The UAE is wise to hitch itself to China’s rising star

Have we just witnessed the moment when the UAE’s eastward tilt became irreversible?

China and the other fast-growing Asian economies have been an increasing focus of the country’s economic policymakers since the financial crisis, when the west emerged largely discredited from the self-inflicted damage.

Chinese contractors have become more prominent in UAE business, as have the country’s retailers. Chinese tourists have flocked to the UAE, lately filling the gap left by the Russians in the big five-star hotels.

Chinese banks and other financial institutions have rushed to do business here, bolstering the numbers at the Dubai International Financial Centre, while China became the UAE’s second-largest trading partner on the basis of average annual growth of 16 per cent in trade between the two countries.

But the sheer volume of deals that has accompanied the most recent official visit to China this week by UAE leaders has been astonishing. A US$10 billion joint investment fund involving Mubadala and Chinese investment groups; new airline routes involving UAE carriers; investments in port facilities there by DP World; a common currency fund to support the globalisation of the Chinese renminbi.

All these in the space of a few days, and there must surely be other big deals lined up between China and UAE corporates.

It is hard to fault the economic logic of the shift eastward. China is still on track to overtake the US as the world’s biggest economy, even if a little later than the most optimistic forecasts when Chinese growth was still in double digits.

The country is at one end of the historic Silk Road, while the UAE is at the convergence of that Road and the southern “belt” pathway the Chinese leadership has enshrined in its “One Road One Belt” doctrine.

Finally, there is a complementarity between the two economies: China of course wants crude oil – still the UAE’s biggest export – but it also wants the engineering, construction and service sectors that go with oil.

The UAE wants China’s high-value, low-cost export goods, but it also increasingly wants the more sophisticated consumer products China is developing. And it wants the financial services that keep the Chinese export machine going.

That is the macro-picture, all of which makes sense of the UAE’s shift eastward. But what of the timing? The latest surge in UAE-China business connections comes just as many economists are predicting a significant slowdown in China’s growth prospects. They also point to the changing global financial environment as a threat to the export-led economic dynamism, and to the inevitable slowdown in growth that changing demographics brings.

There is a “worst-case scenario” circulating among economists that sees a “hard landing” for the Chinese economy, followed by a sharp devaluation of the yuan, a collapse in global growth and trade, and a widespread economic slowdown, especially severe in the emerging markets.

Fortunately, the probability of all these trends coinciding is relatively small, the same experts predict. For example, the French investor Amundi, Europe’s biggest asset manager, told clients on a recent visit to the UAE that chances of a sharp yuan revaluation were no more than 10 per cent.

Chinese growth will slow, that is the universal consensus. The days of 10 per cent plus annual economic growth are over. The conditions that produced those extraordinary rates in the two decades from 1990 to 2010 can never be recreated.

Eventually – perhaps five years from now – Chinese growth rates will level out at about 3 per cent, most economists believe. As that happens, China will have transformed from being an export-led economy to an internal demand one.

Moreover, it will have at least one of the characteristics of developed western economies: it will have an increasingly elderly unproductive population. But this is a problem few modern economies can avoid.

The UAE has decided none of these reservations matter, and you can see the logic. China’s emerging economy will be the power in the world for many decades to come, what does it matter if that ascent is later, or slower? Surely it is right to be hitched to that rising star.

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