UAE on China’s Silk Road map

Wei Wenyi, a project manager with China Railways Engineering Corporation (CREC), pointed to a sign on the company’s stand at last week’s Middle East Rail exhibition when discussing the motivations for the company’s decision to open an office in Dubai.

The sign spelt out the state-owned enterprise’s commitment to the Chinese government’s One Belt, One Road initiative, aimed at growing trade routes through infrastructure investments and trade links.

CREC’s sign read: “Chinese enterprises will make more contributions on infrastructure construction in the areas based on the Belt & Road policy”, and then highlighted the role its subsidiary, China Railways Group, has played in this, handling more than 1,000 projects in 73 countries worldwide.

It also said that, as of the end of last year, China Railways Group had signed new overseas contracts worth a total of US$72 billion (Dh265bn).

“In May, there will be a high-level conference to be held in Beijing by the Chinese government. More than 120 countries are already invited to attend,” Mr Wei said.

“By then, the Chinese government will have more explanations and we also expect to see more cooperation between Chinese companies and those countries for infrastructure development.”

The Middle East in general, and the UAE in particular, play an important part in China’s One Belt, One Road strategy.

“Almost 60 per cent of trade between China and the UAE is re-exported into Africa and Europe,” says Neil Cuthbert, a Dubai-based senior partner at the law firm Dentons.

“That supports the One Belt, One Road direction of travel, with Chinese companies increasingly using the UAE as a trading hub for their business along the Silk Road.”

Mr Cuthbert says there are four drivers behind the Chinese strategy. The first is connectivity with countries along the belt, which is based around a rail route through central Asia, and a maritime route that runs through the Middle East on to Africa and Europe. The second is increased access to export markets.

The third is “to deal with the overcapacity issue that has been prevalent in China for some years now and to provide an outlet and release for China’s vast sums of economic capital and production capacity”, Mr Cuthbert says.

“China now needs to grow global demand because it is not sufficient to utilise all of the overcapacity in China.”

The fourth driver is to broaden its political influence, although Mr Cuthbert says this should be seen as more of a “complimentary by-product”.

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At a glance:

■ What: Major Chinese companies are looking to the UAE as a key to address Beijing's intention to push China's growth worldwide. ■ Why: China needs to boost global demand to cut overcapacity at home.

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Certainly, China’s links with the UAE are strengthening. Hongbin Cong, the vice-president of international relations at Falcon & Associates, a company which organises the annual Dubai Week event in Shanghai every year, says China seems likely to retain its position as Dubai’s biggest trader in 2016.

Although full-year statistics have yet to be revealed, by the end of the third quarter “China by far sits in the number one position”, he says, with bilateral trade totalling Dh120bn, compared with Dh76bn with India in second place.

Chinese nationals now make up about 10 per cent of Dubai’s population, and there are 4,500 Chinese-owned businesses in the city. For China’s big contractors, opportunities abound despite the quieter Arabian Gulf construction markets.

China State Construction Engineering Corporation, the world's biggest contractor, picked up about Dh8bn to Dh9bn worth of contracts in the Middle East last year and its regional president Yu Tao recently told The National that it expects to earn revenue of between $800 million and $1bn locally this year.

Mr Cuthbert says although the weaker oil price has constrained both government and bank balance sheets in the Gulf, making project funding more difficult to come by, “China can help fill that gap”.

“They can bring their contractors, and the advantage with Chinese contractors is they come with finance,” he says.

“Another interesting development is that they want equity. So what they traditionally call EPC+F [engineering, procurement, construction plus finance] is now EPC+F+E [equity],” he says, pointing to CSCEC Middle East’s joint ventures with Skai Holdings to develop the new Viceroy hotels at Palm Jumeirah and Jumeirah Village as one example.

Moreover, the Chinese EPC contractor Harbin Energy’s role in the winning consortium chosen to build the 2,400MW Hassyan clean coal power plant by Dewa is evidence of the fact that Chinese firms are likely to play a bigger role in regional PPP projects, according to Mr Cuthbert.

He says the reason Chinese firms have been involved with so few regional projects of this kind to date is because they have typically been independent water and power projects.

“Most have used project finance, and the problem Chinese contractors have faced is that while they have built power and water projects in China, they haven’t got a track record outside of China,” Mr Cuthbert says. “We’ve seen a couple in Salalah in Oman and then in Rabigh in Saudi Arabia. Harbin is now the third.

“As they complete more of these projects and the banks get comfortable with them, it will be easier.”

Benjamin Highfield, a senior vice-president in Hill International’s construction claims group, says Chinese companies have had to battle against “a quality perception” issue in the region.

“A lot of that is not well-founded. I think they’ve moved a long way into overturning that. But there’s still a long way to go. Putting that stigma to bed is really the big challenge to Chinese contractors. But I think a delivery track record is really important.”

Both he and Mr Cuthbert believe that the major opportunity for Chinese contractors is in delivering major, complex infrastructure projects such as ports and airports. But they differ in how Chinese contractors should approach this.

Mr Cuthbert thinks Chinese firms are at an advantage in that sphere because “they can deploy a lot of capital, a lot of resources and a lot of finance”.

But Mr Highfield says in the long run, Chinese contractors looking to establish themselves in the regional market need to offer more than just money.

“If you want to compete intellectually in the right place, you have to compete with modern-day contracting. It’s no good saying, ‘We’ll carry on the traditional way because we can come with the financing’. It shouldn’t work like that.”

He argues that Chinese contractors’ projects in western markets such as the United Kingdom, where they are delivering schemes including Manchester’s Airport City and the £18bn (Dh80.77bn) Hinckley Point nuclear power plant, will give them the track record to convince even the most sceptical Middle East clients of their abilities.

“I don’t see why in 10 years’ time they can’t pick up something like a Barakah nuclear power station,” says Mr Highfield.

“There is no one like Chinese contractors in mobilising and particularly procuring to make a job happen. At the same time, they do it at a price that is very, very competitive.”

Udayan Mukherjee, a Dentons partner specialising in project finance, says Chinese contractors have already established a presence in the local solar power sphere – JinkoSolar's participation in the consortium that bagged a 25-year deal for a 1,177MW plant at Sweihan in Abu Dhabi this month is perhaps the latest example of this.

Although Chinese firms generally have an advantage in being able to offer cheaper solar panels, Mr Mukherjee says the large solar public private partnership deals in the region are creating “a real opportunity for Chinese companies to move up the value chain from simply being a panel supplier or contractor to becoming a developer, providing the financing”.

“Projects are generally being scaled up because there is plenty of land and plenty of sunshine here, and demand for power is not going away.”

mfahy@thenational.ae

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