Tech focus and diversification drive investments by Middle East wealth funds in China

About $2.3bn of sovereign capital from the region reportedly flowed into the greater Chinese market last year

People walk in front of a large screen showing stock exchange data, in Shanghai, China EPA

As Middle Eastern sovereign wealth funds expand their global portfolios, many are boosting their investments in China as part of efforts to promote diversification and gain access to technology.

Several funds, notably the UAE’s Mubadala and Riyadh-based Public Investment Fund, have opened offices in the Asian country in recent years as they navigate the challenges of operating in the world’s second-largest economy.

About $2.3 billion of sovereign capital from the Middle East flowed into the greater China market last year, the external executive director of Hong Kong’s Central Bank Kenneth Hui said at a conference last month.

That figure was up from about $100 million in 2022, local media cited Mr Hui as saying.

“Middle Eastern SWF investments into China is more the eventual result of some funds opening offices in Hong Kong, China, and other Asian countries as well as a desire to diversify the geographic distribution of assets,” said Robert Mogielnicki, a senior resident scholar at the Arab Gulf States Institute in Washington.

Last year, the US was the top region of focus for the 10 biggest state-owned investors in the world, with investments reaching $82.9 billion, followed by India at $16.7 billion, and Saudi Arabia attracting $15.9 billion, according to a report by Global SWF.

China was among the biggest gainers last year, with funds invested by state-owned investors rising 333 per cent year-on-year to $8.3 billion, the report showed.

“We’re not seeing numbers that reflect a major paradigm shift in where and how SWFs invest,” Mr Mogielnicki told The National.

“It’s more like SWF officials are slowly figuring out the best way to make Chinese assets a slightly larger part of their investment portfolios,” he said.

Investing in stocks

State-owned funds based in the GCC have been investing in listed Chinese equities, drawn by the potential of the market and the increasing significance of the renminbi.

The Kuwait Investment Authority is in the top 10 list of shareholders in 30 A-share companies, with a total market value of 4.52 billion yuan ($2.33 billion), China’s Global Times reported in May, citing third-party industry data.

A-shares are stocks of Chinese companies traded on the Shanghai or Shenzhen stock exchanges, priced in yuan. Previously, foreign access to A-shares was limited, but initiatives such as the Qualified Foreign Institutional Investor programme and the Shanghai-Hong Kong Stock Connect have since opened the market to international investors.

The Hong Kong Stock Exchange, considered a gateway for international investors trying to access Chinese companies, has been seeking to collaborate with Middle East bourses, which have seen a string of high-profile initial public offerings over the past few years.

This month, HKEX announced that it added the Abu Dhabi Securities Exchange and the Dubai Financial Market as recognised stock exchanges.

The move is expected to let public joint stock companies that are listed on the main market of the two UAE exchanges apply for a secondary listing in Hong Kong.

“HKEX is committed to further expanding its international reach, with an aim of attracting more investors and issuers from around the world to our markets,” an official told The National last month.

“HKEX is pleased to be continuing our engagements in the Middle East.”

Tech transfers

Some funds are investing in crucial technologies in areas such as artificial intelligence and semiconductors that can drive economic diversification in their own countries.

In May, Alat, a subsidiary of Riyadh-based PIF, announced that it would invest $2 billion in Chinese Lenovo’s convertible bond in exchange for the company opening a manufacturing centre in the kingdom.

“The Middle Eastern SWFs are not solely made to earn a return but with the expectation that technology transfer and reinvestment will come from China through them, which are needed for their economic diversification,” said Shigeto Kondo, a senior researcher at the Jime Centre in Japan's Institute of Energy Economics.

“Strong government-to-government engagement between the Middle East and China over the past couple of years also doesn’t hurt here,” Mr Kondo told The National.

However, China's push into emerging technology has led the US to become increasingly concerned about the movement of sensitive chip technology to and from the Asian nation.

“Historically, the transfer of military technology, such as from Israel to China, has been a main concern for the US, but now, fields like AI and semiconductors have also become concerns,” Mr Kondo said.

However, the Middle East has also been focusing on growing its tech collaboration with the US.

Tech firms such as Microsoft, Google, and Cisco have all established a strong presence in the region.

In April, Abu Dhabi artificial intelligence and cloud company G42 also received a $1.5 billion investment from Microsoft, which is expected to grow G42's global expansion plans and strengthen the UAE's position as a global technology hub.

Geopolitical tensions

Geopolitical tensions in the Middle East and beyond are the biggest risk for global sovereign investors, outflanking inflation as their primary concern for continued economic momentum, a recent study found.

Eighty-three per cent of global SWFs, including 95 per cent of those from the broader Middle East region, consider conflict as the prime factor that could derail global growth over the next year, asset manager Invesco said in its annual Global Sovereign Asset Management Study this month.

Tensions, particularly in regions such as the Middle East, Ukraine, and between major powers like the US and China, are disrupting supply chains, increasing costs and hindering investment.

To mitigate geopolitical risks, investors are now inclined to explore opportunities in the fast-growing emerging market assets, said the report, which surveyed 140 investment officials at 83 sovereign wealth funds and 57 central banks, managing a combined $22 trillion in assets.

The International Monetary Fund also said this month that Asia's emerging market economies have continued to be the “main engine for the global economy” this year.

The fund also revised growth projections upwards for China and India, which together represent about half of global growth.