China Reforms and its Regional and Global Ramifications

Mehmood Ul Hassan Khan

China’s Communist Party (CPC) leaders in 18th Central Committee “Third Plenum” announced diversified revolutionary reforms titled “Decision on Major Issues Concerning Comprehensively Deepening Reforms”. It covers 16 areas and 60 individual items. It is the new China national character which creates new chapter in its socio-economic prosperity.

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It reflects China’s national determination to remove all discriminations and works for greater economic integration, social cohesion, political motivation and a giant leap toward market economy. It also covers the human aspects of the throat-cut competition considering laborers, workers and common people an asset to sustainable economic development. It is the blue-print of blue economy. It chalks out policies and means to achieve greater industrialization, investment, taxes and revenues. It is above all the manifestation of people’s welfare.

President Xi Jinping and Premier Li Keqiang, announced several effective policy measures in social policy, mainly to unify rural and urban social security systems and to abolish controversial labor camps. The setting up of the National Security Committee and the Central Leading Group on Reform” indicates that the new leaders have a strategic vision to achieve the desired goals in the days to come.

It consists of major economic reforms to provide equal playing field to local and foreigner businessmen. It upholds the importance of foreign investment and announces new incentives/reforms for the local and international investors in China. It intends to overhaul the economic and financial sectors. It speaks highly about the importance of social development. It is all about welfare of the common people. It guarantees the environment and nature. It stands for corporate social responsibility, transparency, accountability and rule of the law. It pinpoints the hurdles in the further strengthening of social security in the country. It is a systematic approach to establish corporate governance and generation of revenues to get rid of debts. The last but not the least, it is the engine of further socio-economic development, attracting foreign investment, resolution of labour shortages/disputes and tax reforms. It has national, regional and global socio-economic ramifications which would be witnessed in the markets of the United Arab Emirates, Bangkok, Brussels, Washington, London and Frankford in the days to come. One of the major economic multiplier effects would be tremendous increase in the bilateral trade volumes between China-GCC/UAE, China-EU, China-Pakistan and of course China-US.

Broadly speaking according to newly announced reforms, the Chinese leadership will streamline its efforts among the local, central and private sectors/organ of the state to further develop interior and border cities Through a coordinated effort the level of investment in those regions will be enhanced, while authorities will guide efforts to upgrade technology in industrial and agricultural production according to each province’s comparative advantage. So, scientific management of governance will be followed to achieve desired goals in the days to come.

More focus will be given to service sector and transportation infrastructure, logistic entities and the international connectivity of hinterland cities in such regions will be enhanced through cooperation between the Chinese administrative authorities and incentivized private investors, both Chinese and foreign. Nurturing of trade activities will be increased in order to achieve sustainable development; ports and economic cooperation zones, therefore will also be opened to tourism and logistical investment in the country.

Third Plenum also pinpoints the importance of market economy claiming that market access will be further developed for all investors, including foreigners. To maintain the high standards of transparency, accountability and fair-play comprehensive measures will be institutionalized and predictability of official procedures will be taken swiftly. The experiment of transforming Shanghai into “a mainland Hong Kong” through the inauguration of the “pilot free trade zone” in the city was referred to as a breakthrough in the opening-up process. Moreover, gradually more such free trade zones will be established in different parts of the country. Through these zones, China will encourage local and national entrepreneurs to further invest overseas and loosen its grip on custom controls and financial inspections.

Further modernization of service sector stands tall in the Third Plenum. More attention will be given to health, finance, education, culture, e-commerce, elderly care, and child care and local and central government initiatives will be initiated in order to draw more international investment and increase domestic consumption. Other priorities were environmental protection, investment protection, and the consolidation of FTAs especially in the country’s close neighborhood.

The newly announced reforms talk about “scientific macro-regulation” and underlined it as a main function of the government in the opening-up process ahead. Efficient business management and coordinated regulation by central and local authorities will be put forth as keys to increasing productive efficiency. It also aims to mitigate structural risks by encouraging domestic demand and gradually re-organizing production to cater to domestic needs. On its part, the government will introduce new regulations to give more authority to private enterprises to take investment decisions, except in sectors concerning eco-safety, national security, energy and other underground resources, and the most vital public interests.

Environment protection is one of the most salient features of the Chinese reforms. From to-day to onward, new higher standards will be implemented on all firms (public & private) and investors will be held responsible regarding environmental protection, energy preservation, safety regulations, and technological inputs.

