China-Middle East investment links: Opening up the oil road

Is it the renaissance of the Silk Road? Speaking at a conference on China-Middle East investment links, Geert Bossuyt seems captivated by the prospect of the 13th century’s most important trade route regaining world prominence in the 21st century. For Bossuyt, head of Middle East structuring at Deutsche Bank, these two partners have the perfect recipe for wealth creation: labour from China and oil from the Middle East. As such, he says, it is not a Silk Road. This, he says, is the Oil Road.

For both regions, the synthesis should be simple, and crucial. The Middle East is the largest exporter of the world’s most wanted commodity, oil. China will soon take over from the US as the world’s biggest oil importer.

Already, the prospect of this vital link is prompting cooperation that has powered ahead in the past 18 months, with both sides finally waking up to the urgency of coming together. At present, the Middle East supplies more than 40% of China’s oil imports; that is set to rise to 70% by 2015, according to the International Energy Agency.

Trade flows between China and the Middle East have been rising more than twice as rapidly as trade flows between the US or Europe and the Middle East. And communications have proliferated: there are now more than twice as many flights between the Gulf and China as there are between the Gulf and the US, even though there were more Gulf-US flights in 2000.

Middle Eastern heads of state shaking hands with high-ranking members of the Chinese Communist Party has become an increasingly familiar sight. Perhaps the most notable of these meetings came when King Abdullah of Saudi Arabia chose China as the destination for his first trip abroad after his accession in August 2005. In developing trade agreements between China and the Middle East – both parts of the world where the state maintains a firmer grip on the economy than in most developed countries – such high-level state visits are a catalyst.

Investment authorities turn east

One of the most immediately important ways this new relationship has been realized is in the interest that the Gulf’s oil-rich sovereign wealth funds are beginning to show in China.

Until recently, Gulf sovereign wealth funds were almost entirely focused on North America and Europe. But these investors are interested in long-term growth stories, and the most obvious of these is China. Government investment funds from Abu Dhabi, Dubai, Qatar, and Kuwait have all made it clear that they are reweighting their portfolios towards the Asian nation. The Qatar Investment Authority, for example, says that it intends build up its assets in China. "Historically the QIA has been much more focused on North America and Europe. When you look at our portfolio, you can see that there are substantial weightings in those geographies. Because of some of the attractive risk/return profiles we see there, as well as because of our current weighting towards North America and Europe, we are looking to increase our exposure to Asia, including China," says Kenneth Shen, head of strategic and private equity at QIA, who adds that he travels to China on business every four to six weeks.

The Kuwait Investment Authority has a 15% stake in the Kuwait China Investment Company. KCIC was created in 2005 after a state visit by the Emir of Kuwait to China, which also resulted in KIA’s stake in last year’s $19.1 billion IPO by Industrial and Commercial Bank of China (ICBC). This is the biggest IPO in history, by what is now the world’s biggest bank by market capitalization.

Bader Al Sa’ad, managing director of the Kuwait Investment Authority (KIA), meets Yang Kaisheng, president of Industrial and Commercial Bank of China (ICBC) discuss business opportunities

Dubai’s governmental investment funds are newer and smaller than many of their peers in the Gulf. But they are also more open than many, and more willing to admit to the extent of their interest in China. Istithmar, whose $3.5 billion of proprietary capital invested since its creation in 2003 has been leveraged up to around $14 billion, opened an office in Shanghai at the beginning of September where it will employ staff with life-long connections to China.

"Especially in a place like China, you need to have locals helping you understand the lie of the land," says Istithmar’s chief investment officer, Felix Herlihy.

Istithmar, which is the asset management arm of government-owned conglomerate Dubai World, completed its first investment in China in July. It paid about $50 million for 10% of Hans Energy, a Hong Kong listed oil and gas logistics and storage company active in Guangdong. According to Herlihy, Istithmar’s bid was successful because of a long-standing relationship between Jane Shao, a managing director of Istithmar based in Shanghai, and David An, the majority owner and chairman of Hans Energy.

Now, with Chinese nationals on its team in an office in Shanghai, Istithmar, Herlihy says, will be able to move beyond the sometimes safer realm of listed stocks, and take more advantage of private equity opportunities on the mainland.

Dubai’s other government-owned investment vehicle, Dubai International Capital, which has no presence on the ground in China, will concentrate on public equity in China, according to Anand Krishnan, chief operating officer.

Krishnan says DIC is looking at the Chinese stock exchanges as a priority for its $1.5 billion Global Strategic Equities Fund, which is to grow to $2.5 billion by the end of the year thanks to an extra injection of cash from its parent, Dubai Holding. He says the fund will probably be making its investments after an Arab-Asia investment conference, which is being held at the Dubai International Financial Centre at the beginning of December.