You're listening to Asia Centric from Bloomberg Intelligence, the podcast that pulls back the curtain on global business so you can invest better across the Asia Pacific Rim. I'm John Lee. In Hong Kong. China is forging closer economic ties with the golf countries. Already this year, Saudi Arabian companies have announced deals to acquire major stakes in Lenovo and Hengli Petrochemical.
In return, Chinese companies are planning to build more factories in the region, while Chinese investors are eyeing the region's equity markets. How will closer ties between these regions create investment opportunities? Can China help Saudi Arabia transform its economy and reduce its reliance on oil through its ambitious twenty
thirty vision? And how will this relationship be impacted by rising US China tensions and the Middle East Wall Here to discuss the golf region is Ziar Dud, Chief Emerging Markets economists at Bloomberg Economics and Edmund Christell, Senior financials analyst at Bloomberg Intelligence. Both are based in Dubai. Welcomes the art and.
Edmund, Hello John, thank you for having us.
I know John, I'm hearing a lot of anecdotal evidence that you can hear a lot of Mandarin being spoken at Dubai's International Airport. Lots of Chinese corporates and investors are heading to the region. What's driving China and the golf countries to forge closer economic ties.
Well, to give you one more anecdote, John, there's been a new extension of the main mall in Dubai, which is called Dubai Mall, and that is basically called Chinatown.
What is driving this?
I think there's a few links between China on the one hand and the Golf region, which includes are the ABAE and for other countries. Link number one is the energy link. You know, the golf region is one of the biggest producers and exporter of energy particular ail and gas in the world, and China is the largest all porter in the world. And the golth tends to export its energy mostly to Asia and China is a big consumer. There's the energy link is one. The second link is investments.
When all process are high, there's a surplus in the Golf Corporation Council the GCC, and they tend to invest that abroad and China, although the share is small, but is increasingly becoming a destination for these investments. And the
third link is the security link. The GCC has traditionally and historically relied on the US for a security and for a geopolitical safety, and recently there is basically an attempt to diversify these geopolitical links, and China is one divers fire of these links.
And Edmond, there seems to be a lot of acceleration of deals happening over the last year. We had a lad which is owned by Saudi Arabia's Sovereign Wealth Fund PIF just announcing you will acquire a two billion dollar steak in technology company Lenovo. Saudia Ramcome is looking to invest in Henley Petrochemical. Do you see this relationship as more of a two way street, i e. Both countries investing into each other.
Thanks John, Yes, we see the Gulf Freeeson is very well positioned to capture this growing interest from China. We see more company in China operating overseas and if you look at the FDI as a percentage of the China GDP, you can see is much lower than other Asian countries a particular career, so there is a huge potential for more FDI and company in China to operate outside their boundaries.
And I think the region is in need for industrial power, a need for liquidity, and need for skills and labor to help build and support the economic transformation from all dependent economician and all dependent economy. So this is a long term partnership. It's a two way investment. I think there is misperception with some of the investors I have met is it's so one way and they think that region is flushlesslyquidity, so it's easy to bring this liquidity back to.
China and invested in China.
And I think from the region here, looking at Saudi Arabia and the UAE, they've been very strategic on how they are investing their money. It has to come to a return back to the domestic market and help deliver on Vision twenty thirty for the Kingdom for example and Edmond.
As you alluded to, this is different from the past or prior conceptions that it's a one way street. Global companies and investors used to go to the Golf region to raise money. I think Softmak famously raised sixty billion dollars for its Vision Fund from a couple of sovereign both funds a few years back. It's different now they want investment to also be invested in the region.
Yes, I mean we see also black Row invested five billion dollars to bring black Rock to the Kingdom have a headquarter here. And I think what's important, I think Zad can comment on it more is the lack of productivity of the labor. It's one of the issue the Kingdom will be facing. Think they've been tackling it by bringing headquarters of the company into the Kingdom, making sure that this company are contributing to the local economy and to the caliber and the talent and the leadership of
the employment. So I think this has been a very important topic under the GENDA and Saudia in particular.
Yeah, I'll just follow business on the productivity side, but on the investment side. So, yes, there's been some investment announcements and Johnny named a couple of them, and there has been an increasing sort of deployment of capital from the GCC towards China. But I'd say a couple of things here. The first thing is the size of that is still small. Yes, the PIF might have deployed two billion dollars to buy a Chinese company, But the PIF is a nearly one trillion dollar investment fund, so two
billion relative to one trillion isn't very large. And the other thing the investment in petro chemicals. Saudi has had the strategy recently where it tries to buy refineries and petro chemical facilities and trees where it exports oil, and the idea there is you have an advantage as a seller of crude oil if you actually have you know
your buyer is also have partial ownership by you. So I think, yes, there's been an increasing sort of flow of capital from the GCC towards China, but the deployment is sturblatively small, and the sectual stuff we have just looked at it in the context of the dynamics of the old market.
