(Mr. Li Shuirong, Chairman of Rongsheng Petrochemical, and Mr. Khalid ·, Minister of Investment of Saudi Arabia, had an in-depth and friendly exchange on cooperation with Saudi Aramco)
In recent years, with the significant improvement of China's political and economic strength, the increasing influence in global governance and international affairs, and the deepening of political, economic and trade relations between China and Middle Eastern countries, the strategic vision of Middle Eastern capital is gradually focusing on China, and the pace of accelerating investment in China is remarkable. Whether it is new energy, Internet technology, or other emerging fields, the presence of Middle Eastern capital is frequent, demonstrating their firm confidence in China's future development, seeking closer political and economic relations with China, and achieving energy and economic transformation through technical cooperation. So, what are the characteristics of Middle Eastern capital? What is the dynamics of its investment in China? Which direction will the future investment trend take? This article will explain them one by one.
Middle East Capital – a heavyweight player in the capital markets
The most common types of capital in the Middle East are sovereign wealth funds, family offices and corporate investment departments.
Table: Introduction to the main Middle East capital classifications
Data source: Rongzhong Research
1.1 Sovereign Wealth Funds
1.1.1 Introduction to sovereign wealth funds in the Middle East
In the domestic investment of Middle Eastern capital, the most common occurrence is the figure of sovereign funds. Sovereign wealth funds, as opposed to private wealth, refer to the public wealth accumulated by a government through specific tax and budget allocations, renewable natural resource revenues and balance-of-payments surpluses, etc., controlled and controlled by the government, and usually held in foreign currency. As an investment fund or entity set up by the state, a sovereign wealth fund aims to manage the country's foreign exchange reserves, usually derived from the country's budget surplus, foreign exchange reserves, merchandise export earnings, etc.
In the last century, after earning a large amount of foreign exchange through the export of natural resources such as oil and natural gas, countries in the Middle East gradually completed the primitive accumulation of capital and set up sovereign wealth funds one after another. At present, the Middle East sovereign wealth management institutions that are more active in the world mainly include ADIA, PIF, QIA, Mubadala and other relatively high-ranking Middle East sovereign wealth funds.
1.1.2 The Middle East sovereign fund is a force to be reckoned with in the global financial landscape
Since the beginning of 2021, the global sovereign wealth fund has exceeded $10 trillion and is in a growing trend. From the perspective of pattern, in June 2024, the Middle East and North Africa region accounted for the highest proportion of global sovereign wealth fund shares, reaching 42%; followed by Asia, accounting for 34%; Europe has the third largest share of 17%. The combined share of the above three regions is more than 90%.
Chart: Global sovereign wealth fund size from 2014 to 2024 (trillion USD)
Source: Global SWF (Note: 2024 data as of June of the same year)
Chart: Global share distribution of sovereign wealth funds
Source: Global Sovereign Wealth Fund Data Platform (Global SWF)
Global sovereign wealth funds (SWFs) have a total investment of $124.7 billion in 2023. The Middle East occupies five of the top 10 investment scales: U.A.E. Abu Dhabi Investment Authority (ADIA), Kuwait Government Investment Authority (KIA), Saudi Public Investment Fund (PIF), Qatar Investment Authority (QIA), U.A.E. Dubai Investment Company (ICD). In 2023, the Saudi Public Investment Fund, U.A.E. Mubadala, Abu Dhabi Investment Authority, Abu Dhabi Development Holding Company (ADQ) and Qatar Investment Authority invested a total of $74 billion, accounting for 58.34% of the total global sovereign wealth fund investment. Among them, the Saudi Public Investment Fund invested 31.6 billion US dollars, ranking first in the world. In 2023, global state-owned investors invested a record $26.1 billion in the new energy sector, with Middle Eastern sovereign wealth funds contributing nearly half. In 2023, the assets under management of the five largest sovereign wealth funds in the Middle East will reach US$4.1 trillion, of which the cumulative investment in China will be about US$40 billion.
Therefore, from multiple perspectives such as fund management scale and investment scale, Middle East sovereign wealth funds occupy an important position in the global financial market and have significant influence.