There will be overhauling in the system of GDP overall production-oriented appraisal and conferral of local governments’ and public administrators including factory managers and other public servants who bear a role in production. Performance will be rectified strictly in line with the emerging necessities of implementing higher standards regarding environmental protection, energy preservation, safety regulations and high-tech capital intensity in order to avoid unsustainable and self-destructive growth. Furthermore, a national platform will be formed to collect and streamline all data regarding housing and credit facilities. The risks associated with the combination of speculation, corruption, and financial complexity will be minimized.

Salient Features

(a) Interest Rate Liberalization and RMB’s full Convertibility

It is wide-ranging systematic mechanism consisting of improved market-based exchange rate formation mechanisms for the RMB, and speeding up RMB capital account convertibility by promoting the two-way opening of capital market, easing restrictions for cross-border capital and financial transactions, and establishing foreign debt and capital flow management systems. It has multiplier effects for the foreign investors, businessmen, and joint ventures.

Better currency exchange management would open new avenue of regional and international banking and finance cooperation speeding up of industrial production chains. China recently finalized its accords of currency swap including Pakistan and United Arab Emirates and hopefully, with better exchange rate scenarios, the volumes of bilateral trade, trade & commerce, investments (FDI & FPI), joint ventures, business activities, banking & finance and the last but not the least, insurance industries would be further flourished in the days to come.

It would accelerate interest rate liberalization by establishing a treasury bond yield curve that reflects market supply and demand. Building a deposit insurance system would be game changer in order to resource mobilization in the country.

It is hoped that a wide range of the financial reforms would be supportive for the further baking and financial development in the country. The deeper more sophisticated financial markets should make China better prepared for financial opening up, while financial opening up, especially RMB capital account convertibility, should attract experienced foreign institutions investors and expertise, speeding up the development of the onshore financial market.

(b) State-Owned Enterprise (SOE) Reforms

Generally, the lack of competition in the state owned sector has resulted in inefficiency, corruption and overcapacity. It emphasizes the importance of reducing government intervention in the economy, pledging to confine the administration to maintaining macro-economic stability, risk control and providing public goods and services. It would further strengthen of regulation and the provision of public services as well as introducing competition in the area of government tenders for services.

Pushing forward state-owned enterprise (SOE) reforms by forcing them to pay more dividends into the government’s social security fund pool would be beneficial for the country. Moreover, increasing the dividend payout ratio to 30 percent from current upper limit of 20 percent would strengthen government spending on social security.

Different SOEs Dividend payout ratios %
Tobacco companies 20
Resources 15
Ordinary companies 10
Military technology companies 5
Source: The Daily China (November, 2013).

The plan consists of integrated ownership of state-owned capital, collective capital and private capital, helping improve competitiveness of state capital. The reforms tell the improvement in the state-owned asset-management system, focusing on capital management. It facilitates the restructuring of selected SOEs into state-owned investment companies. Moreover, state capital investment should focus on key sectors related to national security, national economic lifeline industries, public services, science and technology, and ecological environment protection. To give fair chance to private sector and broadening of investments private investment is allowed to take part in state investment projects.

(c) Establishing of Modern Enterprise System and Improvement of Corporate Governance

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Keeping in view the importance of free market economy and upholding of corporate governance it is pinpointed that all forms of administrative monopolies will be abolished while increasing the state’s contribution to public services. For natural monopoly industries run by state capital, a franchise operation and government supervision mechanism will be implemented. It is hope that it would create a healthy competition between the public & private entities in China and also encourage the potential foreign investors and businessmen to do business in China. It would also streamline the supply-demand chain in the domestic markets which would prove effective curbing the inflationary trends.

(d) Market Liberalization Reforms

For the first time, the private and public sectors will be given equal rights. The first step would be establishing a fair, open and transparent market rules. Deregulation is needed to establish a unified mechanism for market entry so there is a level playing field. China wants to give foreign investors the same rights as local companies both before and after they set up business (aka a pre-establishment national treatment). Moreover, registration procedures will be further simplified. At the same time, regulators will clamp down on regional favouritism, unreasonable regulation, hidden barriers and monopolies.

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It is hoped that the private companies, especially those in the services sector will be benefited most from deregulation and easier market access. Further, deregulation in banking, railway, telecom and culture sectors are expected to speed up.

