The Interests and Trends of Chinese Enterprises' Investment in the United Arab Emirates

International Center for Risk Assessment, May 4, 2016 | 作者: Wei Min | 时间: 2016-12-21 | 责编: Wang Jiapei
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Since the establishment of diplomatic ties in 1984, China and the United Arab Emirates (UAE) have made remarkable achievements in economic and trade cooperation. The establishment of strategic partnership in 2012 ushered in a new era for bilateral cooperation in various areas. Contemporarily, the UAE is China’s biggest export destination and second-largest trading partner in the Arab world. More than 4200 Chinese companies operate in the UAE and 300,000 Chinese live there. In his visit to China in December 2015, Crown Prince Sheikh Mohammed Bin Zayed Al-Nahyan of Abu Dhabi Emirate of the UAE agreed with Chinese leaders to elevate the level of strategic partnership, which provided a favorable political atmosphere for the deepening of bilateral economic relations.

In recent years, China has adjusted its foreign investment policy from merely “bringing in” to the combination of “bringing in” and “going out”, and the process of the latter is accelerating. Chinese companies are more clearly directed due to the proposal of “One Belt and One Road” (hereinafter referred to as “Belt and Road”) initiative and the establishment of AIIB and Silk Road Fund. Standing as a pivotal point along the “Belt and Road”, the UAE enjoys an advantageous geographical location, developed infrastructure and high degree of political and economic stability and public order. It also has an open business environment and sound legal system. As an important transit port in the Middle East Region and a main investment destination for China, the UAE is faced with a rare historic opportunity of development. It responded actively to the “Belt and Road” initiative and became one of the founding members of AIIB in March 2015. Therefore, the UAE is very likely to be an important investment destination for Chinese enterprises in the Middle East Region.

However, the UAE still cannot compare with other regions in attracting China’s investment. The first 11 months of 2015 witnessed robust growth of China’s investment in the U.S., the Shanghai Cooperation Organization countries, Oceania, and Africa, but Middle East Region including the UAE still lagged behind. Both countries shall hold responsibility for the current situation: on one hand, the poor knowledge of Chinese to the Middle East and their concerns over its security and cultural differences block the expansion of Chinese enterprises’ business; on the other hand, neither does the UAE devote enough efforts to its publicity in China, nor does it engage in frequent interactions with Chinese government in terms of policy implementation.

 

I The Interests and Trends of Chinese Enterprises’ Investment in the UAE

1. Chinese enterprises’ strong will of “going global”

Proposed around the turn of the century, the strategy of “going out” was an inevitable choice and necessary requirement for China’s sustainable economic development. It injects strong desire of “going out” into Chinese enterprises. The “Belt and Road” initiative takes into account the demands of both domestic and international markets and thus provides a rare historic opportunity for Chinese enterprises’ “going global” process.

Chinese government attaches much importance to the improvement of business environment for companies’ “going out”. Ministry of Commerce of the PRC continues to facilitate overseas investment and establishes a mode of operation regarding “filing as the primary process”; energetically builds platforms for overseas investment cooperation by signing up related agreements with other countries; pragmatically advances its cooperation with other countries through major projects concerning industrialization, economic and trade cooperation zones, infrastructure and connectivity construction; implements policies to support overseas investment and financing including concessional loans, project financing and export insurance; improves its thoughtful services for Chinese enterprises through the establishment and perfection of Public Service Platform Guiding the Process of “Going Out”; and safeguards overseas interests of Chinese enterprises by strengthening overseas risk prevention.

The above-mentioned series of accessory measures inspire Chinese enterprises’ enthusiasm for overseas investment. China Development Bank and SINOSURE (short for China Export and Credit Insurance Corporation) massively raise credit and insurance lines this year, giving green light for sharply increasing overseas projects.