1.2 Family Office
Family offices in the Middle East are equally eye-catching. As the "crown jewel" of the wealth management industry, family offices are an increasingly important institutional investor in the international financial markets, and the Middle East has benefited from the economy, strategic location, business environment and attractive tax policies, which have led to the emergence of a number of family offices, many of which have more than US$1 billion in management. In March 2024, Dubai's royal prince Sheikh Ali revealed in an interview that he was considering opening a family office worth US$500 million in Hong Kong, China, showing the confidence of Middle Eastern family offices in China's development.
1.3 Corporate Investment Department
In addition to sovereign wealth funds and family offices, companies in the Middle East also have a need for outbound investment, the most well-known of which is Saudi Aramco, the full name of Saudi Arabia Oil Company. Saudi Aramco is a global leader in the oil and gas industry, known for its vast resource reserves, strong production capacity and extensive global market layout. With a net profit of US$121.3 billion and an annual capital investment of US$49.7 billion in 2023, the company is one of the largest foreign companies in the world investing in China, and is involved in traditional energy, AI, new energy and other aspects.
1.4 Analysis of the investment styles of different Middle Eastern capital entities
Table: Summary of the investment styles of different Middle Eastern entities
Data source: Rongzhong Research
Investment dynamics - increase China, frequent shots
2.1 Domestic high-tech industries are favored
Table: Middle Eastern Capital Begins to Accelerate Its Entry into China's Private Equity Market
Data source: Rongzhong Research
In the choice of China's regional investment direction, Middle East capital has maintained its long-term tendency, taking into account its own national industrial development plan and China's advantageous industries, mainly focusing on artificial intelligence, biomedicine, new energy and intelligent vehicles. At the same time, the Gulf countries started with energy, have a full understanding of the industry, and will habitually pay attention to some traditional energy projects. According to the statistics of Zhang Tongshe, from October 2020 to January 2024, among the investments of Middle East capital in 16 enterprises in Shanghai, 7 are biomedical companies and 7 are artificial intelligence companies, which can be seen that Middle East capital favors the above industries.
Chart: Number of Middle East Capital Investments in Shanghai from October 2020 to January 2024 (Unit: up)
Data source: Zhang Tongshe, Rongzhong Research
For example, from the investment orientation of the Saudi Public Investment Fund (PIF), we can repeatedly glimpse the figure of Saudi Arabia's "Vision 2030" - looking forward to the energy transition and changing the economic structure and international image of Saudi Arabia; The purpose of its investment is not only to make profits, but also to serve the realization of national strategic purposes. In terms of specific investment projects, PIF's investment projects in China include the acquisition of 10% of the equity of Rongsheng Petrochemical for 24.6 billion yuan, the signing of a cooperation framework agreement with Dongfang Shenghong, and the promotion of the acquisition of 10% of the strategic equity of Jiangsu Shenghong Petrochemical Group Co., Ltd., a wholly-owned subsidiary. On May 29, 2024, Lenovo Group announced a strategic partnership with Alat, a PIF company, in which Alat proposes to provide Lenovo Group with a $2 billion investment in non-interest-bearing convertible bonds. On July 16, 2024, PIF signed a strategic agreement with a joint venture in Saudi Arabia with a leading new energy company such as Envision Technology Group, JinkoSolar and TCL Zhonghuan to promote the clean energy transition in the Middle East.
Since Mubadala Investment Company of U.A.E. entered the Chinese market in 2015, it has successively invested in companies covering technology, consumption, medical and life services such as Kuaishou, BOSS Zhipin, Xpeng Motors, SenseTime Technology and Ziru.
2.2 Set up offices in China to integrate into the Chinese market
As China's position in the Middle East capital investment map continues to rise, in order to better reach the Chinese market, understand the Chinese economy and Chinese companies, and search for more investment opportunities, Middle East capital is gradually considering setting up offices or offices in China, which is also conducive to strengthening its influence in China.
Table: Middle Eastern capital has set up corresponding institutions in China
Data source: Rongzhong Research
An analysis of the information of enterprises with control in the outbound investment of Saudi Arabia Public Investment Fund Asia Limited (registered in Hong Kong, China) is analyzed in the following table, which shows that its investment direction in China is relatively diversified, involving various industries such as consumption, finance, manufacturing, and real estate.
