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A Review of China-UAE Relations in the Context of Xi Jinping’s Visit to the UAE

A Review of China-UAE Relations in the Context of Xi Jinping’s Visit to the UAE

July 24, 2018
Yong Wang
Yong Wang Non Resident Fellow in Global Political Economy and Chinese Foreign Policy

Starting on July 19, Chinese President Xi Jinping paid a state visit to the United Arab Emirates (UAE). This was the first visit of the Head of State of China to the UAE in the past 29 years. It was also the first visit by Chinese Communist party and state leaders to the Middle East since the 19th National Congress of the Communist Party of China in 2017. This visit is of great significance to the relations between the two countries and to the development and stability in the region.

Through President Xi Jinping’s visit, the two states agreed to a “comprehensive strategic partnership” demonstrating the commitment of China and the UAE to strengthen their bilateral cooperation in various fields including politics, economics, trade, technology, energy and security.  The strategic partnership is directed at the continuous development of the relationship between the two states increasing both the scope and depth of the ties.  Through the fields covered in the partnership the two states will now be working together in support of each other’s wider foreign policy and development strategies, which will strengthen the pragmatic cooperation under the framework of Chinese Belt and Road Initiative (BRI) and the UAE vision for the revitalization of the Silk Road.

The two countries reached a series of cooperation agreements with respect to the BRI cooperation, manufacturing capacity, energy, agriculture, finance, customs, scientific research and people to people exchange. Thirteen agreements were signed setting the foundations for heightened cooperation.  The successful visit of President Xi Jinping to the UAE will lay a deeper foundation for the future cooperation between the two countries in both political and economic fields.

The UAE is well known in China. The shared feelings of the Chinese people and the people of the UAE are reflected in two things. One was that in 1990, His Highness Sheikh Zayed, President of the UAE paid an official visit to China, being the first GCC leader to do so.  This visit came at an important time as the UAE was increasing its global presence and China was facing sanctions after the 1989 Tiananmen incident.  Obviously, Sheikh Zayed’s visit extended a friendly hand to China in a difficult time of foreign relations, conducive to improving the country’s international image.  The other key event in China-UAE relations came with the UAE donation of US$50 million to China in the wake of the destructive earthquake in Wenchuan, Sichuan in 2008.  This generous outreach expressed the UAE’s sympathy and support for the Chinese people in difficult times. All these good will gestures are well remembered by Chinese public and the government.

More recently, the UAE has been the leading GCC country in establishing strategic partnerships with China with the first agreements coming in 2012.  The UAE, especially Dubai, is increasingly well-known in China as it has become an excellent symbol of the integration of tradition and modernization, and of openness and diversity. More and more Chinese tourists visit the UAE and use it as transit to other countries. In December 2017, the UAE and China reached an agreement on visa exemptions to ordinary passport holding citizens (effective from 16 January 2018). The UAE became the first Middle Eastern country to offer visa-free entry for Chinese citizens.  In 2017, Chinese tourists visiting the UAE exceeded 1 million for the first time, and it is expected to see more Chinese visitors in 2018.

While the UAE and China have different national conditions, they equally share a commitment to their traditions and histories; within the context of continual modernization.  Both countries have many common topics and ideas to exchange regarding governance and dealing with international relations and their current views on national development and international relations are highly compatible with each other. Both countries are committed to modernization by embracing globalization, opening up the national economy, and liberalizing trade and investment. They both see the value in promoting regional and international peace and development through economic development. For example, the UAE is now vigorously promoting a “diversified” development strategy, developing the knowledge economy with information technology as the core, striving to become an innovative country, while China is modernizing national governance, promoting innovation-based economy and international cooperation. These shared visions and wishes provide a strong ground for practical cooperation.

The core of this practical cooperation is to be found in commercial/economic activity. In January 2012, China’s Premier Wen Jiabao paid an official visit to the UAE which started the strategic partnership.  Since then, the commercial relations have grown rapidly.  The UAE has become China’s largest export market and the second largest trading partner among the Arabic states, and China has rose to be the UAE’s largest trading partner. In 2017, the bilateral trade volume between China and UAE reached US$40.98 billion, up 2.3% year-on-year, of which China’s exports were US$28.74 billion, down 4.4% year-on-year, and imports were US$12.24 billion, up 22.5% year-on-year. China mainly exports electrical and mechanical and high-tech products and textile and light industrial products. The UAE’s main exports to China are liquefied petroleum gas, crude oil, refined oil, aluminum and aluminum products.  As China’s economy booms, it has sought to ensure a reliable and long-term energy supply, and the UAE has become a trusted partner to China. In 2017, China imported 10.16 million tons of crude oil from UAE.

In terms of investment, the UAE’s developed infrastructure, superior business environment and position as a regional commercial center, have attracted many Chinese companies to invest. The business areas Chinese companies have engaged in the UAE have expanded from trade and engineering contracting to finance, logistics, new energy and tourism.

In the manufacturing field, in June 2016, China’s Harbin Electric Group and the Silk Road Fund of China jointly invested in their first clean coal power generation project in the Middle East in the UAE.  In February 2017, Jinko Energy and a Japanese enterprise consortium won the bid for a photovoltaic power generation plant in Abu Dhabi. The China Construction Group Middle East Company has won a positive regional reputation after taking on multiple landmark projects and being involved in a range of real estate projects as both a builder and developer.  China’s Huawei Company has been working with the UAE partners in R&D, brand promoting, and exploring third-country markets.

