China’s Belt and Road Initiative and expanding trade ties with the Middle East have spurred investments in sectors like renewable energy, infrastructure and technology. This has led Gulf nations’ sovereign wealth funds (SWFs) to substantially increase their investments in China, creating opportunities for Hong Kong to leverage its strengths as a super-connector between these key markets.
SWFs in the Middle East have two major objectives when investing in China: tapping into China’s vast market potential for financial returns and gaining access to cutting-edge technologies that can accelerate the growth of their domestic non-oil sectors, says Ben Simpfendorfer, Partner at consultancy Oliver Wyman, who has experience in both the Middle East and China.
Industries like clean energy, artificial intelligence (AI) and robotics in China are high on the list, as are more traditional plays, such as selective real estate. While there is much untapped potential for Chinese investors in markets in the Middle East, and vice versa, Simpfendorfer notes some key distinctions in the strategies and approaches between the two pools of investors.
“Middle Eastern investors often look for technologies that can be put to work in the Middle East itself. Many of the region’s wealthiest families have made their money by licensing or distributing foreign products domestically,” explains Simpfendorfer. “That’s different from Chinese investors who tend to focus more on building businesses within the Middle East market through their investments.”
Gulf investments surge
In 2023, state-owned enterprises and SWFs from the six Gulf Cooperation Council (GCC) countries, including Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE), collectively poured over US$2.3 billion into the Chinese market, a staggering 23-fold rise from the previous year, according to data from Global SWF, a data platform that tracks SWFs and public pension funds.
When assessing investment opportunities in China, SWFs thoroughly research Chinese laws around foreign investment, taxation policies and industry regulations to minimize risks, according to Dustin Ball, Partner and Asia- Pacific Financial Services Strategy Leader at EY-Parthenon. This diligence is essential to avoid obstacles that could jeopardize an investment’s success, he says.
Government support is highly appealing, Ball notes. SWFs typically seek deals that can benefit from backing from Chinese authorities, such as those aligned with national development goals or strategic priorities in sectors like fintech, healthcare and biotech, which Ball notes are seeing rising interest.
In April, global investment firm Investcorp announced the launch of a US$1 billion platform with China Investment Corporation (CIC), a SWF that manages part of China’s foreign exchange reserves, to invest in high-growth companies across the GCC region and China. Targeting sectors like consumer, healthcare, logistics and business services, the platform has already made three investments in the countries of the GCC through Investcorp’s Saudi Pre-IPO Growth Fund.
“SWFs often target opportunities with sizable addressable markets. This [government] endorsement provides stability and improves the chances of earning profitable returns,” says Ball. “Partnering with strong local firms through joint ventures can help navigate China’s intricate business environment by more easily dealing with regulatory, political and cultural dynamics,” he adds.
Hong Kong’s expertise
“China is a big and often confusing place for foreign investors,” says Simpfendorfer, suggesting that domestic players have a natural advantage compared to international peers.
“Seek out good local private equity partners or major companies,” he advises Middle Eastern investors. “Local partners understand the nuances of the market, can navigate government relations and tap existing business networks – all are critical for success.”
Hong Kong-based accountants play an important role in facilitating this kind of understanding, says Simpfendorfer, as they can help Middle East investors identify opportunities, conduct due diligence on partners and navigate local regulations. “There’s a huge amount of work needed to help Middle East investors move up the learning curve. That’s to Hong Kong’s gain,” he adds.
As both a special administrative region of China and a gateway to the Greater Bay Area (GBA), Hong Kong serves as an attractive springboard for entering Mainland Chinese markets, thanks to its status as China’s most international city, a robust legal system and sophisticated financial infrastructure, said the Hong Kong Trade Development Council (HKTDC) in a written statement.
Hong Kong pegs its currency to the US dollar, reducing exchange rate risk for major trading partners in the Gulf. The city also has a well-established, trusted reputation for commercial mediation and dispute resolution, which are essential functions for smooth international trade, according to InvestHK’s Associate Director-General of Investment Promotion Charles Ng.