And also if you look at the FDI, Saudi Arabia is targetting one hundred billion dollars annually. By twenty thirty and twenty twenty two, the level was only sixteen billion FDI for the Kingdom of which China FDI to Saudi
Arabia was only five billion dollars, so it's very low. However, based on recent data, from Emirate and you know, China was number one greenfield FDI contributed to the Kingdom in twenty twenty three, and we expect the FDI number coming from China and to the Kingdom and the UAE to increase significantly in twenty twenty four, but still coming from a low BASEE has a higher level of FDI to China and the trade floors.
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Continuing on that theme, Saudi Arabia really needs more foreign direct investment now through I guess the prints MBS or Muhammed Bin Salman, it has an ambitious plan to spend one trillion dollars to develop its tourism industry and to diversify away from oil. It's creating theme parks, it's creating a new high tech city, neum and its line project, which is supposedly going to house millions of people and run entirely on renewable energy. How can China help Saudi Arabia with its ambitious goals?
Let me just say a few things here.
One of them is hel can China help well. One of the ways in which it could help is China has expertise in building infrastructure, and Saudi will need that sort of infrastructure and can tap into China's expertise on that front. Charlie is trying to develop his tourism industry. China has one billion people, so you know, the flow of tourists from China to Saudi could also help. But I think also there's a cautionary thing here, which is basically Saudi needs to also be aware of not.
Building too much.
You need to build enough capacity that brings other people and that lifts the infrastructure quality of the country. But you also need to be worry of not building excessive infrastructure that's not going to be used. And maybe also China can tell Saudi where things probably are needed. And given Chinese also historical experience with building cities and infrastructure, some of it was usedful, some of it wasn't. So also to basically give a warning when things things are excessive.
How real are the intentions of Saudi authorities to spend in these grand projects like NEOM and the Line project. Can you explain to the investors that don't really follow the region very much what this project is.
So NEUM is a new futuristic city in the northwest of Saudi Arabia. The Line, which is a linear city that goes perpendicular to the sea and to the sort of the inland of Saudi Arabia, is a part. When the project was announced, I think in twenty seventeen, the budget for that was something like half a trillion dollars, but probably with all infrastructure projects, particularly in the Gulf, the budget is starting to overrun. So that's basically the idea.
The idea is create a futuristic city, to make it attractive for people to live there, to be run by robots, to have the highest number of mission unstyled restaurants per capita in the world, all the futuristic elements that you can think of. Now, the Coutiari side of that is,
are the costs justified and can Sadia afford this? I think what we've seen recently and in particular in twenty twenty four that there were a lot of ambitious announcements from Saudi Arabia about building and spending and large budgets, but there has been a scaling down of some of
these targets. So I've seen the Minister of Finance coming out and saying some of the projects areb dated Division twenty thirty, some of them are likely to be delayed, some of them are like to be spaced out over a longer period of time, some of them might be shelved. We've seen, for example, Saudi had an ambitious target to double or triple the population of his capital Cityriald by twenty thirty, and that ambition has been scaled down. And I've also seen news that the line which is supposedly
one hundred miles long linear city to house millions of people. Again, the plans now seems to be smaller and scaled back, and by twenty thirty only a small fraction of that will be built.
And do you think the decision to scale back was partly influenced by the development of the Israel Hamas War.
Other fics related to the regional geopolitics, So I think this is a financial decision. So you have Saudi Arabia, which basically gets most of this revenue, at least externally from oil sales abroad. That's all dominates Saudi exports, and it tends to spend on these projects. And in the context where even on all prices were relatively high last year at eighty three dollars per barrel, Saudi Arabia was running a budget deficit, so I think even in that environment,
we're always high. Tadema felt that it was overstretching itself and some of these projects may not return or yield the return that it had hoped before, and therefore there was an element of scale impact. The Minister of Finance actually in May he gave another justification, which is basically saying we're scaling back because if you build too much and you don't have the capacity to absorb it, you end up importing too much and that's not good for
the economy, so you get a lot of leakages. And therefore the slowing the spending pattern down so that they reduce the leakages in the form of imports.
And just to pursue this idea of Saudi Arabia becoming a tourist destination, some people view this as a very high ask. It's still a very conservative country. You know, females are only allowed to drive. Recently, alcohol is banned in many parts. Do you personally think that they're making the right path here in terms of transforming its economy.
Well, let's look at the numbers, especially in twenty thirty. Was announced in twenty sixteen, and the targets are for twenty thirty, so we're more than halfway through that. What has gone right? A few things have gone right. So the government has increased it non oil revenue, the revenue it gets from oil. It has increased uman participation in the that has nearly doubled, partly because women are actually participating in party. There's a statistical sort of change of methodology.
