This article examines the growth and shifts in Gulf countries’ sovereign wealth investment patterns in the Chinese market and their place in the US-China rivalry.
In December 2023, the FII Priority Summit was hosted by Saudi Arabia’s Public Investment Fund (PIF) in the lobby of the Hong Kong Stock Exchange, the first meeting of its kind in east Asia. The PIF announced it would be setting up an office in China, following other critical Middle East partners, including the UAE, Qatar, and Kuwait’s sovereign wealth funds (SWFs). Just a few weeks prior, agreements between the Chinese stock exchange and Abu Dhabi, the Saudi exchange, and the Dubai Financial Market had been struck.
These moves come on the back of Washington’s increasingly vocal concern with the ever-growing Gulf investments in China—and vice versa. Despite reports of US investigations into funds over security concerns, including the Abu Dhabi Investment Authority (ADIA) and the PIF, the Gulf countries have not been dissuaded.
A new article in Middle East Policy finds that a “gradual upward trajectory in both the scale and diversity of investments by Gulf funds,” another sign of the region’s growing engagement with China that the journal’s Spring 2024 issue examines.
Mai Alfarhan and Mohammed Alsudairi explore questions regarding the past, present, and future of Sino-Gulf investment relations, from understanding what is driving rising investment and its uniqueness to examining how the growth may impact Sino-American competition in the region.
The scholars argue that analyzing the Gulf Cooperation Council (GCC)’s SWF capital flows is important because “they are among the few actors that, by outclassing all other public and private entities, are capable of altering capital-flow patterns and dynamics between the Arabian Peninsula and China” and can reflect not only the economic, but political interests of Gulf states.
Over the last two decades, the Chinese equity market’s Gulf investment has been dominated by the UAE, Kuwait, and Qatar, who enjoyed greater access to the stock market via Beijing’s qualified foreign institutional investor (QFII) certification. Early investment was limited but diverse, from pharmaceuticals to software to entertainment. Over the years, the SWFs have also sought to increase their QFII quota by establishing offices in China.
Alfarhan and Alsudairi identify major trends in GCC SWF investment: they have a larger stake in the Chinese stock market than the broader international community and a median shareholding of 50 percent, also higher than average. More significantly, their investment in China has growth notably in recent years; in 2021-2022, the number of investing Gulf entities applying for the QFII certification jumped from three to nine and included the power Saudi PIF.
“The data show that GCC member states…are keen on harnessing the vast potential of the Chinese market,” the scholars say.
The level of remarkable growth is undeniable, but its potential is still limited. QFII certification still enforces quotas as Beijing works to maintain control. Additionally, while China is seen as a critical trade partner, many SWFs still have close ties to Western financial markets and are unlikely to stray too significantly.
Despite the pull from both sides, regional states are not likely to give in to pressures from China or the increasingly concerned US: “GCC leaders do not perceive their investments in either China or the United States as zero-sum… they do not view engagement with China as being mutually exclusive of relations with the United States, as they recognize that each region has its distinct advantages and drawbacks.”
Ultimately, Alfarhan and Alsudairi conclude, “we expect Sino-American competition to have a limited impact on Gulf capital flows in the 2020s, which we believe will grow within [certain] constraints,” while GCC “member states will seek to hedge, diversify, and pursue an omnibalancing approach.”
Among the major takeaways readers can find in Mai Alfarhan and Mohammed Alsudairi’s Middle East Policy article, “The Past, Present, and Future of Gulf Sovereign Wealth Fund Investments in China”:
- Since the end of the Cold War, China-Gulf economic relations have become more sizable and complex as five of the six GCC members now rank among China’s largest trading partners in the Middle East.
- GCC sovereign wealth funds have historically directed the majority of their investment towards the West, but that pattern appears to be changing.
- Gulf SWFs are powerful, state-controlled, and can wield substantial influence over the flow of capital in and out of the region.
- The UAE, Kuwait, and Qatar are the most active in the Chinese equity market, utilizing their massive SWFs as domestic and foreign economic statecraft tools.
- Older investments in China were more conservative but have become more assertive and risk-taking.
- The UAE’s ADIA and Kuwait’s Kuwait Investment Authority maintain a primary role in the Chinese equity market and have diversified investments across multiple sectors.
- Gulf SWFs in general have a larger shareholding than the broader community of foreign investors, although with a level of deviation.
- In recent years, average ownership in top industries has risen from 25 to almost 75 percent with greater diversification.
- Increasingly positive views towards China and a growing level of trust have encouraged SWF investment and are offering new foreign partnership diversification to GCC states.
- This rapid growth may not continue at this rate, or at minimum, not any more rapidly.
- The QFII certification still presents quota limitations because of the capital-controls regime.
- Foreign hesitancy towards China may also be slightly off-putting for SWF investors, particularly if the West assesses the economy negatively.
- The rising flow of GCC capital into China could inspire increased utilization of the Chinese renminbi as a de facto currency of trade, although it is unlikely to replace the dollar entirely.
- GCC leaders are unlikely to significantly change their approach to either China or the West because they do not believe engagement with Beijing is mutually exclusive of relations with the West.
You can read “The Past, Present, and Future of Gulf Sovereign Wealth Fund Investments in China” by Mai Alfarhan and Mohammed Alsudairi in the Spring 2024 issue of Middle East Policy.