In the financial and professional service industries, China’s four largest commercial banks have established seven branches in the UAE, working with local partners to issue Chinese renminbi and US dollar bonds, to provide financial support for Chinese foreign investment and local companies. In November 2016, HNA Group and Mubadala agreed to expand investment cooperation in areas of tourism, logistics and financial services. The Alibaba Cloud Dubai Data Center was also launched late 2016, and in February 2017, the Yihang 184 self-driving aircrafts were tested in Dubai.

The current cooperation between the UAE and China is substantial and is continuing to develop through the “Belt and Road Initiative” (BRI) of international economic cooperation and with the establishment of the Asian Infrastructure Investment Bank (AIIB).  The government of the UAE made a positive response and became one of the earliest BRI partners in the Middle East. It also joined the AIIB as a founding member.  At the core of the shared goals and objectives in the BRI, the two countries agreed in 2015 to establish a renminbi clearing center in the UAE which has seen consistent growth.  Added to this the China-UAE Joint Investment Fund has recently finalized planning for projects valued at over one billion US dollars.

China-UAE commercial cooperation will continue to grow as the BRI is highly compatible with the UAE’s ongoing growth and development plans.  The UAE’s key geographical location and open cooperation policies naturally gives the UAE a unique and important role in carrying forward China’s BRI program. Located at the intersection of the land-based silk road and the maritime silk road the UAE is posed to play a major role in the framework of the BRI; especially in relation to the rapidly growing areas of cooperation in the fields of energy, finance, manufacturing and technology.

Chinese companies have started to invest heavily in oil extraction in order to satisfy the rapid growing energy demands of China, as the second largest economy in the world. In February 2017, Chinese companies were granted a 12% stake in an onshore oil block in Abu Dhabi. At the same time, the COSCO Group of China obtained the right to expand the container terminal Khalifa Port, doubling the port’s capacity in the coming years.  Obviously this investment by COSCO is part of the company’s efforts to meet the increasing demand for shipping that China needs, and it also meets the interests of the UAE in consolidating its position as the regional transportation and trading center.

Heavy investment in the manufacturing sphere is also relevant to the BRI and China’s comparative advantage, resulting in strong support for the UAE’s moves to grow its manufacturing base, further diversifying the economy. As the largest project in the UAE framed in the BRI, China’s Jiangsu Province and the UAE have established a China-UAE Capacity Cooperation Demonstration Park, which was started in May 2018 with a starting area of ​​2.2 square kilometers and a reserved area of ​​10 square kilometers. Up to now, more than a dozen Chinese companies have signed an agreement of intention to enter the park, with an estimated total investment of about 3.4 billion yuan. More Chinese companies and international companies are expected to station in the park in the future.

By the end of 2017, China’s investment in the UAE was 9.9 billion with China’s direct investment flow to the UAE at 620 million U.S. dollars.  President Xi’s recent visit shows there is much more room for investment cooperation in the future.  Many opportunities will arise with the ongoing transformation of Chinese economy, as it becomes the largest economy in the world, predicted to occur between 2027-2030. The Chinese economy is increasingly driven more by domestic consumption than exports.  At the same time, more and more Chinese companies have entered the rank of global top 500 companies and they have strong incentives to shift their focus to global markets.  In maintaining its advantages in the area of traditional manufacturing, China is embracing new technologies and gaining growth in sectors such as e-commerce, and telecommunications like 5G technology and related hardware. The UAE’s economic diversification path means further opportunities for the UAE to benefit from the growing demand of the Chinese markets, beyond energy and petro-chemicals.  More important, as one of the most stable countries in the Middle East with the fastest economic growth and the highest level of globalization in the region, the UAE will play a vital role in linking the different regions involved in BRI projects. As the BRI evolves, the UAE can become a regional hub for the economic activity that is occurring.  Clearly, the both countries can work together in more areas to achieve common interests, either in respective markets or third-country markets.

To further these advantages, China and the UAE should work together to adopt a free trade agreement (FTA) as soon as possible. China and the GCC have negotiated the FTA for many years and it has been on the main agenda of the Chinese government on several occasions. Unfortunately, the differences on the issues of market access on petrochemical industry has delayed the agreement, and the current political situation makes an FTA with the GCC unlikely.  China is accelerating its market oriented reforms and opening its market to foreign investment as a counterbalance to the impact of a US trade war, as well as responding to the demands of the domestic reform agenda. In this context, China and the UAE face greater opportunities for reaching an FTA agreement. Of course, the most important thing is that the two sides adopt a flexible and pragmatic attitude to promote the FTA agreement and cannot expect it to fulfill all the wishes of both sides in one single agreement.

The two countries will need to work together to cope with the risks and challenges inherent in the BRI project.  Such grand initiatives are far-sighted in their objectives, but equally will encounter some difficulties in implementation.  These are reflected in risks related to intercultural communication, domestic political structures in host countries, and the financial risks of investment projects. Moreover, Western countries such as the US and the EU have doubts about the intent of the BRI and fear it will impact their regional influence.

These factors will challenge the long-term sustainability of China-UAE cooperation.  At the same time, China and the UAE have a demonstrated commitment to furthering global development and both states are in a substantive position to ensure the ongoing success of the BRI.  The bonds which have been built will strengthen through future growth that is mutually beneficial to the two states and their people.

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