The reforms has made crystal clear that any price that can be affected by the market must be left to the market and prices set by government will be confined to public utilities, public service and areas that are naturally monopolized. China will also push ahead with price reforms of water, oil and natural gas, electricity, transportation and telecommunication.

(e) Fiscal Reforms

The document of the Chinese reforms tells that a more transparent and standardized budget system is needed. It will help to shift the focus the size of the fiscal deficit to expenditure and policy, to establish a standard debt management system for central and local governments and a risk-alert system, and to improve government transfer payments. In principle, if a central government policy requires expenditure by a local government that cannot afford it, the center will help out with transfer payment. It is simply deregulation of financial power to manage the supply and demand of the credit and handling of debt.

(f) Revenue Generation

To streamline the local government’s revenue generation to optimal level, the fiscal revenue divide between central and local government will be gradually adjusted through taxation reforms. It is indeed a capacity building measure for all the local government in China. Moreover, the central government is responsible for national defence, diplomacy, national security, and matters concerning nationwide market regulations; central and local governments share some of the costs for social security and key regional construction project; local governments are mainly responsible for local public services.

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(g) Improved Tax System

The reforms document includes broadening the local government tax base, simplifying the level of VAT, and adjusting the coverage and rate of the consumption tax, especially for energy intensive/big polluters and some high-end products. In addition to this the personal income tax system will be improved and property-tax legislation will be speeded up, as will resources tax reforms. The current environmental-protection fee will become an environment tax.

(h) Greater Scope of Private Sector

Permission has been given to qualified private capital to set up financial institutions such as small and medium sized (SME) banks, under enhanced supervision. It would be huge market booster for the country which gives attracts the foreign countries to open their financial centers including banks, insurance companies and could float bonds in the Chinese markets in the days to come. It is hoped that it would be beneficial for its banking and financial industry at large.

(i) Development of Capital market

Developing a multi-layered capital market, promoting a registration based stock issuing system and increasing the share of direct financing by developing the bond market and encouraging financial innovation are mentioned in the newly announced Chinese reforms. It would further strengthen the overall efficacy of the capital market in the country.

(j) Investments

It will no longer be necessary to apply for government approval for specific investments unless the projects are related to issues such as national security, ecological safety, manufacturing capacity and strategic resources exploration. Moreover, enterprises and individuals will be encouraged to invest overseas and undertake engineering and labour service cooperation projects at their own risk, through greenfield investment, M&A, equities and joint investment.

(k) Development of Free Trade Zones

It is announced that the opening of the Shanghai FTZ is only the beginning of new chapter in the Chinese trade and investment policy. The establishment of more free-trade zones would facilitate the joint ventures, value-addition and supportive world trade system and enhance bilateral, multilateral and regional cooperation. Reforms will be carried out in terms of market access, customs supervision and inspection and quarantine management.

(l) Land reforms

According to the newly announced reforms land reforms would create a unified rural-urban construction land market to benefit farmers. Farmers will be given more property rights, in addition to establishing a more equitable and sustainable social security system and to provide basic but equal public services to all. China has started to clarify farmers’ rights to their contracted land and promised to finish registration and certification within five years, so that a legal foundation can be laid and the property rights of farmers safeguarded.

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The CPC stressed that both public and non-public ownership are key components of China’s socialist market economy and vowed to protect the property rights of both. It reiterated that China will maintain the dominant role of public ownership economy and continue to develop the leading role of the state-owned economy.

It recognises that property rights of the public ownership economy and non-public ownership economy are equally inviolable. By protecting the property rights and legitimate interests of all kinds of ownership and ensuring that various ownerships have equal access to production factors, open and fair market competition and the same legal protection and supervision, potential and ingenious of nonpublic ownership economy could be boosted.

Granting the non-public ownership economy equal legal status with the public ownership economy will help build a foundation for the future expansion of the private sector, which in our view will be the driving force behind China’s long-term sustainable development.

(m) Improvement in Labour System

The new reform has abolished the 56 year old re-education through labour System as part of efforts to improve human rights protection. Mobility of the labour force has been made easy and effective.

(n) Patronized Urbanization

China values the contribution of its rural population in its onward socio-economic march. To reduce the widening development gap between rural and urban areas now farmers will be allowed to have equal access to the benefits of China’s development.

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According to the newly announced Chinese reforms farmers will be given full property rights to their contracted land and they will be allowed to become shareholders in agriculture-enterprises by using their land-rights. It would further encourage the framers to produce more in the country. It would be an effective tool to eradicate the ratios of poverty, unemployment and above all curb the food shortage in some parts of the country.

