200 billion reasons why the Gulf is China’s hottest trading partner

media.ega.ae

• China-UAE trade expected to reach $200 billion by 2030
• 6,000 Chinese businesses operating in the Emirates alone
• 17% of China’s oil imports in 2021 came from Saudi Arabia

When Deng Xiaoping, the former communist leader of China, started his modernisation drive in the late 20th century, he looked to the Middle East as the only place that could provide the enormous quantities of oil and gas that his country required to become a global powerhouse. 

By the end of this decade, less than 40 years after China and the UAE established diplomatic relations, trade between the two countries is expected to reach $200 billion, with accelerated growth being driven by the Belt and Road Initiative (BRI).

Today, the UAE is the largest logistics hub for China in the Middle East and more than 60 percent of China’s trade in the region transits through the UAE.

Last week Dubai Multi-Commodities Centre (DMCC) revealed a doubling of its free zone over the past five years, adding, on average, more than two companies a week.

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The UAE is China’s biggest trading partner in the Arab world, as it was last year.

In 2021 China accounted for 11.7 percent of the UAE’s total foreign trade, and the value of non-oil trade exchanged between the two countries amounted to $58 billion dollars, a growth of 27 percent from 2020 and 19.8 percent from 2019. 

Bilateral trade between the two countries during the first quarter of 2022 was $15.5 billion.

According to latest figures released by the Observatory of Economic Complexity (OEC), China’s July exports to the UAE increased by $1.78 billion to $5.12 billion, compared to July 2021, while its imports reached $3.94 billion, resulting in a positive trade balance of $1.18 billion. 

The country’s top exports to the UAE include telephones ($377 million), computers ($350 million), semiconductor devices ($149 million), motor vehicle parts and accessories ($107 million) and video displays ($95.3 million). 

Crude oil ($3.04 billion), petroleum gas ($414 million), ethylene polymers ($160 million) and refined petroleum ($92.3 million) accounted for the most imported products.

Chinese goods are now part of everyday life in the region and the country’s popularity is growing among young Arabs who this week named China as a stronger ally than the United States in the annual ASDA’A BCW Arab Youth Survey, which explored the views of 3,400 young Arabs aged 18 to 24 in 50 cities across 17 states in the Middle East and North Africa (MENA).

In fact, they perceived China to be their strongest ally among non-Arab countries.

“The headwinds faced by Chinese firms in the US and Europe along with some of the macroeconomic and geopolitical issues in other countries are forcing Chinese companies to explore other jurisdictions which can offer safety, international connectivity, financing, good trading, banking and financial networks,” Dr Bhaskar Dasgupta, head of strategic development, MEA at global financial services provider Apex Group, told AGBI.

“The UAE has long been a welcoming hub for Chinese firms who are looking for a base to service the Middle East, Africa and South Asia (MEASA) market. 

“This strong and increasing presence needs an international financial hub where such trade and investment can be financed, banked, hedged and invested.

“Apex Group is seeing a strong increase in our funds and companies who are either investing in Chinese firms, or have Chinese investors or counterparties, and this trend is going to just keep increasing as the Chinese pivot away from the US and EU.”

The growing trade ties come as China faces major challenges at home.

Its strict Covid Zero policy of lockdowns and mass testing has damaged the economy while a housing market collapse, a drought, and weak demand both at home and overseas have all undercut growth.

But the UAE-China relationship remains strong and DMCC is now home to 703 Chinese businesses, representing nearly 12 percent of the 6,000 operating in the Emirates. 

Dubai opens its arms wide

Since its establishment DMCC has signed a wide range of agreements with public and private entities in China to boost the bilateral trade relationship, and hosted roadshows to facilitate the international expansion of Chinese companies.

DMCC has also created an infrastructure that caters to the Chinese business community, including the creation of the Yingtian Chinese Business Centre DMCC in 2017 to aid Chinese companies wanting to set up a company in Dubai. DMCC’s website was also launched in Mandarin to further increase the ease of doing business there. 

“China has always been a significant market for DMCC,” Ahmed Bin Sulayem, executive chairman and CEO of DMCC, said.

“It is the largest economy in Asia and the second largest in the world, and the biggest trading partner for the UAE.”

“More than any other Gulf country, the UAE has benefited from import, export, and re-export opportunities,”

Giulia Interesse, an associate with professional services firm Dezan Shira & Associates, based in Hong Kong, said that the UAE is well positioned to lead the BRI nations in the Gulf and solidify its position as the region’s commercial hub and entry into Africa.

“The UAE has the busiest seaports, airports and most established and diversified free zones in the area because of significant investment in this infrastructure,” Interesse said.

“A closer relationship between the two countries is anticipated to strengthen the UAE’s function as a hub for China in the region and encourage investment, as major infrastructure and power generation projects already underway will be supplemented by new joint trade, logistics and greenfield initiatives across the emirates.”

According to Standard Chartered, the UAE will be a key driver of global trade growth over the next decade, with its exports projected to grow at an average annual rate of six percent to cross $299 billion by 2030.

Mainland China will be among the largest export corridors for the UAE, accounting for 9.5 percent of total exports, with only India expected to be a bigger contributor.