Table: Enterprises under effective control of Saudi Arabia Public Investment Fund Asia Limited
Data source: Qichacha, Rongzhong Research and collation
2.3 Requirements and Challenges for Attracting Middle Eastern Funds
2.3.1 Trends of domestic enterprises and GPs - going overseas in the Middle East
What conditions do domestic entities need to meet and what challenges do they face if they want to attract Middle Eastern capital? We can observe and analyze the trends of each related company and GP.
1. A number of invested companies go overseas to the Middle East to stimulate local industries: Behind the strengthening of investment in Chinese enterprises, Middle Eastern capital also hopes to form strategic cooperation with China in various fields, cultivate domestic markets and improve economic structure.
Table: Examples of portfolio companies going overseas to the Middle East
Data source: Rongzhong Research
2. Domestic GPs are also accelerating their presence in the Middle East: In addition to Chinese companies hoping to attract investment from Middle Eastern capital, many domestic GPs also hope to be favored by Middle Eastern capital. Since 2024, several well-known VCs have started to open offices in the Middle East.
Table: Examples of GPs setting up offices in the Middle East
Data source: Rongzhong Research
It can be seen from the above-mentioned main trends that Middle Eastern capital not only aims to obtain financial investment returns, but also has its own special demands in the field of investment, industrial cooperation and other aspects. We have further summarized and analyzed the conditions required to attract capital investment from the Middle East and the challenges that will lie ahead from the enterprise side and the GP side respectively.
2.3.2 Challenges for domestic firms to attract Middle Eastern capital
For domestic enterprises, in addition to satisfying their investment returns in the future, they also need to face challenges such as catering to the technology export demands of the joint venture partners, adapting to cultural differences, and adapting to the policy, regulation and legal environment to obtain funds from the Middle East.
- Technology Export and Economic Diversification Demands: Middle Eastern investors often want to invest in advanced technologies and innovative solutions to help transform and diversify their economies. This requires Chinese enterprises to focus on the investment and commercialization of high-tech products, export them overseas in the future, and may need to solve complex intellectual property management issues in technology transfer.
- Differences in Cultural and Religious Backgrounds: There are significant differences in culture, religion, and business practices between the Middle East and China. Companies need to overcome these cultural barriers, establish good communication channels, and respect local religious practices and social norms, which is also a challenge for Chinese companies that are preparing to set up a local branch.
- Differences in policy and legal environment: The legal system and regulatory environment in Middle Eastern countries are very different from China's, and companies need to be familiar with and comply with local laws and regulations, which may include foreign investment restrictions, tax policies, labor regulations, etc. At the same time, the economic policies of Middle Eastern countries may be adjusted due to political changes, and domestic enterprises need to consider the continuity and stability of policies when formulating long-term cooperation strategies with Middle Eastern enterprises or capital.
2.3.3 The challenge of domestic GPs to attract Middle Eastern capital
For domestic GPs, attracting funds from the Middle East needs to meet the requirements of capital flow and compliance, the governance structure and registration location may need to be adjusted, and the behavior of attracting reinvestment needs to be carried out.
- Restrictions on the use of funds: Due to the fact that the attributes of the GP's past funds may be different from those of Middle East capital, resulting in different investment strategy preferences, Middle East LPs are likely to impose specific requirements on the use of funds, such as restricting investment in specific industries or projects. This may not be entirely consistent with the past investment strategies of some Chinese GPs and needs to be clearly stated in the agreement. This also means that if domestic GPs are good at investing in the past and the intentions of Middle Eastern capital, it will be difficult to get capital injections.
- Compliance and transparency requirements: Some Middle Eastern capitals may not be familiar with the Chinese market and domestic GPs in the past, and as multinational investors, they tend to be more cautious and may have higher requirements for compliance and investment transparency.
- Governance structure and domicile may need to be adjusted: Some Middle Eastern investors may require significant positions in the investment governance structure, such as board seats or decision-making power, which may affect the independence and flexibility of GPs. At the same time, some Middle Eastern LPs will want the GP to set up an office or register a new fund in the local area, and the GP needs to have a full grasp of the local laws, regulations and business rules.
