Gulf states tighten ties with China

Gulf states tighten ties with China

By Henny Sender in Hong Kong

Published: April 8 2008 02:50 | Last updated: April 8 2008 02:50

Drawn by mutual self-interest, China and the Gulf – the two great pools of wealth in the world today – are moving ever closer. In the coming days high-powered delegations from several Abu Dhabi investment bodies and from Qatar are expected in Beijing, followed by a senior investment official from Saudi Arabia.

Sheikh Mohammed Bin Rashid al Ma ktoum of Dubai, vice president and prime minister of the United Arab Emirates, last week visited Hu Jintao, the Chinese president. Mr Hu was quoted as urging companies from both sides to increase investment in each other.

As Middle Eastern investment funds are scouring the globe for investment opportunities for their oil revenues, the Chinese consider securing stable supplies of energy of paramount importance. While there have yet to be landmark deals of the scale of Gulf investments on Wall Street, the tightening ties between the Middle East and China come at a time when the US is seen as an increasingly risky investment destination.

“We see the world economy as revolving around us, our desires and our standards,” says David Rubenstein, co-founder of the US-based Carlyle Group, which is partly owned by the Mubadala investment arm of Abu Dhabi. “But the economic centre of the world is beginning to shift from the US and Europe to the Middle East and Asia.”

The Gulf has been attracted to China for some time. The Chinese economy continues to grow strongly and the currency is appreciating at an accelerated rate, with many analysts predicting that the renminbi will soon rise to about 6Rmb to the dollar. According to a recent economic research note by JPMorgan Securities out of Hong Kong there is a “virtuous circle of trade and investment growth between China and other emerging economies, particularly the commodity producers”, which helps to moderate the global downturn. The links between the Gulf sovereign wealth funds and the China Investment Corp, the official Chinese sovereign fund, have also grown closer.

Bader Al-Sa’ad, head of the Kuwait Investment Authority, has met frequently with senior officials at CIC, both in China and in the US.

Staffers at the Abu Dhabi Investment Authority have also been in close consultation with CIC.

The Kuwait Investment Authority took a stake in Industrial and Commercial Bank of China when the Chinese bank went public in 2006. In September last year, the KIA sent a delegation to China with a mandate to look into property investments. At the time, the KIA found Chinese property overvalued. By now valuations are attractive again as both the Chinese stock market and the real estate market have come down significantly.

Beijing is expected to seek reassurance about energy supplies, though Dubai investment bankers say it is unlikely that these talks will result in any direct Chinese stakes in Gulf companies.

A few months ago, both KIA and ADIA turned once more to the US, the traditional recipient of most Gulf money, regarding the credit crisis as a once-in-a-lifetime opportunity to put a lot of money to work at bargain prices.

ADIA led the recapitalisation wave with its investment in Citibank, while KIA followed with the second recapitalisation of the Wall Street firm and an investment in Merrill Lynch. Both deals have a lot of downside protection and coupons on the complicated securities that guarantee a healthy return, despite the sagging stock prices of both Citibank and Merrill Lynch.

In contrast to the attractions of the appreciating renmimbi, however, the dollar weakness is proving a severe headache, both from a financial and macroeconomic standpoint.