increase in airline flights is also indicative of the growing links, with China Southern Airlines opening an additional route between Dubai and Guangzhou at the end of last month.

Lost in Translation

Dealing with Chinese companies is not always easy—a common complaint voiced by businessmen ever since China opened its doors to the outside world in the 1980s, citing cultural differences and transparency in business practice.

“You hear stories of Chinese signing deals with companies and then reneging on the deal, saying it didn’t comply with their legal definitions or simply disappearing,” said a source at a real estate firm.

“There have also been cases of the Emirati authorities closing down construction sites as in the heat the Chinese workers strip down to their underwear and only wear hardhats, which is against UAE law—they have to cover up,”he added.

Han acknowledged that the consulate had received complaints, largely about wording and English terminology,but said the language issue and business transparency were being addressed.

“Both languages are difficult to learn, so it’s not a deep relationship but a growing one between the Arabs and the Chinese,” said Han.

The relationship is in fact an ancient one that is being gradually rejuvenated.

According to historical texts, some 1,400 years ago there were an estimated 10,000 Arab and Persian traders in Guangzhou (Canton) plying the waters between China and the Middle East. Evidence of the ancient link is also present at Dubai’s Ibn Battuta Mall, where one section is devoted to the famous Tangerine’s travels in the 14th century to China—the exterior a partial replica of the Forbidden City and the interior painted red and offset with traditional Chinese woodwork.

The dark side of the relationship

But it is the Chinese Ministry of Commerce-supported Dragon Mart in Dubai that is the Emirates’ real China Town.

The China connection is not only bolstering official trade ties. As has been the case for most rapidly growing markets,organized crime is on the rise in Dubai. Russian and Indian money launderers are considered the main perpetrators in the financial line, taking advantage of Dubai’s construction boom and real estate speculation to launder money without paying out large commissions to “clean” the cash. But in terms of counterfeit goods, China is the bad guy.

One source likened China to a “massive Xerox machine,”ready to copy any product a buyer might want. China is indeed the No. 1 manufacturer of counterfeit goods, which are estimated at $500 billion worldwide.

Dubai has become the conduit for that illicit trade in the Middle East, with Dubai ports handling some seven million containers a year. Although most of the illicit trade transactions are between Chinese suppliers and Middle Eastern buyers, Dragon Mart, a mall and business center established three years ago, has become the hub for Chinese organized crime, according to a source in the real estate sector.

Earlier this year an undercover Dubai cop was sent to the Dragon Mart to investigate organized crime links at some of the center’s businesses. Told to call in on the hour, every hour, the cop suddenly disappeared. The Dubai police made a raid on the Dragon Mart and after kicking down a few doors, found the policeman dead in a freezer.

Such gruesome incidents are not the only illicit activity connected with China.

According to the real estate source, construction companies linked to the People’s Liberation Army—China’s largest business owner—were exporting convicts to work on sites in the UAE to cut overheads.

The issue has reportedly become so acute that the UAE government has recently banned Chinese construction workers.“It has become too much of a headache for both contractors and the government to regulate,” said the source.

China denies it is involved in such activity, however.

“It’s not true. China is now free, so if a construction company wants to go elsewhere, workers must have passports and visas,” said Han.

China is also reportedly trying to curb counterfeits.“China has a special department to regulate products,especially for exporting products as too many people want to do forgeries and sell low quality products to our friends—this is not good for business,” he added.

Even if this developing friendship will bring with it certain negativities, both economies are experiencing double-digit growth so bolstering such a relationship can only be prudent business for all concerned parties.

But as Han points out, the increasingly strong trade ties require political and economic stability in the Middle East for the relationship to warm any further.

“I think growth all depends on the regional situation,particularly over Iran. If Dubai keeps silent, like the present situation, China will pay more attention.”

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