China and the Gulf: Navigating the New Silk Road

Home to more than 2,300 Chinese companies, and positioned at the heart of the New Silk Road, Dubai is poised to make significant gains from its growing economic links with China

Gulf Cooperation Council countries should bolster investment, trade and financial ties with China, and promote the greater use of China’s currency to accelerate integration between the Middle East and Asia’s leading economy. That was the message at a high-level discussion held in Dubai last week.

“New strategic partnerships can be developed between the GCC and China,” said Dr Nasser Saidi, Chief Economist for the Dubai International Financial Center. He was speaking at ‘Developments Along the New Silk Road: Venturing with and Investing in Chinese Companies’, a conference sponsored by the DIFC and law firm Latham & Watkins LLP, in partnership with Falcon and Associates and the Financial Times. More than 200 delegates attended.

China’s ties with the Middle East are on the rise, with total trade between the regions forecast to reach between US$350bn and $500bn by 2020. GCC trade is leading the way. Total trade (non-oil) between the GCC and China amounted to US$92.4bn in 2010, a 15-fold increase from US$6.1bn recorded in 2002. 

Dubai, which already acts as a hub for Asian trade and is home to more than 2,300 Chinese companies, may gain the most from growing economic links, according to Abdulla Mohammed Al Awar, DIFC’s Chief Executive Officer. A New Silk Road “could see trade between Asia, the Middle East, and Africa eclipse trade between developed nations and emerging nations, or even among developed nations”, Al Awar said.

In order to facilitate deeper trade and investment flows, Middle East governments ought to promote the use of China’s currency, the renminbi (RMB), Dr Saidi says. He calculates the RMB may emerge as the third global currency, after the US dollar and the euro by 2015.  At that time, the RMB may be used for between 30 and 50 per cent of China’s imports and exports, which by then should reach US$2 trillion. Discussions between the GCC and China on a free trade agreement, which began in 2004, also need to be hastened, Dr Saidi added. Meanwhile, GCC central banks and the Chinese central bank should move to establish RMB swap lines to ensure the ready availability of Chinese currency.

“Once you have a more transferable currency, that helps to develop trade corridors and foreign direct investment flows,” said Nicholas Levitt, head of UAE commercial banking for HSBC Bank Middle East Ltd. HSBC is one of two financial institutions to allow customers to open RMB accounts in the Emirates. The bank was the first in the region to conduct a cross-border Chinese currency transaction last year, allowing UAE retailer Royal Palace Furniture to settle a trade letter of credit denominated in RMB with its suppliers in China. Both HSBC and Standard Chartered Bank now offer cross-border deliverable RMB options.

One promising area for co-investment is renewable energy, says Aaron Bielenberg, a Latham & Watkins Senior Associate and co-founder of the Clean Energy Business Council, an association of renewable and low-carbon energy developers, investors and governments in the Middle East and North Africa. Over the last two years, China not only has become the world’s biggest user of energy but also the biggest investor in renewable energy technology, spending US$83.5bn in 2009 and 2010 in its development. “It’s really almost the perfect marriage of economies,” said Bielenberg. China has invested enormously to build-out its clean energy power generation industry, while Middle Eastern markets have solar resources and the incentive to best use oil and gas supplies.

There are also proven models for project development and third-party financing, Bielenberg says, pointing to the private-public partnership used by Abu Dhabi in development of the Shams One 100-Mw concentrated solar power (CSP) facility, a joint venture between Abu Dhabi’s government-backed renewable energy initiative Masdar, French oil firm Total, and Spain’s Abengoa Solar. In March, Shams Power Co. announced that US$600m in non-recourse financing for the project had closed, with participation by BNP Paribas, KfW, Mizuho, National Bank of Abu Dhabi, Societe Generale, and Sumitomo Mitsui Banking Corp.

Scores of alternative energy projects throughout the region now being negotiated are likely to use Chinese technology, Bielenberg adds. There are limitless opportunities for Chinese technology providers to partner with developers and local governments on utility-scale renewable power plants, he says.