But I think there are things that having gone quite according to targets and plants. One of them is that exports are absolutely dominated oil oil. If you look at oil and related products, we're talking about eighty to ninety percent of that is oil plus related products. And if you look at the government's spending, for example, it has basically run so SADY might have increased normal revenue, but
the spending has actually outpaced that. So the dependence on oil has over time increased, and we estimate that basically Saudi Araba needs if you look at the central government alone, it needs all price in the region of ninety one dollars per barrel to balance his budget. If you include also domestic investments by the Sovereign Wealth Fund, because a lot of the domestic investments has gone is now executed by the Sovereign Wealth Fund instead of the central governments.
So you need to take that into account when calculatd the dependence on oil. If you take that into account and incorporate it into you're spending, the Saudi Arabia needs oil prices of one hundred and eight dollars per barrel to meet these spendings. So ninety one or one hundred and eight dollars per barrel is high. It's hard that it was in the past, and it's harder than the current market price. So the dependence on oil has, if anything, increased over time.
Edmund, we joked about how there's so much Mandarin being heard at Dubai International Airport. I know that you traveled to China, you traveled to Beijing, Shanghai and Hong Kong. You met hundreds of investors. How real is the interest is of Chinese investors looking to deploy money in the Gulf region.
Yes, definitely there is significant interests given the headwind in the domestic market and the low return on the equity market in China, so they are looking at a way
to diversify and generate higher return. The region, as we all know, at higher oil prices is generating higher liquidity, more opportunities and the transformation gender that's happening either in the Saudi or we have also strategy spending happening in the UAE, and specific sector like cybersecurity, semiconductor and food securities are upgraading infrastructure is creating opportunity for Chinese investors
to look at the region. I think the challenge they face is they look at the region as one dynamic, which is not things the AD explained that Saudi is spending more, is learning more of the cash they need higher oil prices, so more liquidity into Saudi is very
important than deploying liquidity outside of Saudi. For the UAE and KATAR, I think we do have liquidity looking at opportunity to deploy liquidity outside the UAE and the strategic sector that you bring specific technology to the UAE, that strategic sector technology that will be an important area to focus on.
So I think the interest is there.
The clarity on where the opportunity is is yet to be established. You know, investors are looking at what sector they should focus on, where the opportunity is. If we look at the UE, for example, the hospitality sector has already been established, so the UAE in the next five
year is not spending on the hospitality yet. The UAE is spending on housing because the population is growing, spending on upgrading infrastructure and railway, so this is important, and also the semicontactor and the industrial part of the economy. If we look at Saoudi, Saudi doesn't have hospitality sector. It's spending significantly on the hospitality sector in the near term, plus transportation and what we call it mixed use development
that will be recreational asset and commercial offices. So I think this is where the discussion has been very interesting to understand the different dynamic between the UE and Saudi. It's not one region to target in terms of products,
offering or any value proposition. You are coming to investor in the region to buy and I think for Saudi I truly believe it's more of a long term partnership to build and that is a risk of any geopolitics plus U as China tensions, that could be an issue of trust between the two regions to deploy capital for the long term.
And Edmund, you know one of the Chinese ETF issues with CESAP mont. It's first Saudi Arabia ETF in Hong Kong, which gives access to vessis in this part of the world to Saudi Arabian equities. Is this just the start of a growing trend.
This is a great collaboration and work between the PIF, the Saudis of Rafun and Sea Soap. For the first listing in Hong Kong, we believe there will be another listing happening in the mainland China.
And this is very very.
Important for Saudi to get the scale because Hong Kong would not be sufficient in terms of the flow that comes into underlying as the ATF, so they need to
list it in mailand China and maybe other countries. So probably we're going to see the Saudi ETF listed in different countries across all Asia and the opposite you're going to see where UAE and Krattar could be potential candidate for similar listing of their ETF and Hong Kong and China later on, which could all of this paved the way for a cross listing of equity in the future, which will take more time in terms of the regulation has to be set up and the framework with term
of the countroparty risks, et cetera. But this is very exciting. But if you look at the start the ATF and Hong Kong was listed since November last year and the fund and flow still low is around the nine million dollars since inception, so a lot of work need to be done. Clearly, investors are interested as I seen from my trip to Meland China, but in terms of the investment in flow into the fund it's still low level,
so execution need to be done. And also you do have the what I learned during my trip, there is overseas quota share on how much you can invest. So also this doesn't make it challenging for the money to get out.
Edmund after making these hundreds of investors, what's your sense how knowledgeable are they in the region.
