How can Saudi Arabia's $4 trillion sovereign fund invest in China?

Finance Associated Press, December 14 (Reporter Yan Jun) There will be new tools for domestic direct investment in Saudi Arabia.

According to the website of the China Securities Regulatory Commission, on December 13, Huatai Pineapple Fund reported a fund called "Huatai Pineapple CSOP Saudi Arabia ETF", which will invest in the Saudi Arabian ETF listed on the Hong Kong Stock Exchange by CSOP Pineapple Fund.

The pace of this report is very fast, and on November 29, the CSOP Saudi Arabia ETF was listed on the Hong Kong Stock Exchange, the first exchange-traded product in the Asia-Pacific region to track the Saudi Arabian stock market, through which the Saudi stock market index constituents can be traded, including the shares of oil company Saudi Aramco. It is reported that the asset size of this ETF is the largest of its kind in the world, and it can be traded in RMB or Hong Kong dollars.

Huatai Pineapple CSOP Saudi Arabia ETF, if approved, will be the first domestic ETF to invest directly in Saudi Arabia.

Whether it is from the trade level or the investment level, the relationship between Saudi Arabia and China has warmed up rapidly, and it has started a two-way journey.

At the China-Saudi Arabia Investment Conference on December 12, bilateral companies signed more than 60 memoranda and agreements, with a cumulative contract value of $25 billion, according to Arab sources.

Since Saudi Aramco's strategic investment in Rongsheng Petrochemical at the end of March this year, the sovereign wealth funds of Middle Eastern countries, including the Abu Dhabi Investment Authority and the Kuwait Government Investment Authority, have frequently made moves in China, including but not limited to energy, minerals, automobiles, electronic equipment and other fields.

Saudi Arabia's Public Investment Fund (PIF) also recently announced that it will open an office in Chinese mainland. The sovereign fund, with a management scale of more than 4 trillion yuan, has locked its investment scope in various fields such as new energy, large consumption, biomedicine, and information technology.

Domestic direct investment in Saudi Arabia, public offering and reporting ETF

By investing in Saudi Arabia by investing in the ETF target in the Hong Kong market, Huatai Pineapple Saudi Arabia ETF, which is a CSOP Saudi Arabia ETF, realizes the FTSE Saudi Arabia Index by tracking the Saudi Arabian ETF listed on the Hong Kong Stock Exchange by CSOP Fund.

Some industry insiders pointed out that it seems to be a bit awkward, but in fact, this product may still be carried out in the form of mutual listing, that is, the domestic public offering is linked to the CSOP fund products for overseas investment, and it is expected that the CSOP fund will also report ETF products linked to the domestic index to facilitate overseas investors to deploy A-shares. This type of cross-linked product is known as a bridge for domestic and foreign investors to invest in each other.

Previously, Huatai Pineapple CSOP Hang Seng Technology ETF and CSOP Huatai Pineapple CSI Photovoltaic Industry ETF, Huatai Pineapple CSOP Pan-Southeast Asia Technology ETF and CSOP Huatai Pineapple SSE Dividend ETF created a precedent for Shanghai-Hong Kong cross-listed ETFs and Shanghai-Singapore cross-listed ETFs respectively.

The Huatai Pineapple ETF tracking target is also a new product, only 16 days after listing, on November 29, CSOP Saudi Arabia ETF was listed, becoming the first exchange-traded product in the Asia-Pacific region to track the Saudi Arabian stock market.

CSOP Saudi Arabia ETF tracks the FTSE Saudi Arabia Index, which comprehensively covers more than 50 leading large and mid-cap companies listed on the Saudi Exchange, covering sectors such as financials, basic materials, energy and telecommunications, and can be said to be representative of the index that captures the driving forces of the Saudi Arabian economy. The same is true in terms of returns, with the FTSE Saudi Arabia Index delivering a respectable return of over 45% over the past three years.

As for the reasons for the layout, some industry insiders believe that driven by domestic and foreign market demand and the vigorous layout of domestic public funds, the cross-border ETF market is gradually emerging, the product variety is constantly enriched, and the increasingly diversified cross-border fund product system also continues to attract capital inflows, and more and more investors choose to use ETFs to deploy overseas markets. According to the data, as of November 28, the total share of cross-border ETFs has increased by 151.242 billion since the beginning of this year, an increase of 58%.

