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UAE economy offers increasing range of opportunities for Chinese investors

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China’s early recovery post COVID-19 may reinvigorate appetite of the coun-try’s companies for overseas ventures, boosting trade and investment in the Belt and Road Initiative.

The UAE economy has been offering an increasing range of investment opportu-nities for Chinese companies from power generation to infrastructure with new trade, logistics and greenfield projects likely to help boost economic revival post COVID-19.

At the same time, China’s quick recovery from the clutches of the pandemic and reduction in corporate taxation is expected to reinvigorate appetite of local com-panies to expand their activities and investment overseas.

With vaccines on their way, the recovery is expected to strengthen and broaden, indicating that the world’s second-biggest economy might be heading for 8.5 per-cent growth in 2021.

While base effects flatter the reading, it marks a return to vibrancy, allowing offi-cials to set their sights again on long-term structural adjustments as well as strengthening partnerships along the Belt and Road Initiative (BRI).

Since its grand plan to revive the land and maritime trading routes of the ancient Silk Road with other parts of the world was launched in 2013, China has made a significant push in terms of infrastructure projects and policy coordination to strengthen its ties with countries along the BRI.

“We see a substantial growth opportunities for Chinese companies in the MEN-AT region that is rapidly evolving beyond the traditional energy and construction sectors into territories of technology, healthcare, and renewables,” Gareth Thom-as, Regional Head of Global Banking MENAT at HSBC, told a webinar on Chi-nese business opportunities in the region.

China has long been a major market for UAE oil exports, with the Gulf country one of its top suppliers, exporting crude worth U.S.$5.95 billion to Asia’s eco-nomic powerhouse in 2018, according to the OEC 1.

But the relationship between the two countries has deepened over the past few years way beyond hydrocarbons.

Reciprocal visa-on-arrival policies helped boost tourism, with the number of Chinese visitors in Dubai surging by 15.5 percent to 989,000 in 2019, according to Dubai Tourism, although the pandemic took a large toll on the sector in 2020 2.

And in a sign of confidence in China’s pharmaceutical industry, the UAE issued the first government approval of a coronavirus vaccine made by Sinopharm and rolled out inoculations for the public, a move that could bring Chinese vaccines a step closer to widespread use.

Trade gateway

Following escalation in tensions with the United States, it has become more im-portant for China to diversify towards other economies, underscoring the im-portance of the BRI and its next stage – a shift from infrastructure to trade and investment.

In 2019, China was the UAE’s biggest non-oil trade partner, with an 11.5 per-cent share of the total, data from the Federal Competitiveness and Statistics Au-thority showed.

Moreover, non-oil trade with China surged by 16.3 percent to U.S.$50 billion in 2019, outperforming a 4.4 percent rise in the non-oil total, the figures showed 3. Before the pandemic, officials expected bilateral trade to exceed U.S.$70 billion in 2020.

Reduced tariffs and non-tariff barriers, plus improved infrastructure, are ex-pected to continue to lift Chinese trade with BRI countries in the coming years, according to HSBC Global Research.

Despite the substantial growth in trade between China and BRI partners, the World Bank thinks that these countries still under-trade – both with each other and the rest of the world – by 30 percent on average due to physical and policy barriers.

Investment drive

Acquiring resources and advanced technology has long been the main driver of China’s outward direct investment (ODI). However, more Chinese private com-panies are now investing in marketing networks and factories overseas than ever.

This trend might get a hand from a continued reduction in corporate taxes and fees in China, particularly social security contributions, after a 2019 VAT reform and last year’s pandemic-related waivers and reductions.

Such steps can lead to cost savings for companies, now facing one of the highest taxation rates in the world, encouraging private investment and spending, HSBC Global Research said.

At the same time, the structure of China’s ODI has become more diversified. Over the past eight years, the share of outbound investment in energy and real estate has fallen, while more investment has flowed into transport, technology and healthcare, China Global Investment Tracker (CGIT) data showed.

More private firms are relocating part of their production processes to countries with lower labour costs as producing in China becomes more expensive. This trend will likely continue and even accelerate in the coming years, according to HSBC Global Research.

Expanding partnership

In recent years, China’s ties with the UAE, the Arab world's second-largest economy, deepened substantially.

After the 2015 launch of a joint U.S.$10 billion investment fund focusing on stra-tegic sectors, a visit by President Xi Jinping three years later yielded a raft of deals strengthening the UAE’s BRI connection.

