Middle East Embraces Capitalization for Future Growth

Recent developments in the financial markets have signified a promising collaboration between the Middle East and China, as demonstrated by the anticipated listing of the first Hong Kong stock exchange ETF in the Saudi Stock Exchange on October 30. With a fundraising target reaching a substantial HKD 10 billion, this ETF stands as the largest in the Middle East, outstripping the total of nine previously listed Saudi ETFs combined. This move follows the successful introduction of the world's largest Saudi ETF on the Hong Kong Stock Exchange last November, along with a surge of investor interest in two Saudi ETFs launched in China this July, paving the way for deepening cooperation in capital markets between China and the Middle East.

In conjunction with the listing of the new ETF, recent disclosures of quarterly reports from A-share companies have shed light on the shifting investment landscape of Middle Eastern funds in China's A-share market. Notably, significant investments have been observed from Abu Dhabi in ten Chinese companies during the recent quarter, signaling a vigorous infusion of capital and confidence into the market.

As relations between Saudi Arabia and China strengthen—especially after they established a comprehensive strategic partnership in 2022—financial market collaborations have become more frequent and robust. For instance, in September 2023, the Hong Kong Exchange recognized the Saudi Stock Exchange, allowing Saudi companies a channel for secondary listings in Hong Kong, further solidifying economic ties between the two regions. Additionally, by the end of this month, the MSCI Hong Kong China ETF, developed in association with Albilad and CSOP, will launch on the Saudi Exchange, actively facilitating mutual investment between China and the Middle East.

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The strategic initiative of the new ETF involves channeling 95% of its capital into the Southern East Ying MSCI Hong Kong China ETF. This not only provides Saudi investors with simplified access to the Chinese stock market but also underscores the growing international interest in China's capital market.

The ongoing economic transformation in Saudi Arabia is also a significant factor driving this investment surge. The nation is undergoing an unprecedented shift towards economic diversification, seeking to reduce its reliance on oil and embrace new possibilities beyond its traditional energy wealth. The challenge of maintaining economic stability in a post-oil era is paramount for the region.

Saudi Arabia’s Crown Prince, Mohammed bin Salman, articulated this vision back in 2015, emphasizing the importance of investing in opportunities like China to secure future living standards as oil consumption declines globally. The "Vision 2030" initiative symbolizes this ambition, aiming to position Saudi Arabia as a core hub for investment and an influential player on the global economic stage.

Concrete steps have been actively put in place to bolster these relationships. In 2016, the establishment of several ambitious funds aimed at investing heavily in Chinese markets marked a turning point. It began with the Kuwait Investment Authority subscribing to an $800 million stake in Agricultural Bank of China, followed by Qatar Investment Authority’s $2.8 billion purchase—an indication of burgeoning confidence in Chinese assets. Moreover, the inception of QFII (Qualified Foreign Institutional Investor) licenses for the Abu Dhabi Investment Authority and their establishment of offices in Beijing illustrates a growing commitment to engage with China’s market dynamics.

The shift from mere indirect investments through ventures such as SoftBank's Vision Fund—which yielded less favorable returns on some projects—has prompted Middle Eastern investors to reconsider their strategy and dive directly into Chinese assets. The independent investment company Investcorp from Bahrain even took the initiative to set up a RMB-denominated fund focusing on Chinese acquisitions, signaling a bold step in aligning with the burgeoning economic sphere of influence in China.

However, the fragility of the dollar-centric economic reliance has not gone unnoticed. Notably, tensions have emerged in U.S.-Middle East relations, particularly surrounding the Israel-Palestine conflict. This prompted Saudi Arabia, a traditional ally of the United States, to seek a more independent international approach in its security and investment strategies to stabilize its own economic future.

While the Middle East has historically leveraged oil revenues, geopolitical tensions and the global push towards renewable energy have necessitated a diversification of investment portfolios. As these nations grapple with the decline of oil’s pivotal role, the opportunities within China’s burgeoning economy present themselves as stable and potentially lucrative alternatives. Gulf leaders keenly recognize the immense potential within China, envisaging it as a reliable partner for long-term investments. The sentiment expressed by Abu Dhabi’s Crown Prince—“we want to hold Chinese stocks for 50 years”—highlights their unwavering confidence in the Chinese market amid shifting global economic paradigms.

The deepening collaboration goes beyond typical investment avenues; it encompasses a shared vision for future musical chords of economic interdependency. As China and Middle Eastern economies intertwine, opportunities proliferate to access not only capital investments but also technological exchanges and innovations, with specific focus areas including energy and technology. Consequently, both parties are positioned to gain leverage in the evolving global economic landscape.

Presently, the economic partnership between the Middle East and China is intensifying. The surge of interconnections seeks to provide a counterbalance against the dynamics of U.S.-China relations while simultaneously ensuring each party optimally reaps the benefits of this strategic alliance. With an eye towards the future, it is clear that this relationship aims to reinforce not just financial gain, but a mutually beneficial voyage towards a diverse economic future.

In conclusion, as this unprecedented cooperation continues to mature, both regional and international stakeholders must be vigilant and responsive to the rapidly changing global financial terrain. The trajectory of Middle Eastern investments into China, accompanied by efforts to diversify inwardly, signifies a promising outlook not just for the Chinese market, but also for the sustainable future of the Middle Eastern economies as they strive for a post-oil narrative.