- Meet the requirements of investment or investment: Although Middle Eastern consortiums have abundant capital, as LP contributions, they often have the need for investment and investment. Due to the development strategy of the country where they are located, they also hope to help their country change the single economic structure that relies on oil and gas and upgrade to new energy and smart cities through the layout of China's new energy and advanced manufacturing. Chinese GPs will also face the soul torture of "whether there are projects that can be built and landed", and GPs who have enough resources and reserves in related industries will be favored by more Middle Eastern LPs. For GPs, it is difficult to attract Middle Eastern capital if they do not have enough experience in attracting return investment or more suitable reserve projects. This also brings more transformation requirements and pressure to GPs, prompting them to continue to cultivate internal skills, accumulate resources, and optimize services. GPs' ability to combine their own advantages to build an ecosystem with distinctive and sustainable output capabilities will become more and more important.
2.4 There are many benefits to bringing in Middle Eastern funding
2.4.1 Benefits of domestic firms in attracting Middle Eastern capital
For domestic enterprises, the benefits of attracting Middle Eastern capital include alleviating the financial pressure that may be brought about by the withdrawal of the US dollar, facilitating industrial cooperation and market development, and enhancing brand and international influence.
- Dealing with global economic uncertainty and dollar exit through the help of Middle East funds: Against the backdrop of increasing global economic uncertainty and tightening US dollar liquidity, the Middle East is expected to become an important source of funding for domestic enterprises and LPs due to its abundant capital. Sovereign wealth funds and investment institutions in the Middle East have accumulated a large amount of capital due to the income from oil and other resources, and are strong enough to provide a relatively stable and sufficient source of funds for the domestic market, helping to alleviate the financial pressure that may be brought about by the gradual withdrawal of the US dollar.
- Industrial cooperation and market development: By introducing Middle Eastern capital, domestic enterprises can promote industrial cooperation with related enterprises in the Middle East. For example, Chinese companies can use their own technology and manufacturing capabilities to cooperate with Middle Eastern countries in areas such as new energy and infrastructure construction, so as to achieve a win-win situation. At the same time, the introduction of Middle East funds can not only provide financial support, but also help domestic enterprises to enter the Middle East market more easily. By partnering with local investors, businesses can better understand and adapt to local market needs and cultures to successfully expand their business.
- Enhance brand and international presence: Gaining the support of Middle Eastern sovereign wealth funds or well-known investors can enhance the brand image and credibility of domestic companies in the international market. This helps businesses attract other international investors and enhance their global competitiveness.
2.4.2 Benefits of domestic GPs in attracting Middle Eastern funds
For domestic GPs, the replenishment of Middle East capital is conducive to diversifying funding sources, stabilizing capital supply, enhancing international reputation and brand image, and optimizing investment portfolios.
- Diversify funding sources: By attracting LPs from the Middle East, Chinese GPs can broaden their funding sources and reduce their reliance on domestic and other traditional funding sources. This is especially important in the current context of heightened global economic uncertainty.
- Stable capital supply: Sovereign wealth funds and large investment institutions in the Middle East have large amounts of stable capital that are not susceptible to short-term market fluctuations. For Chinese GPs, this means more stable financial support.
- Long-term investment perspective: Many Middle Eastern investors prefer long-term investments, which is in line with the long-term investment strategy of many Chinese GPs. This kind of long-term financial support helps GPs to plan for the long term in asset allocation, project selection and value creation, without worrying too much about short-term market fluctuations, and is more conducive to the optimization of GP portfolios.
- Enhance international reputation and brand image: Obtaining financial support from well-known investors in the Middle East can enhance the international reputation and brand image of Chinese GPs, help to further attract other international investors, and improve the global influence and competitiveness of GPs.
Compare United States - Middle Eastern capital investment in the United States
3.1
Table: Partial investment by Middle Eastern capital in the United States
Data source: Rongzhong Research
Judging from the investment trends of Middle Eastern capital in United States, it is more favored in the fields of big data, cloud computing, medical and health, new energy, finance, and infrastructure construction. We believe that it is mainly based on the following considerations: 1. Investing in technology and biotechnology companies will help Middle Eastern countries obtain advanced technology and innovation results, and promote the development and technological progress of their own related industries; 2. The technology sector of the United States market tends to bring higher returns; 3. By investing in United States, one of the most important markets in the world, Middle Eastern countries can not only gain economic benefits, but also enhance their influence and voice in international affairs.
