The tale of the promised land

The visit by His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, to China this month generated a huge amount of interest, and understandably focused attentions on the UAE's growing ties with the Asian giant.

There can be no doubt that China is becoming an increasingly central cog in the global economy. Yet do those analysts who argue the UAE's future lies with China have a point? Or are they reading too much into the figures?

First, it's important to note that the volume of trade between China and the UAE has been growing at an impressive rate. Non-oil trade growth between Dubai and China, as monitored by Dubai World, has been consistently above 30 per cent since 2004, and last year hit 47 per cent.

Total volume of trade between the two is now worth almost $20 billion a year, and all the signs point toward continued strong growth. China is Dubai's second-largest trading partner, and its 12th-largest market for exported goods.

More the merrier

Impressive figures, to be sure. Yet how much scrutiny do they bear? A quick look into the balance of trade reveals a more complex picture. Of those $20 billion, some $19 billion are Chinese exports, with Dubai's non-oil exports amounting to only $180 million.

Yes, that $180 million does represent impressive growth, yet it is practically a footnote compared with the traffic coming the other way. Total UAE exports to China equal $3 billion, 51 per cent of which ($1.54 billion) is oil.

When one considers that Dubai's total non-oil exports, announced by Dubai World this January, amounted to some $45 billion, one can see that China represents an extremely modest market for Dubai's goods. Indeed, China is not even a particularly significant consumer of the UAE's oil; Oxford Business Group estimates China's consumption of UAE oil in 2007 ran to no more than 60,000 bpd - a figure dwarfed by supplies from Angola, Saudi, Iran, Russia and Oman.

Given that the UAE is the world's third-largest oil exporter, it has if anything a lower than to-be-expected share of the Chinese market. Given all these factors, why then is China so important to the UAE economy?

Arguably, the answer lies in those $19 billion dollars of imported goods.

Just like everywhere else in the world, the artificially weak yuan has helped keep down inflation in the UAE. China's seemingly inexhaustible supply of cheap consumer goods has essentially acted as a deflationary valve, which has been all the more important to the UAE in light of the recent inflationary pressures resulting from the dollar peg and excess liquidity.

Free trade zone

Perhaps it was this that led to talk of a free trade zone between the GCC and China, brought up during Shaikh Mohammad's visit. Lowering barriers to entry would be convenient to both sides in the current climate: China is facing an increasingly nervous consumer market in the West, and record inflation is creating major headaches in the Gulf. Include too hopes in the UAE to ramp up oil sales to China to around 600,000 bpd by 2025, and the two parties' mutual interest is easily understood.

So, China is unlikely to replace neighbouring states such as Saudi Arabia and Iran in terms of an export market for non-oil goods, or even challenge Japan as a market for UAE oil. However, given the current macroeconomic climate, the two markets are likely to become increasingly integral to one another.

- The writer is regional editor (GCC), Oxford Business Group.