Moreover, farmers are encouraged to transform their collectively owned property rights into a shareholding system. They can sell their share or use them as collateral or warranty. The share can be inherited. Meanwhile, the current homestead system in rural areas will be improved, and a pilot programme will be carried out to enable the mortgaging and transfer of farmers’ homesteads. A rural property-rights trading market will be established. It covers all aspects of the rural life, chain of production, economy and tradition so, it is a complete package.

(o) Improving the legislative and judicial system

It is pledged that people’s congresses should provide more supervision of the government’s financial budget and state-owned assets. Governments at all levels must report to the local people’s congresses before adopting important policies. Meanwhile, the independence and fairness of courts implies that the judicial system can be freed from local government interference. It is a necessary for ensuring that the market plays a larger role while reducing government intervention in private businesses.

(p) Easing the one-child policy

China’s one-child policy has been relaxed now. Family-planning policies have been applied throughout China since the 1970s in order to control the population growth. However, such policies were always loosely applied in the rural provinces and they were gradually relaxed

(q) Modern Cultural System

It is promised to develop a modern cultural system by stressing socialist values, in a bid to boost the country’s cultural influence. China is proud of its ancient culture, contribution towards civility, infrastructure, governance, arts, and above all human development.

(r) Equalisation of basic services provisions

A total of 260 million migrant workers live in major cities within the country but do not have access to the same public services as other urban residents who hold a city hukou (residency permit). To facilitate free mobility of population and break the barriers initiated by the fifty years old hukou registration system, China intends to help rural migrants gradually become urban residents.

All restrictions on rural migrants settling in towns and small cities will be abolished, while those governing medium-sized cities will be loosened in an orderly manner. Reasonable requirements for settlement in large cities will be adopted, and strict control of population size in mega cities will institutionalized. It would promote sense of equality, freedom, healthy competition and above all production system in the country.

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(s) Social security reforms

The leadership of China promises to establish a fairer and more sustainable social welfare system. The detail is given the following table as:

Different Systematic Measures/Incentives Elaboration
Nationwide pooling of a basic pension Chinese leadership thinks that it is a basic human right which may bring desired goals of greater welfare for the workers in the public & private sectors.
Gradual suspending the retirement age of employees It would be giant step for work security, productivity and efficacy in the corporate, service and industrial sectors.
Development the commercial insurance China is sitting on the apex of industrial world. It would provide insurance cover to all the finished commodities services.
Speed up the reform of pension programmes for employees in public institutions affiliated with government It encourages the employees to work at their best for the overall betterment of the country.
Urban and rural basic pension and basic medi-care insurance schemes It would reduce the development gap between urban and rural areas and sense of privileged would be no more
Unified welfare system for all the Chinese citizen living in different parts It would build a national character of equality, fair-play and excel.
Diversification of investments for national social security system, improve public housing security and supply system Introduction of diversified investments options would be good for the country, institutions, corporation and insurance companies in the longer run

(t) Ecological Reforms

Ecological reforms focus on building a beautiful China through improvements in the use of land and resources and ecological and environmental protection. It indeed China’s love, respect and care towards environment, nature, earth and global common heritage.

(u) Political Reforms

Political reform to advance socialist democracy based on unity of three elements the leadership by the Communist Party, the people being masters of their own country and administering the country in accordance with the law. In this regard, the reform of the CPC would be achieved raising the level of governance, to be scientific, democratic and according to the law.

Multiplier Effects on China-UAE Future Engagements

It is expected that recent China’s reforms would provide ample opportunity for UAE investors in the days to come. It would gradually ease barriers to investment. It would also increase the volumes of bilateral trade and economic integration.

UAE private sector would now enjoy more freedom to do businesses in China since the recently announced reforms promised to give the market a “decisive” role in steering the market. According to reforms China is interested to seek to foreign investors to help develop its financial markets and prop up slowing economic growth. It would be win-win situation for the UAE private and national banking industry and financial centers to operate in China in the days to come. The UAE banks and financial corporations would be considering investing in small medium enterprises, construction, real estate, consumer banking and capital markets of the China. Parts of the liberalisation reforms include the gradual opening of Chinese markets which will give more opportunities to retail investors of the UAE to tap Chinese growth.

On its part, the central bank of the UAE has already activated a US$5.5 billion currency swap agreement between the two countries which is now facilitating the bilateral trade, investments, and banking and finance cooperation.