The deals included the approval of the first Chinese state-owned financial ser-vices firm to set up in the Abu Dhabi Global Market centre, as well as a U.S.$1.6 billion hydrocarbon survey contract awarded to China National Petroleum by the Abu Dhabi National Oil Company (ADNOC) 4.

Aiming to diversify its heavily hydrocarbon-reliant economy, Abu Dhabi also awarded a 35-year concession to Cosco Shipping Ports in 2018 to operate a con-tainer terminal at its Khalifa port. The Chinese company invested U.S.$300 mil-lion in construction and machinery at the terminal, Abu Dhabi Ports said at the time 5.

Another project that emerged from the emirate’s connection to the BRI is the U.S.$614 million Tire plant at Abu Dhabi’s KIZAD industrial hub. The green-field project is looking to produce 10 million passenger car tires and 1 million truck and bus tires by 2022, officials said. Several other Chinese companies have pledged investment in the KIZAD zone 6.

“There is a very strong objective in the region to diversify away from hydrocar-bons. Renewable energy is also a big focus,” says Manav Futnani, MD, Head of Export, Asset & Infrastructure Finance MENAT at HSBC.

The UAE’s power generation diversification drive has been long on the radar of investment opportunities for Chinese companies.

Jinko Power HK, a leader in renewable energy, was part of a consortium that has been awarded the Al Dhafra solar project in Abu Dhabi, United Arab Emirates. The future solar photovoltaic plant will be in the region of Al Dhafra, 35 kilome-ters south of Abu Dhabi City. With a capacity of 2 GW, it will be the largest sin-gle-project solar plant in the world and will generate the equivalent electricity to power over 160,000 local households each year. 7.

In Dubai, the state-owned Silk Road Fund and a Chinese power equipment com-pany are part of a consortium with Dubai Electricity and Water Authority (DE-WA) and Saudi Arabia’s ACWA Power, which is developing the U.S.$3.4 bil-lion, 2,400 MW Hassyan clean coal power station, partly financed by Chinese banks 8.

Chinese contractors are also working on other major projects in the UAE, such as phases 4 and 5 of the Mohammed bin Rashid Solar Park and Etihad Rail net-work.

“The infrastructure in the GCC is already extremely well developed but the pipe-line of projects continues to be very strong,” Futnani says.

“As the infrastructure plans continue to grow, there is an even greater opportuni-ty for Chinese banks, particularly on the limited recourse financing and the non-recourse financing in support of Chinese equity and EPC (Engineering, Procure-ment, and Construction),” he says.

HSBC’s tracker shows the total value of projects pledged in the whole MENAT region is an enormous U.S.$4.3 trillion, according to Futnani.

Beyond infrastructure, other sectors such as technology and telecommunications hold promise for Chinese companies willing to participate in smart cities projects and e-commerce at a time of an unprecedented digital transformation in the UAE and the wider region with a large young population.

Increasing FDI inflows

During a 2019 Belt and Road conference in Beijing, Chinese wholesale company Yiwu signed a U.S.$2.4 billion deal to build a 5.5-million-square-metre logistics station close to Dubai’s Expo site to store and ship Chinese goods from the emirate’s massive Jebel Ali port.

Another agreement with Chinese companies at the conference was to create a U.S.$1 billion food manufacturing and processing plant called Vegetable Basket in Dubai, to import, process, pack and export agricultural, marine and animal products 9.

China’s overall direct investment in the UAE reached AED2.4 billion (U.S.$650 million) in January-September 2019, a jump of 171 percent from the previous year, according to data from the Chinese Embassy in the UAE. The figure ac-counted for 54 percent of China’s investment in all 22 members of the Arab League 10.

Overall, foreign direct investment (FDI) inflow into the UAE soared by 32.8 per-cent to U.S.$13.8 billion in 2019, the highest level since 2007, according to data from the UN Conference on Trade and Development (UNCTAD), largely due to major investments into ADNOC assets 11.

And recent sweeping changes to the UAE’s Commercial Companies Law are like-ly to draw even more interest from investors in the coming years.

The amendment published in September will scrap restrictions for firms outside of free zones requiring a majority ownership by UAE nationals or their compa-nies and will allow 100% foreign shareholding from March 30 among a raft of other investor-positive changes.

Deepening ties between the two countries are expected to help enhance the UAE's role as a regional hub for China and boost investment with new joint trade, logis-tics and greenfield initiatives across the emirates adding to major power genera-tion and infrastructure projects already underway.