Increased Middle East-China Cooperation: New Silk Road, New Riches

 |  Includes: CHL, FXI, GAF, PGJ, TM
by: Shaun Rein

A few months ago, I had a nice meeting with one of the heads of Dubai’s sovereign fund. He was in China scouting out new investment opportunities. He was seriously well-informed on the markets in China but was looking to increase his exposure to China while at the same time was concerned about high valuations. I gave him my opinion on the macro trends of China’s economy and consumer insights such as increased mobile phone use (NYSE:CHL) that is charging consumption of certain products.

My meeting is an example of a developing trend—Middle Eastern countries increasingly looking to invest in China. This investment will lead to a major shift in the global balance of power, and the emergence of incredible opportunities to those paying attention. My colleague, Ben, just got back from a trip to 4 countries in the Middle East because we are thinking about setting up an office in the region. Many leading private equity firms operating in China are now raising money from the Middle East.

The Middle East is perhaps the richest region on the planet in terms of natural resources. But their wealth source, oil, is not sustainable. Leaders are looking for ways to sustain this wealth, and their countries’ economic growth, by investing in financial institutions like Citigroup (NYSE:C). Many of the Middle Eastern leaders seem more interested in buying into other companies rather than developing Middle Eastern brands and companies as the Japanese and Koreans have done with companies like Toyota (NYSE:TM) and Samsung.

China is growing, and needs oil as well as a host of other commodities. Throw in investment protectionism from the US and Europe like we saw with the Dubai Ports fiasco where Middle Eastern countries might have invested traditionally, and you have the recipe for a fast-growing and increasingly lucrative partnership between China and the Middle East.

Given this scenario, it is no surprise that trade flows between China and the Middle East have doubled to over $240 billion USD since 2000, increasing twice as fast as trade between the Middle East and the US or Europe. Banks are expecting another $250 billion of investment from the Gulf Cooperation Council into China in the next five years.

Much of this investment is coming from government investment groups looking to diversify their portfolios away from the US and Europe, and tap into China’s growth. Dubai, Qatar, and Kuwait are just a few examples: Dubai International Capital [DIC] plans to increase its assets from $7.5 billion USD to $25 billion in the next three years, with “a significant portion” of that going into China. Istithmar, the branch of government-owned conglomerate Dubai World in charge of asset management, set up an office in Shanghai this past September, after completing its first China investment in July-- $50 million for a 10% stake in Hans Energy, a Hong Kong listed oil and gas logistics company in Guangdong.

Qatar Investment Authority [QIA] announced in September that it was looking to invest significantly in financial institutions and consumer-oriented export companies in Asia, with a focus on China. Kenneth Shen, QIA’s head of strategic and private equity, travels to China every four to six weeks to help build QIA’s assets here. Only a month ago QIA signed onto a plan with Singapore’s Keppel Corporation to invest in a 30 sq. km. “eco-city” in Tianjin, China, meant to serve as a model for sustainable development in other Chinese cities. Qatar has plans for many similar real estate projects in the near future.

The Kuwait Investment Authority [KIA] has doubled its investments in Asia in the past two years and is now the largest foreign investor in the Industrial and Commercial Bank of China. KIA also has a 15% stake in the Kuwait China Investment Company [KCIC], created in 2005, which manages $200 million in assets and has as its primary goal “to establish itself as one of the premier investment companies in the Gulf by building its capabilities and knowledge in the dynamic and growing economies of emerging Asia,” (KCIC Annual Report).

Where is the investment happening?

Most of this investment is going into banking, real estate, manufacturing, and infrastructure.

The Kuwait Investment Authority was one of the largest investors in the Industrial and Commercial Bank of China’s record-breaking IPO in October, 2006, buying $720 million USD worth of shares. Qatar Investment Authority was another of the largest investors, buying $205.5 million in shares. Dubai World invested in Bank of China’s IPO, and is rumored to be pursuing other banking deals.

Bader Al-Sa'ad, the head of the KIA, is looking at real estate in China’s second-tier cities as part of his effort to build a long-term for the sovereign wealth fund. Saudi Prince Alwaleed bin Talal Alsaud, considered by many the most successful investor in the Middle East, has similar plans. Alwaleed made his first hotel investment in China last May, paying $58 million USD for the leading hotel in Kunshan, an industrial city near Shanghai, and is reported to have earmarked another $1 billion USD for similar investments. Like Bader Al-Sa’ad, Alwaleed is looking to purchase properties in second and third tier cities where growth is expected to exceed that of the rest of the economy.

These and other Middle Eastern countries are also looking to invest in Chinese manufacturing and infrastructure. A Saudi Arabian clothing company, for example, launched a $50 million USD cotton-spinning project in China’s Xinjiang province this past July. And Saudi Aramco has acquired stakes in three major multi-billion dollar Chinese oil refinery projects located in Guangdong, Shandong, and Fujian provinces.

How is it happening?

Many of these big sovereign wealth funds are opening offices or partnering with local investment firms in China to figure out where to invest this money. For example, KCIC has partnered with Shanghai’s Jade Alternative Investment Advisors to get better perspective on the ground. Argent Financial Group’s Dubai operation is also considering establishing a $250 private equity fund to invest in the mainland in cooperation with a mainland partner.

What does it mean?

Middle East investment in China at this scale signifies major shifts in the global economy and balance of power. Investors need to be aware of these changing trends. The massive investment from the Middle East into China is another clear sign that Asia is “where it’s at” for the foreseeable future.

CMR Managing Director Jessica Lo, CFA; Senior Analyst Ben Cavender; and Analysts Charlotte MacAusland, Natalie Zhu, and Meredith Sun contributed to this article.