According to many regional financial experts Hong Kong, Singapore and London have been among the few places outside the China to benefit from an easing of controls in China’s financial system. Moreover, it would also a golden opportunity for the UAE to stride in the markets of China. The most meaningful step towards enhancing trade and investment ties between the two countries has already been signed i.e. the currency swap deal signed in January 2012. China has signed a string of similar deals with other nations in recent years as a way of bolstering trade and supporting the international use of the yuan.

Liberalization of currency management of China is another area of much interest of the UAE investors and money markets dealers. Analysts say the move reflects a concern by authorities that the yuan does not rise too fast. It has gained 2.4 per cent against the dollar so far this year, even as currencies of other emerging economies such as Indonesia and Brazil have been sold off. The reforms mean that it he yuan will gain power.

Dubai Chamber of Commerce and Industry (November, 2013) says that China-UAE trade has soared by an average 35 percent every year for the past decade, surpassing $35bn last year. It now represents 10 percent of total trade excluding oil.

In 2011, Dubai’s non-oil trade with China was valued at AED99.8bn ($27.2bn), making it the emirate’s second largest trading partner behind India.

UAE: A Strategic Trade Partner

It recently published report of the Dubai Chamber of Commerce and Industry about 60 percent of China’s total trade passes through the UAE, from where it is re-exported to Africa and Europe, making the UAE one of the Asian powerhouse’s most crucial partners. It is expected that the UAE would be one of the greatest beneficiaries of the recently announced Chinese reforms. Trade, tourism, construction and financial services would be the main sectors of mutual benefit in the days to come. The Economist Intelligence Unit assesses (November, 2013) by 2020, that China will be the most important economic partner of the GCC. Nearly 70 percent of all Sino-Arab trade takes place through Dubai.

Strategic Investments Prospects (UAE-China)

Different Fields Elaboration

Technology Transfer It would further enhance the volumes of bilateral trade. It would be a value-addition to UAE products. It would generate more jobs and as well as revenues for the government. The pace of the industrialization would be enhanced. Last but not the least, diversification of economy drive would be achieved.
Industrial Investment Industrialization is one of the main pillars of the UAE non-oil economy development. The greater industrial investments would be beneficial for the UAE. UAE investors would also consider investing in the Chinese markets.

Energy Alternative energy especially investments in Solar would be accelerated in the days to come. Mutual energy cooperation between Masdar and Chinese energy companies would be explored and further strengthened.

Tourism UAE tourism and hotelier industries on booming. Both countries would extend their cooperation in these fields.
Banks Currency swap has been inked. UAE investors and businessmen are now gearing to operate in yuan. It would streamline their businesses, investments and financial transactions.

Logistics UAE is the hub of logistics. It would provide vast opportunities for both the countries to excel in this particular sector.

According to UAE Ministry figures (2013), the Chinese bought properties worth nearly Dh550 million in 2010. GCC projects worth more than $350 billion are expected to be launched in 2013 by different Chinese private companies.

The research study conducted by the Dubai Chamber of Commerce and Industry stresses the need to have mutual cooperation in fields such as manufacturing, construction, electricity, gas and water industries, infrastructure (such as, roads, buildings, transportation, storage and communication), hotels and tourism, financial institutions, agriculture, healthcare, education and the various training sectors.

Trade between the UAE and China

According to an official data of the UAE government, Emirati trade with China is steadily increasing and it could reach to as much as $100 billion by 2015. During the past three years, economic ties between the UAE and China have grown stronger, particularly in sectors such as aviation and tourism.

The volume of trade between the UAE and China amounted to approximately AED 57.45 billion ($15.65 billion) in 2011. It accounted for almost 6 percent of the UAE’s international trade. UAE imports from China accounted for 95.6 percent of total trade activity with China. UAE imports from China accounted for AED 54.960 billion ($15 billion), while exports and re-exports to China accounted for AED 1.042 and 1.449 billion ($.25 and 4 billion), respectively. The machinery and mechanical appliances sector accounted for the largest import sector to the UAE from China with a value of AED 19.173 billion ($5.2 billion), followed by textiles and related articles with a value amounting to AED 7.905 billion ($2.15 billion). In terms of exports to China, plastic and related articles accounted for AED 0.548 billion ($.15 billion). As for re-exports, vehicles, aircraft, and vessels contributed approximately AED 0.656 billion ($.18 billion) in value terms.

