Institutional investors from the Middle East are deepening their engagement with China, signing new agreements and establishing onshore offices in the giant Asian market.
Over the past two years, a growing number of Middle Eastern investors, including sovereign wealth funds (SWFs), family offices, and corporate investment arms, have been investing in Chinese assets.
Earlier this month, the Public Investment Fund (PIF), Saudi Arabia’s SWF, signed memoranda of understanding (MoUs) with six of China’s leading financial institutions, including the four major state-owned banks, the Export-Import Bank of China, and China Export & Credit Insurance Corporation.
The MoUs not only allow PIF to invest in China but also facilitate Chinese investment in Saudi Arabia. They represent a total investment value of around US$50 billion. A significant feature of the MoUs is the potential shift towards using local currencies for trade settlement, bypassing the US dollar.
The past 12 months have seen Middle Eastern SWFs investing about US$7 billion in China, approximately five times the amount in the previous year. This trend underscores the immense potential of these investments, especially considering that six of the world’s top ten SWFs are based in the Middle East.
Top emerging market
Fund managers from the private equity/venture capital sector have noted that Middle Eastern investors widely regard China as the most important emerging market investment opportunity in the next 12-18 months, potentially surpassing interest in Southeast Asia and diverting attention from India.
The growing political and economic ties between the Middle East and China are driven by several factors. Gulf countries are strategically planning for a post-oil economy, which might need China’s expertise in the digital economy and new energy sectors.
Additionally, Middle Eastern countries are striving to maintain an independent political stance by balancing relationships with the United States and China. With global markets facing a host of challenges and uncertainties, Middle Eastern investors want to diversify their investments across the globe.They are rebalancing their portfolios, which historically have been heavily concentrated in the US and Europe.
Mubadala Investment Company, a sovereign investment arm of the Government of Abu Dhabi, established an office in Beijing in September last year, and PIF is planning to open a Beijing office by the end of 2024 or early 2025, building on its existing presence in Hong Kong. Additionally, institutional investors like the Kuwait Investment Authority (KIA) and Abu Dhabi Investment Authority (ADIA) already operate offices in China. These moves reflect their confidence in the long-term development of the Chinese market.
As Middle Eastern SWFs establish offices in China, their local teams are becoming more sophisticated. The growing familiarity leads these investors to favour direct investments and expand from traditional US dollar funds to renminbi-denominated funds.
Investcorp, an independent asset management company headquartered in Bahrain, announced late last year its plan to raise between 2 billion and 4 billion yuan (US$282-564 million) for its first renminbi private equity fund, which it intends to use in acquiring Chinese companies.
Shift in strategy
For the past two decades, Middle Eastern institutional investors have been participating in the Chinese market mostly as limited partners (LPs), which has limited their knowledge of the investee projects or companies.
However, according to private capital/venture capital houses, this investment strategy has shifted to a more proactive approach. Nowadays, Chinese general partners (GPs) identify investment projects for Middle Eastern LPs, and the LPs must approve and set up dedicated funds to conduct co-investment instead of GPs taking care of everything on behalf of LPs.
Middle Eastern investors are focused on sectors such as new energy, hard technology, biomedicine, digitalization, fine chemicals, and large-scale cultural and tourism projects.
According to a study by Chinese firm Orient Securities, Saudi SWFs see significant potential for collaboration with China in three key areas: energy, infrastructure, and manufacturing. Solar power is likely to become a major focus of Saudi investment in China, with gaming, e-sports, and leisure consumption emerging as new investment hotspots.
PIF's holdings reveal a preference for growth-oriented, innovation-driven companies, according to Orient Securities, with technology enterprises poised to become favourites.
Mubadala is more interested in China's new economy based on internet development, particularly the innovation of traditional industries on internet platforms.
ADIA is focusing on innovative medicine and biotechnology, new energy and traditional energy manufacturing, as well as infrastructure-related industries such as urban construction.
KIA prefers a conservative investment approach, focusing on fixed-income and listed companies, according to Orient Securities.