Compared with previous investment mode of SOEs-dominated, both powerful state-owned enterprises (SOEs) and fast-growing private companies are participating in the “going global” process nowadays. Up to the end of 2013, the outward investment stock of non-SOEs accounted for 44.8% of China’s total overseas investment stock, while the outward investment flow of non-SOEs was 56.1% of the total. Telecommunication enterprises such as Huawei and ZTE are among the most outstanding private companies in China.

2. Key industries of China’s investment in the UAE

The “Belt and Road” initiative will boost the infrastructure connectivity of China, its surrounding countries and regions and those along the belt and road. It will benefit more than 60 countries along the route of belt and road and offer new development opportunities for overseas investment in such three areas as infrastructure construction, energy cooperation and high-end manufacturing industries.

China pays much attention to infrastructure construction in recent years and vigorously advocates connectivity, which may turn infrastructure construction into an investment hot spot and greatly increase the number of large-scale projects. Therefore, the UAE’s industries including infrastructure, high-speed railways, electricity networks, city construction and transit port construction (such as air harbor, vessels, port, etc.) will attract the most Chinese investment.

Chinese government attaches much importance to global production capacity cooperation. On May 16, 2015, the State Council issued a guideline on boosting cooperation in production capacity and equipment manufacturing with other countries. According to the guideline, by 2020, priority will be given to setting up a mechanism to carry out production capacity with the main partners, to achieving progress in a number of key projects, and to establishing several overseas demonstration centers. The mechanism of global capacity and equipment manufacturing cooperation will be further improved, and a number of key enterprises that are able to compete internationally and expand the global market will be encouraged.

As to specific industries, a list of 12 key sectors was chosen to promote such cooperation, including steel, nonferrous metals, construction materials, railway, electricity, chemical industry, textile, automobile, communication, engineering machinery, aviation, and naval architecture and ocean engineering. Faced with huge international market demands, Chinese companies in these sectors are characterized with strong manufacturing capacities and advanced technologies, and are therefore endowed with competitive edge in international markets. Chinese companies in these 12 sectors can also play a guiding role in global production capacity cooperation. For example, the export of high-speed railway may result in a large number of overseas infrastructure projects and the export of related equipment. High-speed railway, nuclear power and power grid and electrical equipment compose the first phalanx in the “going out” process due to their huge competitive edge. Among them, high-speed railway is especially outstanding since China has the uniquely valuable experience in operating 16,000 kilometers length of railways. Besides, China enjoys obvious advantages in sectors such as steel, nonferrous metals, construction materials and electricity equipment.

During Crown Prince of Abu Dhabi Sheikh Mohammed bin Zayed Al Nahyan’s visit to China in December this year, China and the UAE signed the Memorandum of Understanding on Establishing China-UAE Investment Cooperation Fund (Limited Partnership). With total worth of 10 billion US dollars, the Fund will be equally funded by both governments and gain 4 billion US dollars in the first phase. It will be managed by Abu Dhabi’s Mubadala Development Company, China Development Bank Capital and China’s State Administration of Foreign Exchange and invested into China, the UAE and fast-growing third-party markets in areas including conventional and renewable energy, infrastructure, technology and high-end manufacturing. The fund will provide capital assurance for further pragmatic cooperation between two countries.

3. PPP and RMB cross-border financing are alternatives due to intensifying funding pressure in the Gulf

Currently, due to the oversupply of petroleum and OPEC’s recent failure to reach consensus on production cut, international oil prices will continue to decrease. The interest-rate increase from the Federal Reserve makes the dollar-priced oil further cheaper, and thus reduces revenues of Gulf Nations and raises their fiscal deficits. Though enjoying a much better situation, the UAE saw fiscal deficit for the first time during the past 9 years. The remarkable liquidity tightening in the Gulf is likely to raise project financing costs and make financing even harder for companies.

 PPP enjoys high popularity in the Middle East. Gordon Brown, former British Prime Minister and Director of Infrastructure Construction Projects of World Economic Forum, holds that the best choice for governments in the Middle East and North Africa is to plan and implement projects through public-private-partnership (PPP) and the sovereign wealth funds of wealthy countries in the region should also be included in the infrastructure construction.