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In 2005, just 11 Chinese companies were registered in Dubai. Four years later, the number had increased to 2,346. China is the world’s largest exporter to Dubai at AED 111 billion ($30.2 billion) worth of trade in 2012. Dubai’s trade with China covers a variety of sectors and activities. It is estimated that over a quarter million Chinese are involved in various business activities and development projects in Dubai.

Chinese Corporate Sector’s Presence in UAE

There are now 2,411 Chinese companies with Dubai Chamber membership, up 18 percent in only two years.

Dubai (2411) UAE (more than 1400)
Building materials, electrical, machinery, garments, gifts and novelty items Garments, consumer goods, construction, tourism, electrical machinery etc.
The Industrial and Commercial Bank of China Chinese oil giant Petro China
Source: Dubai Chamber of Commerce and Industry

Moreover, 250,000 Chinese toured the UAE in 2012, 30 per cent more than in 2011while a further 200,000 work and study here and 3,800 Chinese companies are now Emirates-based. By the end of last October, China’s annual investment in the UAE was $170 million. And its vast population, with a growing appetite for travel and luxury, has played a major part in the rise in Chinese visitors to the Emirates. Chinese travellers spend about $55bn a year, and that will increase.

UAE: An attractive investment market

UAE has now become an attractive investment market for China. It also further increases its position as an export hub for Chinese products in the MENA and beyond, providing a wide range of opportunities for SMEs in the import-export sector. The increasingly diversified economy of the UAE, its significant growth prospects, favorable tax regime and good infrastructure also make it a popular destination for Chinese investors.

The UAE is an attractive investment market for Chinese institutions and companies, especially in the real estate and tourism sectors. Earlier this year, China State Construction Engineering Corporation Middle East (CSCECME) announced it will invest USD 1 million in Dubai Palm Jumeirah’s Viceroy Hotel, one of the most ambitious hotel and luxury residential projects in the region.

UAE: Gateway for Chinese commodities & services

UAE has unique geographic position due to which the UAE acts as a gateway for Chinese products not only to the rest of the Middle East, but way beyond. According to the Emirates Center for Strategic Studies and Research (ECSSR) approximately 70 percent of Chinese exports to the UAE are re-exported to the rest of the GCC, Africa and even Europe. Many research studies and markets analysis establish that the UAE is one of China’s most important economic partners in the Gulf region, serving as a transfer center for Chinese products to the Middle East and African markets.

Standard Chartered Prediction

The closer commercial ties between the two countries would generate lots of economic benefits for both Abu Dhabi and Beijing. China has already outpaced India as the UAE’s number one trading partner. It is predicted that bilateral trade would surpass US$100 billion by 2015.

Historic Perspectives

Since 1984, China has had diplomatic ties with the UAE. Dubai (UAE) and Hong Kong (China) are emerging as new global banking centers. The UAE is an important hub for commerce to the Middle East and Africa. As more countries purchase Chinese goods, the popularity of the Renminbi will naturally grow. The Yuan can then grow in prominence as a global currency.

Since China and the UAE eased bilateral visa regulations in 2009, the number of annual Chinese travelers pouring into the Gulf state nearly doubled to over 300,000.

Cooperation of Convenience

1. Construction

China and the UAE have comparative advantages in different sectors. China has rich experience and expertise in the construction sector.

Field/Sector Details
Construction The Dubai Metro is one example of their expertise. There would be construction boom in different parts of the UAE especially in Dubai after winning the World EXPO 2020, the Chinese firms could further expand their networks in the UAE so as to get more contracts. According to the Chinese Ministry of Commerce, during the last two years, Chinese firms have secured over US$4.8 billion worth of contracts in the UAE.

2. Agro-Economy

It is analyzed that both countries would further strengthen its agricultural ties for mutual benefit.

Field/Sector Details
Agriculture China has vast expertise in in dry land farming. It has developed new varieties of vegetables, grains and fruits that have high degrees of tolerance in arid regions such as the UAE. Animal husbandry could be another area of mutual cooperation. Chinese biotechnology is highly advanced compared to that of the UAE. Chinese experience with dry land farming is fitting and the import of Chinese technology is promising with respect to enhancing the agricultural sectors of the UAE.

