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The Chinese connection
Published in Al-Ahram Weekly on 20 - 01 - 2016

Egypt's exports to China currently amount to around $700 million, while the country's imports are around ten times that figure. How can the trade balance be improved?
Egypt should enhance its industrial production. The Chinese market is open to everyone, and we import more than $1 trillion worth of goods every year. But the products have to be competitive in terms of quality and price as well as quantity. Last year, we saw a big increase of imports of oranges from Egypt.
The Egyptian government wants to export more agricultural products, which is welcome because we do not have the same seasons and therefore we can import items when they are not in season in China. The Chinese market needs these goods. If we do not import them from Egypt, we will need to import them from other markets.
However, we face technical problems because being on a different continent with a different climate and different pests we have to be very careful about not importing Mediterranean diseases to China. We need appropriate technical treatment to prevent the transfer of such diseases.
During the first half of this year we will send a team to study the Egyptian grape harvest to see whether through technical cooperation we can import grapes from Egypt. However, when we import we import in very large quantities, which is also a problem because in Egypt farms are mostly small, meaning that we cannot monitor the quality equally among them.
On a large farm, the same technology is used, and there is the same quality. If there is interest from Chinese investors, we may perhaps take the opportunity of the government's plan to reclaim 1.5 million feddans to cultivate specifically for export to China.

Official figures show that Chinese investment in Egypt is only around $500 million. Why is it so low?
We have different figures for Chinese investment in Egypt. We have the statistics of the General Authority for Free Zones and Investment (GAFI) and those from the Chinese Ministry of Commerce. Neither shows the real size of investment, and they only record some of the investments from China. Some investments come from companies registered in Hong Kong and are not recorded as Chinese, for example.
The real investment from China to Egypt is much bigger and is about 10 times the official statistics, or around $6 billion. For example, the China Petrochemical Corporation (Sinopec Group), the biggest oil company in China, has invested more than $3.8 billion over the last three years through the American oil company Apache. The Chinese company has around one third of Apache's Egyptian oil and gas business. Another company, the Zheng Hua Oil Company, has invested more than $800 million in the oil sector. These two companies alone have between them invested $4.6 billion in Egypt.
In addition, the TEDA industrial zone in the Gulf of Suez houses many Chinese companies. The first phase of the industrial zone, which occupies over 1.34 square km, is run by the Chinese industrial land developer, the TEDA Group, which invested around $150 million to develop the zone.
In this zone there are more than 30 manufacturing companies that are already operational, as well as 35 service companies. Work in the zone started five years ago. The second phase of the project, extending over six square km, begins this month. We hope the launch of the construction will be during the president's visit to Egypt.
In the first phase of 1.34 square km some very big Chinese companies are involved. These include the Jushi Group, the world's largest fibreglass manufacturer, which has set up Jushi Egypt for the Fibreglass Industry. It has invested $260 million in the first line of fibreglass production, and 95 per cent of its produce is exported.
One of its export markets is the European Union, and as a result the company uses Egyptian minerals to benefit from Egypt's association agreement with the EU. It also exports to the Middle East and is now constructing a second production line at an investment cost of $188 million. It is scheduled to go into operation by the middle of this year.
A third production line, costing $180 million in investment, is planned for the end of this year. When these three phases are complete, production capacity will be 200,000 tons per year, making Egypt among the top producers of fibreglass in the world.
Since this production has a high technology component and the products are much needed by the international market, and there is a wide range of uses for its products, this company has become a magnet for downstream and upstream industries. Already last year a downstream company was established making fibreglass fabric for industrial use.
Upstream, there is a factory processing minerals in preparation for production. We expect that in the future companies will be set up to manufacture blades for wind-energy generation made from fibreglass.
The industrial zone includes storage silos and manufacturers of petroleum pipes and electrical transmission equipment as well as oil rigs. Outside the TEDA zone there is substantial Chinese investment in other areas such as Beni Suef, Sadat City and 6 October City. Companies there manufacture everything from yeast, to poultry feed, air conditioners, automobile assembly lines, scarves, garments and furniture.