The UAE’s dollar-pegged exchange rate system may raise costs for non-dollar investors due to the stronger dollar and hence pose negative effects on foreign investment inflows and comprehensive economic development of the UAE. With the continuingly increase of oil and non-oil trade volume between China and the UAE and RMB’s inclusion in SDR basket as an international reserve currency, it shall be an alternative for the UAE to hold more RMB assets and promote diversity of its foreign reserves.

An increasing number of countries are inclined to use RMB in their cross-border trade. On December 14, 2015, China’s central bank extended the currency swap agreement worth 35 billion yuan (20 billion UAE Dirham) with the central bank of the UAE. The two parties signed a memorandum of cooperation on RMB clearing in the UAE on the same day and agreed on expanding the RMB Qualified Foreign Institutional Investor (RQFII) program to the UAE at a quota of 50 billion yuan. The agreements will increase the use of RMB in bilateral cross-border trade and facilitate trade and investment activities between two countries.

RMB cross-border financing is another alternative for the UAE. China's four major commercial banks have branches or offices in Abu Dhabi and Dubai. The Bank of China's Abu Dhabi branch listed its 2 billion yuan ($322 million) bonds on the Nasdaq Dubai this year, and 20-30% of the investors were from the Middle East. This was the first bonds issued for the “Belt and Road” in global financial market, and was of great importance to supporting the initiative and deepening the Sino-UAE economic and trade cooperation. Financial institutions of the UAE and China can jointly conduct RMB cross-border financing in the future.

4. Overseas Economic and Trade Cooperation Zone is a trend in Chinese enterprises’ “Going Global” Process

Overseas Economic and Trade Cooperation Zone represents a highlight for China’s overseas investment this year. To encourage enterprises’ “going out” process, China has started to promote the built of overseas economic and trade cooperation zones since 2006. Coordinated by the Ministry of Commerce, Chinese enterprises signed agreements with friendly countries of high political stability in order to attract other Chinese enterprises’ investment and to ultimately form industrial clusters. The aim of cluster investment is to build a good industrial ecosystem in the host country, through which the risk of global cooperation on production capacity can be reduced. Cluster investment can also promote complementary coordination among Chinese enterprises and avoid their possible cut-throat competitions.

Meanwhile, there are some other noteworthy features in China’s overseas investment. Compared with precious mode of setting up trading companies aboard, Chinese enterprises nowadays are more actively integrated into global innovation network through setting up R&D centers overseas or conducting mergers and acquisitions in high-tech and high-end manufacturing sectors. Overseas contracting projects have expanded their coverage from civil constructions to high value-added areas such as EPC (Engineering Procurement Construction), project financing, design consultation, and operation, maintenance and administration.

The UAE has signed FTAs with many economies and provides preferential treatment for foreign capital. If the UAE can effectively connect its FTAs with China’s Overseas Economic and Trade Cooperation Zones and provide an exclusive zone for Chinese enterprises as a production base, enterprise agglomeration will be formed. This exclusive zone can help averting risks for enterprises by providing one-stop service. The UAE shall take into account this kind of demand of China when providing investment services.

 

II Major Risks and Challenges of Chinese Enterprises’ Investment in UAE

Based on investment risk reports released by many institutions, we can discover that risk indexes of many countries have been modified, while the risk rating of the UAE remains broadly stable, making the UAE an ideal destination for China’s investment. But from the perspective of security, economic, legal and investment environment, there exist some potential risks for investors.