3. Energy Cooperation

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Field/Sector Details
Energy China has become a giant in energy consumption and it has even surpassed the US energy imports in the GCC and MENA. Development of energy resources, petro-chemical, and exploration of energy along with mutual cooperation in the fields of solar energy would be full of benefits for both the countries. Aramco and Sinopec Group signed the deal to develop the 400,000-bpd refinery, known as Yasref, in January 2013.

Chinese Currency Marketability

Since the global financial crisis of 2008-09, China has accelerated its efforts to open up international trading of its currency as it seeks to deepen investment and trade channels. The published data of the Society for Worldwide Interbank Financial Telecommunication (Swift), showed the Chinese currency had overtaken the euro to become the second-most used currency in global trade finance during 2013. China, Hong Kong, Singapore, Germany and Australia were the top users of yuan in trade finance.

According to World Street Journal (November, 2013), China Yuan for the first time joined the ranks of the most-traded international currencies, underscoring the rise of the world’s second-largest economy and the growth of the global foreign-exchange market. The Chinese yuan vaulted to ninth in the Bank for International Settlements’ latest report on foreign-exchange turnover, surpassing the Swedish krona and New Zealand dollar, among other widely used currencies.

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Trading in the Chinese currency, also known as the renminbi, has more than tripled over the past three years, to $120 billion a day in 2013, the BIS said, referencing survey data from April. Daily U.S. dollar trading in 2013 has averaged $4.65 trillion. It means that market share and acceptability of Chinese currency is on the rise around the globe. It is predicted that if a centre is established in Abu Dhabi, along with the other main markets, China would be able to increase its role as a global trade hub, developing short, medium and long term trade contracts.

Most of the trade from the GCC countries in the Chinese currency was done by firms in the UAE and Dubai in particular. As of now exports and imports done in renminbi by the UAE account for only 4 percent of the UAE’s total foreign trade but chances are high that this figure will rise to double-digit rates in the coming years. China’s largest bank ICBC and the Bank of China have branches in the UAE. It is proof that both sides are interested in intensifying financial and commercial relations.

According to analysts of the Hong Kong and Shanghai Banking Corporation Limited (HSBC) the trade between the United Arab Emirates (UAE) and China soared in 2012, but the Chinese currency did not reach the Gulf state’s hearts and minds. UAE-China bilateral trade reached to $40.42 billion in 2012 but only about 4 per cent of that trade is settled in yuan rather than dollars.

Although banks, including HSBC, Standard Chartered and local bank Emirates NBD, offered RMB accounts in the UAE and many Chinese banks’ established branches in the Gulf state, many consumers do not usually trade in RMB.

While Chinese businesses are naturally inclined to trade in the domestic currency, their business partners are also following suit now, as yuan transactions cut down foreign exchange risks and enable them to get discounts where possible. They also simplify documentation.

It is suggested that major oil and construction companies in the UAE must open RMB accounts. It would help them to reduce currency risk to import machinery from China in RMB and increase sales opportunities when they export through labeling goods in RMB, rather than in U.S. dollars. The RMB has globally become an accepted trade currency its way to internationalization was irreversible. The Western Union research (November, 2013), UAE traders could save more than US$200 million (Dh734.5m) a year by settling trade with China in the yuan. The majority of small to medium-sized enterprises (SMEs) trading between China and the UAE are using US dollars, leaving them exposed to foreign exchange costs and charges.

It is estimated that direct renminbi payments could help UAE SMEs reduce their exposure to currency fluctuations and give them the ability to price and settle invoices straight into renminbi providing a faster, cheaper and more transparent supply chain. Chinese suppliers can also benefit helping to reduce costs in the supply chain while simultaneously protecting profit margins.

RMB accounts

Many foreign banks including Standard Chartered, HSBC; local bank Mashreq; and Emirates NBD, Dubai’s largest bank are now offering RMB accounts in the UAE. Emirates banks have also begun taking their business to the yuan heartland. In addition to this, the Union National Bank was the first to open a representative office in Shanghai in 2007. Since then the National Bank of Abu Dhabi has established representative offices in Shanghai and Hong Kong, and Emirates NBD opened its Beijing office last year. Industrial and Commercial Bank of China (ICBC), Bank of China and Agricultural Bank of China are also operating in UAE. According to the published data of the Central Bank of the UAE, ICBC alone conducted yuan transactions valued at $2.1 billion in the inter-bank money market in the first half of 2012.

In 2012, Emirates NBD became the Middle East’s first issuer of offshore yuan bonds as Gulf firms sought to diversify from traditional funding sources in Europe. The 750 million yuan three-year notes had HSBC, Standard Chartered and Emirates NBD Capital as the book-runners.