EGA leads the way

The trade ties were further highlighted earlier this month when Emirates Global Aluminium (EGA), the largest industrial company in the UAE outside oil and gas, welcomed Zhang Yiming, China’s ambassador to the UAE, to its Jebel Ali site in Dubai.

China is the largest single market for EGA’s bauxite, the ore from which aluminium is derived.

EGA ships bauxite directly to China from its mining operation in the Republic of Guinea. Last year, EGA procured some $616 million of goods and services from China from 55 different companies.

“I hope that there will be more Chinese enterprises that can strengthen cooperation with high-level enterprises in the UAE such as EGA,” Yiming said.

“We also welcome EGA to invest in China and share the dividends of the new round of reform and opening up in China.”

Last month State Grid Corporation of China (SGCC), the largest utility company in the world, announced its expansion in the region by setting up in Dubai International Financial Centre (DIFC), its first in the UAE.

The newly established entity will support the region in advancing its energy transition with a focus on electricity transmission and distribution with investment, construction and operation of power grids as its core business. 

“Renewables are increasingly playing a significant role in the energy mix, and governments in the region have reiterated their commitment to decarbonisation,” Chengzhong Liang, of SGCC Middle East Representative Office, said.

“SGCC believe we are in a unique position to contribute to the regional energy transition and capacity-building efforts, particularly in the field of electricity transmission and distribution.”

Raghu Mandagolathur, CEO of Marmore Mena Intelligence, a research subsidiary of Kuwait Financial Centre (Markaz), said the importance of trade relations have become paramount during the current uncertain times of high inflation and fears of an economic slowdown. 

“With a rise in transportation costs, Dubai prevails as an ideal trade route for Chinese businesses to cater not just to the growing demand within the GCC but to the western markets as well,” Mandagolathur said.

“On the other end of the spectrum, this would help UAE to boost its logistical and infrastructural landscape, while leveraging on digitalisation.”

But China’s Middle East interests are not restricted to the UAE.

China has attracted 21 Arab countries into the BRI, its multi-trillion dollar project to revive the fabled silk road in order to transport and sell its goods to the markets of Europe and Africa. 

Oil remains China’s biggest need

Two of its bigger business names – Wanda Group and Hisense – are among the main sponsors of the FIFA World Cup in Qatar later this year, but at the heart of China-GCC collaboration remains Chinese energy needs. 

Saudi Arabia provided 17 percent of China’s oil imports in 2021, making it the latter’s top crude oil supplier.

Qatar, a major natural gas exporter to China, signed several long-term contracts with Chinese firms in December 2021 after placing its first order for vessels carrying Chinese liquefied natural gas (LNG) for $762 million in October of the same year.

Similarly, a huge portion of oil exports from Kuwait, Iraq, the UAE and Oman are directed to China.

Last month Saudi Aramco signed an agreement with China Petroleum & Chemical Corporation (Sinopec) to explore refining and petrochemical integration opportunities, oilfield services, upstream and downstream technologies as well as collaboration across carbon capture and hydrogen processes.

The deal builds on existing joint ventures between the two companies, including Fujian Refining and Petrochemical Company and Sinopec Senmei Petroleum Company in China, and Yanbu Aramco Sinopec Refining Company in Saudi Arabia.

Robert Mogielnicki, senior resident scholar, Arab Gulf States Institute in Washington (AGSIW), told AGBI that greater cooperation is also expected in the region’s non-oil sectors.

“There are strong complementarities between China and the Gulf Arab states across proposed growth sectors in the Gulf such as tourism, telecommunications, renewables, smart cities, artificial intelligence, and other technology-oriented industries,” Mogielnicki said.

“Chinese technological influence – from social media apps to digital payment platforms – will be intensified by the Gulf’s young and fast-growing population and user base.”

But he added that continued US pressure on Gulf allies to slow the proliferation of Chinese technologies complicates the commercial environment for Chinese firms operating in the region.

Dr Mordechai Chaziza, the author of China’s Middle East Diplomacy: The Belt and Road Strategic Partnership, agreed.

“GCC governments are embracing digital adoption to promote sustainability, accelerate economic diversification, and help ensure that the region is well positioned to evolve into a power-packed digital economy,” Chaziza said.

“This provides more opportunities for China-GCC digital economic cooperation.

“Overall, the economic influence of China through its oil and gas imports from the Gulf, infrastructure investments, technology transfer, and arms sales provide influence and leverage that runs counter to US interests in the region.

“In the age of strategic rivalry, the question is whether China is already well on its way to becoming the most prominent technology partner of the GCC countries.”

In 2004 China and the GCC launched multi-stage negotiations on a free trade agreement but they have since languished.

Earlier this year Chinese officials called for negotiations to resume when they met with the foreign ministers of Saudi Arabia, Kuwait, Oman and Bahrain in China.

Mogielnicki said he doesn’t expect any real progress in the short-term. “GCC states are going to prioritise bilateral economic relations with China over the GCC mechanism, though China would prefer to secure an FTA with the GCC for prestige and broad economic benefits,” he said.

“It’s probably still going to take some time before anything serious happens on that front.

“China is unlikely to seek to replace the US in the Middle East.

“Rather Beijing wants to out-compete the US in areas where the US lacks competitive capabilities.”