What laws govern the TEDA industrial zone?
The first phase of 1.34 square km is subject to Investment Law No 8. The second phase of six square km is subject to Law 83 regulating the special economic zones [SEZ]. We hope that eventually the entire zone will be subject to Law 83. We are still discussing with the Egyptian authorities whether this is possible because the industrial zone is already within the perimeters of the new Suez Canal Area Development Project.

What do you think of the amendments to Law 83 governing the special economic zones?
The current law should apply to the second phase of six square km because TEDA signed the contract for the second phase in 2013 before the amendment to the law. Law 83 was first passed in 2002. In the 11 years since then no single investor has entered the country under Law 83 except TEDA.
When it signed the contract in 2013, it needed more than one year to register the company because Law 83 requires the setting up of a new company to run the zone. But when it was about to receive the land from the government, the law was changed and two key articles regarding tax relief were removed from the law.
We would like to ask the Egyptian authorities to apply the “old investor, old law; new investor, new law” principle and to treat TEDA as an old investor subject to a tax rate of 10 per cent rather than the amended 22.5 per cent tax rate in the new law. But we have not yet received a positive response from the Egyptian authorities.

What problems are Chinese investors facing in Egypt?
They are facing a lot of problems. Sometimes they do not feel that the policy environment is very stable. The stability of the policy environment is very important for the confidence of investors. They need to be sure that the environment in which they made their calculations will be maintained for a certain period.
They also complain of the bureaucracy. Company registration and work permits take a long time and sometimes they are refused by the authorities, without explanation. They also do not feel any improvement after the amendments to the investment law. They complain about the electricity cuts. Last year was better, but there is still a problem here. Chinese investors also have difficulty repatriating their profits because of problems with hard currency.

From your point of view, how can these problems be resolved?
Through allowing more favourable conditions for foreign investors to help enhance production and industry, supply products for the domestic market, and reduce imports and increase exports. In China, growth was triggered by the country's special economic zones. No money was given by the central government to the SEZs, which grew with investments from abroad.
The government gave tax relief and facilitated procedures for investors. The provision of land, company registration and other administrative procedures were taken care of by the local government in order to help the investors. Of course, this needed a gradual change in the mindset of government officials.
It is very important that foreign investors make money. If they do not make money they will not come. That is why foreign investors enjoyed favourable treatment for a very long time in China, even more than domestic investors. This was not fair for the domestic industries, but at that time we needed to do it and we learned a lot from the foreign investors. Now we treat all investors equally.
This is also the way to resolve hard currency problems. At one point, China had a critical level of foreign exchange reserves at just $20 billion. We resolved this by attracting a very large number of foreign investors to come to China to manufacture and to export. For a long time, 80 per cent of Chinese exports were by foreign investors.
If Egypt can attract foreign investors to the manufacturing sector, it can also improve its hard currency situation. Egypt has more favourable conditions for attracting foreign investment than China did 40 years ago, including its location, the Suez Canal, relatively good infrastructure and ports, a good transportation network, and the treaties with the EU and the African and Arab countries. Egypt also has a large number of workers who can be trained.

To what extent are Chinese investors interested in the Suez Canal Area Development Project (SCADP), the new capital and in modern transportation projects in Egypt?
These projects should be profitable. Any investor, private or public, wants to make money, so if the projects are profitable they will come. If they are not, they will not. I met with the chairman of the SCADP Authority, Ahmed Darwish, and was impressed by his views to develop the zone. I am very optimistic about Chinese investors coming to the Suez Canal area for investment. The TEDA zone is a good base for Chinese investors.
Infrastructure projects are more complicated, as they need huge investment and they need a long time to achieve returns. As for transportation projects such as the project for electrifying the rail network, we cannot expect private investment for that as it is more of a social project than an economic one.
For the new capital, there may be some projects for real estate developers. I do not believe the investment will be from Chinese companies, however. It will probably come from contractors. Chinese companies have an interest in investing in new national projects, but they will look carefully at which will be possible investments and which will be engineering, procuring and construction contracts.


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