Keeping in view its geographic location, level of economic integration with the different countries even to outside of the GCC and MENA, Abu Dhabi would be the obvious location to develop a Middle East clearing centre for the Chinese currency.

It is predicated that Dubai can be a yuan hub because of the increasing importance of Chinese trade with Africa and the Middle East in general, the huge growth in US domestic oil production will lead to a decrease in dollar trade with the Middle East. Hong Kong Monetary Authority (October, 2013) says that the UAE has huge potential to become a regional hub for the off-shore renminbi (offshore RMB) trade. It has the necessary financial infrastructure to link up the entire region’s trade with China to the fast growing off-shore RMB denominated trade and investments.

Chinese Efforts

China as part of internationalising the RMB (yuan) began trade settlement in RMB in a limited way using Hong Kong as the offshore RMB business centre. Currently more than 30 per cent of Mainland China’s trade is intermediated through Hong Kong. Last year some 60 per cent of China’s foreign direct investments originated from or through Hong Kong and China’s overseas direct investments were made through Hong Kong.

The regional bankers and financial experts say the scope of off-shore RMB settlements are fast catching up as demand for foreign direct investments into China and RMB denominated fund raising from the international markets are gaining momentum. Demand from offshore RMB is on the rise from traders, investors and all those looking to raise money.

Concluding Remarks

President Xi Jinping and Premier Li Keqiang announced a new socio-economic contract which would hopefully put their country on the right path of political glory, economic sustainability, financial stability and human dignity. It is the new beginning of deregulation and further economic liberalization. It is the new charter of massive industrialization, free trade zones and labour rights too.

It is the science of interest rate and currency management. It enhances the spirits of honesty, transparency, accountability among the employees and provides ample opportunity for the private sector to flourish in the reigns of state-owned enterprises. It facilitates the provisions of investments, and doing business across the country. It opens the gates of foreign banks and financial institutions to operate in the country of Confucius and avail win-win situation.

It values the importance of social security system in the country and strategies have already been announced to make it more productive, effective and supportive for all the citizens. Above all it is the systematic advancement of its social economy in the age of globalization 3.0 where interest is the ultimate weapon in the hands of free market economy’s handlers and resultant is the frequent political chaos, alarming ratios of poverty, unemployment, hunger, disease and underprivileged people living in the different parts of the world.

Some reform measures, such as curbing overcapacity and controlling local government spending, will involve short-term pain. But hopefully with strong political commitment, that specific matter will be resolved. Creating of a level-play field for private companies/entities and many other related reforms can unleash private sector demand for investment and consumption, providing support to growth even in the near future.

The easing of one-child policy will modestly raise the birth rate in the coming years, slowing down the pace of population’s aging process. According to China’s official data the number of new born babies is likely to rebound to the level of year 2000, implying around 1-1.5m addition from current level. It should have a meaningful impact in 2030 and beyond.

It is hoped that the combination of fiscal and financial reforms would boost productivity growth. Systematic urbanization would hold up infrastructure investment growth, and unleash the private investment power through easier access to funding for private companies. Deregulation would support for innovation. On the other hand, SOE reforms and urbanisation reforms would definitely boost efficiency in business.

The service sectors, allowing private companies to participate in railway, culture, financial services and healthcare would be giant leap in the future. The related supply of services will grow to match domestic and international demand. Moreover, the urbanisation reforms would assist shift labour from productivity farming work to higher productivity urban jobs, which itself is a substantial and sustainable productivity gain.

Historically, unlike previous third plenums, which mainly focused on economic issues, this time Chinese leadership has pledged to deepen diversified reforms, with the general goal of developing socialism with Chinese characteristics, and advancing modernization in the State governance system and governance capability.

Due to massive economic reforms it is hoped that bilateral trade, volumes of investments, pace of economic integration and activities of trade & commerce would be further increased between the UAE and China. Moreover, potential of logistics, aviation, space industry, electrical appliances production and energy would be rigorously explored. Last but not the least, tapping of water resources, agricultural, fishery, construction, and infrastructure would be given priorities by both the countries.

The Chinese government has certain limits on different countries. It is suggested that until there is more flexibility on that issue there will be broader shift to the yuan. Chinese authorities would need to ease further convertibility of the yuan before it could begin to make an inroad into the dollar’s status.

 

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