3.2 The geopolitical impact will not change the long-term capital inflow into China
In recent years, Sino-US relations have undergone remarkable changes, and although the cooperation between the two countries in the fields of economy, trade, science and technology has been deepening, there are still differences and controversies on some sensitive issues. These differences are not only reflected in the political and security spheres, but also have an indirect impact on economic cooperation between the two countries. For Middle Eastern capital, these divergences may increase the risk of uncertainty and political costs of investing in China.
Political and Diplomatic Environment: Changes in U.S.-China relations have a direct impact on the global political and diplomatic environment. For example, geopolitics will lead to increased political pressure on China from the international community, leading some countries to be cautious about investing in China. However, China has maintained friendly diplomatic relations with Middle Eastern countries for a long time, especially under the "Belt and Road" initiative, and the cooperation between the two sides has become closer, and this stable bilateral relationship provides a relatively safe political environment for Middle Eastern capital to invest in China. Middle Eastern capital investments in China are often strategic and long-term, with the aim of seeking stable returns and strategic cooperation; The huge potential and economic growth prospects of the Chinese market are hugely attractive to capital in Middle Eastern countries, and we believe that many Middle Eastern capitals continue to be optimistic about the long-term development of the Chinese market, even in the context of unstable relations between China and the United States.
Economic environment and market access: Geopolitical issues may lead to global economic instability, but they also provide unique opportunities for Middle Eastern capital to invest in China. During the US-China trade war, China stepped up its openness to investment from other countries in response to United States economic pressures. For example, China has reduced restrictions on foreign investment, further opened up its financial markets, and actively attracted investment from countries along the Belt and Road. In this case, for Middle Eastern capital, it can get more opportunities to enter the Chinese market.
Technology Cooperation and Industrial Investment: The impact of U.S.-China relations on the high-tech sector is particularly significant. As the U.S.-China technology competition intensifies, China faces more external pressure in high-tech areas such as chips, artificial intelligence and new energy, which is also an opportunity for cooperation and investment in these areas in the Middle East. For example, Saudi Arabia's Vision 2030 proposes to build Saudi Arabia into a core country in the Arab and Islamic world, a global investment powerhouse, and a hub connecting Asia, Africa and Europe, with three themes as "a vibrant society", "a thriving economy" and "an aspiring country". The specific implementation level can be divided into 27 sub-goals and 96 strategic goals. It clearly proposes the localization of the new energy industry chain, the development of industrial equipment manufacturing, and investment in the digital economy, which not only includes a large number of scientific and technological and innovative projects, but also demonstrates its demands for improving the business environment, strengthening trade, and developing and prospering the retail industry. China's technology and market can provide support and cooperation opportunities, and Chinese companies can also gain access to a larger consumer market.
Of course, taking Russia as a reference, we can see that after the Russia-Ukraine conflict, United States launched economic sanctions against Russia, and expanded the subject and scope of sanctions by establishing a broad sanctions alliance. In the financial sector, for example, banks in Russia are banned from using SWIFT; Foreign financial institutions involved in facilitating relevant transactions will face the risk of secondary sanctions. If tensions between the two sides continue in the future, it cannot be ruled out that the United States may introduce a policy to restrict international financial institutions that have invested in China. At that time, international capital will need to face the choice of different investment markets, or consider policy circumvention by setting up different entities.
Conclusion - mutual respect and win-win cooperation
On the whole, it is a general trend for Middle Eastern capital to pay more attention to and participate in the Chinese market. However, when Chinese companies and fund managers need to try to attract Middle Eastern capital, they need to pay full attention to their demands: the importance of China's advantageous technology industries, the demand for diversified investment, and the demand for feeding back the relevant industries in the countries where they are located. In the long run, the changes in Sino-US relations are both a challenge and an opportunity for Middle Eastern capital to enter China's investment, China's technological progress, industrial upgrading required capital gap for a long time, Middle Eastern capital also needs a large volume, high level of science and technology, stable and safe investment environment to carry its huge capital, the Chinese market has a huge attraction to it. We have reason to believe that based on long-term development considerations, Middle Eastern capital will increase its investment in the Chinese market for a long time.