1. Security risk. Turmoil in the Middle East and religious conflicts pose potential threats on the local security situation. Security risk is mainly manifested in two aspects: one is the threat from a few domestic Islamic terrorists. In response to the turmoil in the Middle East caused by the “Arab Spring” and the torture brought by “Islamic State”, the UAE has actively participated in regional counter-terrorism operations and may possibly become the target of terrorists from both home and abroad; the other is the relationship between Sunni Saudi Arabia and Shia Iran. The UAE is a Sunni-dominated country, but many Shia Muslims and Iranian labors live and work in Dubai. Contemporarily, diplomatic relation between Iran and Saudi Arabia continues to be strained. Yemeni civil war has been evolved to a scramble for supremacy in the Middle East between these two regional powers. The UAE joined the coalition led by Saudi Arabia to fight against Yemeni Houthi forces, making itself an actual opponent of Iran.

2. Macro-economic risks against the backdrop of falling oil prices. “The UAE economy may experience a soft landing this year.” Though the UAE is less directly affected by the falling oil prices compared with other GCC countries in the short term, plunging oil prices in the long run may cause indirect effects including the tightening of regional and domestic liquidity, and problems in such areas as real estate and debt. The UAE economy, though relatively diversified, is still deeply influenced by oil prices. The year 2016-2017 may see a weak economic growth and reduced fiscal revenue in the UAE. Therefore, IMF suggests the GCC countries to reform their tax systems and to collect value added tax. The simple and low tax regime without corporate or personal income tax plays an important role in attracting foreign investment in the UAE. Once reformed, the less favorable tax system may negatively influence the its inward FDI.

3. Government regulatory and legal risks. It is noticeable that business exit costs are rising in the UAE. Exit costs can be measured by the indicator of bankruptcy procedures in Doing Business 2015 issued by the World Bank. It estimates the time, cost and obstacles concerning bankruptcy procedures. The UAE ranks 92nd in 189 countries in 2015, compared with 88th last year.

4. Ease of doing business. It takes complex approving procedures to start a business in the UAE. Its government efficiency declined from 49th in 2014 to 58th in 2015. The country needs to further facilitate trade and investment activities, and to promote negotiating process of FTA or BIT with China with the promotion from top-levels when necessary.

 

III How to Attract Chinese Enterprises’ Investment in the UAE?

1. Strategy Connection. Currently, China attaches much importance to the connection of development strategies with other countries. Some successful examples include the European Juncker Plan and “one belt one union” of Eurasian Union. To attract more Chinese investment, the UAE should further clarify its own development strategy, and seek to connect it with that of China on the basis of mutual interests.

2. Increase publicity in China and establish more investment promotion platforms. Despite of their poor knowledge of the UAE, Chinese enterprises are eager for investment information there. Without large scales or strong research abilities like SOEs, Chinese private companies are increasingly relying on overseas public service for investment information. In addition, they are facing a series of difficulties in the host countries concerning business visa application, protection of legitimate overseas interests etc. When H.H. Crown Prince of the UAE visited China in December this year, China and the UAE signed 9 agreements, two of which are involved in providing better conveniences for business personnel of two countries: the two sides agreed to expand the visa-free to holders of ordinary passport for public affairs and recognize each other’s driving licenses at the same time, hoping these measures will take effect as soon as possible. The UAE embassy and consulates in China should increase its publicity and hold more activities to introduce the country and inform ordinary Chinese of investment opportunities in the UAE.

3. Lack of institutional guarantee for bilateral cooperation. To a certain extent, China-UAE Investment Cooperation Fund may serve as an institutional guarantee for bilateral cooperation. But more needs to be done. China has signed 14 free trade agreements with other countries or regions, but negotiations on China-GCC FTA have lasted for rather a long time, and needs to be finished as soon as possible so as to promote facilitation and provide institutional guarantee for trade and investment between China and GCC countries.

 

 

 

Wei Min is a Senior Research Fellow at Department for World Economy and Development, China Institute of International Studies.

 

 

Source: International Center for Risk Assessment, May 4, 2016.

http://icra.ae/article/the-interests-and-trends-of-chinese-enterprises-investment-in-the-study-by-ms-wei-min/

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