Middle Eastern tycoons have become A-share incremental funds

Saudi Arabia and China have always had close economic and trade exchanges. China has been Saudi Arabia's largest trading partner for the past decade, and Saudi Arabia has been China's largest economic and trade partner in the Middle East since 2001. In 2022, the bilateral trade volume between China and Saudi Arabia exceeded US$116 billion, an increase of more than 30% year-on-year.

Since the beginning of this year, the relationship between Saudi Arabia and China has warmed up rapidly, both at the trade level and the investment level.

At the China-Saudi Arabia Investment Conference held on December 12, bilateral companies signed more than 60 memoranda and agreements, with a cumulative contract value of $25 billion, covering a variety of sectors such as esports, energy, agriculture, tourism, mining and finance, according to Arab news. Among them, the Saudi Esports Federation and Chinese e-sports event operator VSPO signed a memorandum of cooperation worth US$8.5 billion, and Donghua Energy signed a cooperation agreement worth US$7.5 billion with Saudi companies.

In the capital market, the pace of mutual investment between Saudi Arabia and China is also accelerating. According to the brokerage research report, China's position in Middle East capital has increased from 4.5% at the end of 2019 to 22.9% in the first quarter of this year, ranking third in the first quarter of this year, from fifth at the end of 2019 to third in the first quarter of this year.

In March this year, Saudi Arabian oil giant Saudi Aramco announced that it would buy a 10% stake in Rongsheng Petrochemical for 24.6 billion yuan, a substantial premium of 90% that caused a sensation in the market. According to the announcement of Rongsheng Petrochemical, through this transaction, Saudi Aramco will obtain a large and stable crude oil procurement demand of about 480,000 barrels per day from Rongsheng Petrochemical and its subsidiaries, and further expand its layout in the field of chemicals in China.

In June, NIO signed a share subscription agreement with CYVN Holdings, an Abu Dhabi investment institution, which made a strategic investment of about US$1.1 billion in NIO to deploy a new EV manufacturer in China.

In terms of the layout of new energy vehicles, it is also reported that PIF is negotiating cooperation with Human Horizons, the parent company of Gaohe Automobile, and plans to invest at least 250 million US dollars. Previously, in June this year, PIF signed a joint venture agreement with Human Horizons to cooperate in the research and development, production and sales of new energy vehicles.

According to the data of the third quarter of this year, the Abu Dhabi Investment Authority has invested in 25 A-share companies, with a market value of about 9.567 billion yuan, and the Kuwait Government Investment Authority has invested in 28 A-share companies, with a market value of about 4.831 billion yuan. Middle Eastern capital has become an important incremental fund for overseas sovereign wealth funds to deploy in the A-share market.

This dimension of cooperation is also extended in the official context. Following the signing of a memorandum of understanding with the Saudi Exchange Group on December 10, the Shenzhen Stock Exchange and the Abu Dhabi Exchange signed a memorandum of understanding on cooperation in Abu Dhabi, the capital of the United Arab Emirates, on December 13, and the two sides will strengthen cooperation in promoting the participation of market entities in cross-border investment.

At the recent FII PRIORITY (Saudi Arabian Future Investment Initiative) summit in Hong Kong, PIF Chairman Yasir Al-Rumayyan revealed that the Saudi Public Investment Fund is expanding its international investment and will soon open an office in Chinese mainland after opening an office in Hong Kong.

This means that the sovereign fund, which manages more than 4 trillion people, is looking for investment opportunities in China. It has been pointed out that although the official has not yet disclosed the scope of investment, judging from the preferences of Middle Eastern capital many times before, new energy, large consumption, biomedicine, information technology and other fields are worth looking forward to.

In fact, in addition to the imminent opening of an office by PIF, in September this year, Mubadala Development Company, the sovereign wealth fund of the United Arab Emirates, opened an office in Beijing. Prior to Mubadala, Middle Eastern sovereign funds such as the Abu Dhabi Investment Authority, the Kuwait Investment Authority, and the Qatar Investment Authority had set up offices in China.

(Financial Associated Press reporter Yan Jun)