UAE beats an ancient path to boost China trade

Singapore could be the route through which the Gulf states reestablish trade with China.

A recent visit to China by the Crown Prince of Abu Dhabi showed the similarities between the age-old trade partners, and a divide that needs to be conquered. When Sheikh Mohammed bin Zayed walked this weekend into the Forbidden City, the palace of China's ancient emperors, and crossed its sea of flagstones, he was retracing a once well-beaten path that linked the Arab world and the country known then as the Middle Kingdom.

The visit to China by Sheikh Mohammed, the Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, reinforces a journey there last year by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai. Even before the global crisis, China was rapidly reclaiming its role as one of the world's leading economies and reforging ancient trade relationships. Now, as the People's Republic leads the global recovery, that rise is accelerating, so naturally China and the UAE are reaching out to each other to exploit common interests and complementarities.

What might have been a headlong rush of trade and investment, however, has become a deliberate, often awkward, encounter, as Asia and the Gulf confront a legacy of colonialism, war and revolution that has left them estranged, their relationship defined by western politics and their interactions mediated by links to bygone empires. Yet they are being driven ever closer by their shared interest in a single substance - oil; China's need for it, and the Gulf's need to sell it.

"Irrespective of what China and the Gulf think of each other, there's a gravitation pull," says Ben Simpfendorfer, an economist at RBS in Hong Kong and author of The New Silk Road: How a rising Arab world is turning away from the West and rediscovering China. China's demand for oil has almost doubled in the past decade and now accounts for almost a 10th of all the oil consumed in a year globally. There is no shortage of other anecdotal and statistical evidence to illustrate the burgeoning ties between the Gulf and East Asia, and with China in particular. Trade between the UAE and China, for example, rose 40.5 per cent last year to US$28 billion (Dh102.84bn).

Already, more than 2,000 Chinese companies and 200,000 Chinese are in the UAE. DP World owns six ports in China. Jumeirah Group operates a hotel in Shanghai and Dubai has its sprawling Chinese mall, Dragon Mart. But compared with their respective investments and trade with the US and Europe, economic ties between China and the Gulf remain relatively unimpressive. This may be surprising considering the historical links between the two. China's roughly 20 million Muslims are evidence of the close contact that once flourished along the Silk Road.

But Europe's seaborne empires supplanted those routes, setting in motion a long history that culminated in China's Communist revolution in 1949. The China that emerged in the 1980s was fundamentally different. "Gulf Arabs have a big problem," said Mr Simpfendorfer. "They don't really understand the Chinese." To help them navigate the way back into China, the UAE is looking to another East Asian nation, Singapore, which the Crown Prince visited before heading to Beijing. With a predominantly ethnic-Chinese population that is about the size of the UAE, Singapore might seem like the perfect matchmaker.

All three countries share some common economic interests. China, Singapore and the UAE enjoy sizeable export surpluses that have left them flush with foreign exchange reserves, most of which are invested abroad by their central banks or sovereign wealth funds. All have tasted the bitterness of xenophobia towards their investments. And all three now have to worry about the future of the US economy and its dollar, in which the bulk of their investments lie.

Singapore, for its part, would doubtless like to become a weigh station for Gulf capital heading for China. But Singapore's ability to form a partnership with the UAE is complicated by the fact that it is a rival to Dubai for financial services and port traffic, particularly for passengers flying between Europe and Australia. And Singapore, despite advertising itself as a gateway to China, cannot compete with Hong Kong as a springboard for investment and trade.

Singapore enjoys greater success advising developing nations such as China on how to emulate its own economic success. Once a chaotic backwater, it has in the 44 years since its independence from Malaysia vaulted to the top of almost every list measuring prosperity and competitiveness, all under the dominance of a single party that has never lost power. Singapore has achieved much of what the UAE aspires to, creating an educated, modern workforce and luring in new industries such as electronics and pharmaceuticals to diversify its economy and create jobs.

By consulting with business and fine-tuning its economy, Singapore managed to avoid the kind of investment bubbles that tripped up its neighbours during the Asian financial crisis a decade ago, or that have more recently hit Dubai. But some economists say Singapore's vaunted economic tinkering has left it less nimble than free-market Hong Kong. After pharmaceuticals proved less successful at replacing manufacturing jobs than hoped, Singapore began restyling itself as a haven for Asia's new rich, easing taxes and lifting a long-time ban on casinos to cater to the Chinese passion for gambling.

Gulf oil might seem its own passport to investing in China but most Gulf oil is heavy in polluting sulphur, while China is trying to buy more oil low in sulphur from other nations. Kuwait and Saudi Arabia have invested in Chinese refineries that can cleanly use their sulphurous product. Sheikh Mohammed has proffered the UAE's help in developing facilities to store Abu Dhabi crude. The Gulf's sovereign funds would also like to diversify their portfolios toward faster-growing Asia, but many of China's biggest companies remain either state-owned or limited in how large a stake foreigners can buy.

China, of course, faces its own frustrations in the Gulf. Chinese aid and investment has helped its oil and mining companies secure access to mines and fields from Australia to Africa. But gulf oil producers do not need its aid, do not need its investments and do not need its help tapping into oil fields where more advanced western oil firms are willing to work for almost nothing. Perhaps the biggest division between the Gulf and China, though, is something that they both share: a heavy emphasis on personal relationships in business and investment. Business in the Gulf requires wasta; in China nothing happens without guanxi.

It may take many more friendly visits before Beijing and Abu Dhabi are on the same wavelength. "It's all on the basis of relationships," said Mr Simpfendorfer. "And that takes time to develop." [e-mail]