I think they are in the exploration phase trying to understand. First, their main concern is geopolitics the world that's happening between Israel and Hamma, how this is impacting the region, how
this is impacting the tourism industry in the Kingdom. They see more risks of this war impacting the rect sea projects, and during my trip, the complex was back and forth, so you can see that there is a lot of uncertainty on how they don't see there is a clear path of how this war will end up or how it will phase out, and what the spell over impact
will be on Saudi if something wrong happened. The other thing is the tension between the US and China has been brought a few times in terms of the long term relationship. To build a long term relationship, you need to have a trust, and deploying capital into the region and then having issue later on in terms of US and the Reesian relationship could be something that they have to think about it twice before deploying a larger motor capital.
With these geopolitical tensions, the US is imposing a lot of sanctions on Chinese companies, especially in the technology field. So it's quite interesting that this PIF led in the was to a Chinese technology company Lenovo. Do you think these sanctions and geopolitical tensions will influence what type of industries companies they will invest into China?
Well, I'll say this for the GCC, the US has traditionally been the main political sort of backer, main security backer, and main seller of arms. But the GCC also China is the biggest commercial market. They export a lot of their oil that goes east tours China. So in the world now, I think there are three geopolitical hotspots. There's Russia Ukraine, which is sort of the GCC is immune
from that. If anything, some pockets in the GCC, like Dubai is benefiting by having an influent population that's coming from Russia Ukraine into the GCC with their money. There is the Middle East conflict in Gaza, which is closer to the GCC, but it hasn't quite influenced it yet in the sense that oil is still flowing and ails the lifeblock the economy here and are still flowing uninterrupted to different parts of the world. And then there's the
sort of China US tensions, the two great powers. And I think the gccit wants neutrality. What it doesn't want to take in size in this conflict. As I said, one of them is the historical ally and one of them is the commercial partner. And there has been explicit but also implicit statements from GCC officials saying we don't
want to make a choice here. But of course, if things escalate between the US and China, if more sanctions are imposed on Chinese companies, then that might make life a little difficult for the GCC.
And what I mean since is most of this investment has been in the hardware, not the software, and the sanction become more crucial when it comes to the software development than the hardware. So we know that as you explained before, PIF already invested an ex surveillance company Dahua. I believe spend it correctly, and this is what's sanctioned by the US. But they are developing hardware and Lenovo
is focusing on the hardware side of the business. So I think Saudi is aiming to manufacture at the hardware level, one that could not create any threat relationship.
Edmund, when you met these investors in China, looking at the region, some of them for the first time, what countries, what sectors do you think that will be interested in the Gulf region.
The energy definitely, that says great opportunity will always be
the contracting sectors. We know that there's a lot of opportunity for the contractors from mainland China to start thinking about the region here in terms of the expansion, as I said, the UAE is spending a lot of money on the housing sectors, and the excess supply of contractors and China, given the head whend the market is facing domestically, could be deployed in terms of resources, capacity and manpower and to the region energy as I said, and that
will be the ad discussed before, is the skills and the infrastructure and the ability to deploy infrastructure and to the region that know how, et cetera.
So I think this is very important.
We also discuss food security as an interesting area that where the region always since COVID has been focusing on food security as a priority for the government, and this is where the technology could be deployed as well.
Yeah, what are the biggest misconceptions investors have about the Gulf region?
Oh, that's a that's a tough one to speak on behalf of other people.
Here's my thing.
I think it's the GCC is probably more open than people generally think in the sense of social openness. It's extremely safe, and I think the impact from the war in the Middle East hasn't quite affected it yet. You know, if you open the street, the population is probably you know, more politically engaged, probably more in tune of what is happening. But on the street, this is completely safe, and it's
completely unaffected. And the economies are largely and affected. And many of the cities in the Gulf are actually more or less international cities where there's a large population backpattery espose from the region and outside, and I feel like international city where English is generally spoken as the first language.
And Edmund, did you want to chime in on this?
I think top one for me will be social openness, the ability to blend within the society and enjoy your life as experts, and the high quality of life people ask me, I mean during my trip is if I'm able to enjoy my weekend the im is going back to the UK or not? And is there a school available everywhere? The choice of school, et cetera. And we do have a lot of school UAE has a lot of school options, KATA has number one of schools and
the regions. So I think, yeah, there is misuception in terms of the infrastructure available for the experts, the support they can get in terms of healthcare, education.
Yeah, it's been a fascinating discussion on the Gulf Region, China and geopolitical risks with Zia Dold, Chief Emerging Markets Economists at Bloomberg Economics, and Edmund Christal, Senior financials analyst at Bloomberg Intelligence. Edmund, thanks for coming on.
Thank John. Thank you John.
I'm John Lee in Hong Kong. This episode was produced by Clara Chan and you've been listening to the Asia Centric podcast