The recent establishment of the International Organization for Mediation in Hong Kong, combined with unique enforcement recognition between Hong Kong and Mainland Chinese courts, gives Middle Eastern companies greater certainty when pursuing expansion opportunities across Hong Kong, says Ng.
Government cooperation between Hong Kong, Mainland China and the Middle East has also taken off. In 2023, agreements between the Saudi Central Bank and the Hong Kong Monetary Authority (HKMA) aimed to promote financial innovation by collaborating on regulatory approaches. On top of a landmark strategic partnership between China and Saudi Arabia, Hong Kong’s Chief Executive signed 13 memorandums of understanding with their Saudi and UAE counterparts.
Hong Kong’s accounting and auditing professionals have much to offer SWFs and other investors from the Middle East looking to capitalize on the city’s financial expertise, according to Dr. King Au, Executive Director of the Financial Services Development Council (FSDC), and government-appointed lay member of the Institute’s Council.
“Hong Kong accounting firms have deep capabilities in areas like initial public offerings (IPOs), fundraising and portfolio management — all are of interest to institutional investors in the Middle East,” Au notes. Furthermore, mapping out and streamlining regulatory differences between Hong Kong and various Middle Eastern countries would be essential, he says.
Firms such as EY-Parthenon, for example, works closely with Middle Eastern companies to establish successful presences in Hong Kong and Mainland China. This includes ensuring regulatory compliance through services such as company incorporation, applications for licenses and permits, and ongoing reporting, explains Ball.
Family offices eye Hong Kong
Hong Kong has seen surging interest from family offices in the Middle East looking to establish or expand their presence in the region. This comes as the Hong Kong government has made attracting and facilitating family offices a policy priority.
As of May 2024, the FamilyOfficeHK team under InvestHK has assisted 89 family offices in establishing or expanding their businesses in Hong Kong, with an additional 136 family offices confirming their intention to set up operations, some of which originate from the Middle East, according to Polly Tang, Senior Vice President, FamilyOfficeHK, and an Institute member.
“Hong Kong’s strategic position as a gateway to China has been a significant draw for family offices, particularly for those interested in technology investments in cutting-edge fields like artificial intelligence, data science, and fintech. The city’s vibrant fintech sector has garnered growing interest, driven by demand for innovative cross-border payment solutions to facilitate the region’s trade flows,” says Tang. “Additionally, Middle Eastern investors have shown interest in Hong Kong’s mega projects, such as the Northern Metropolis, with the government exploring the establishment of an infrastructure bond scheme for public subscription.”
Lured by large real estate developments and IPOs, as well as the ability to partner with local firms, high-net-worth individuals and wealthy families can benefit from what Hong Kong has to offer, says Ng.
With over HK$30.5 trillion in locally managed assets, Ng observes that the city’s wealth and asset management industries give wealthy investors access to Hong Kong’s well-established expertise in private banking, investment and related fields.
CPAs play a key role in helping these wealthy families from the Middle East in a number of ways, notes Tang. “From our past experiences, many Middle Eastern high-net-worth individuals would have complex financial structures involving multiple jurisdictions. Hong Kong CPAs are skilled in managing these complexities, providing clarity and strategic advice to optimize asset protection and tax planning.”
The global experience of CPAs is also valuable. “In the design of equity investment structures, CPAs can utilize their professional experience in Hong Kong, Mainland China, the Middle East, and other jurisdictions to comprehensively consider factors such as tax incentives, tax treaties and regulatory requirements, so as to achieve the overall optimization of structure,” Tang adds.
Sustainable Islamic investing
As the economic and financial ties between Hong Kong and the Middle East continue to deepen, Islamic finance presents an attractive opportunity for growth. Islamic finance refers to financing activities that comply with Sharia (Islamic law) and its religious prohibitions on interest, uncertainty and gambling.
Yet, Islamic law differs significantly from Hong Kong’s common law system, making cross-border banking processes complex and time-consuming. “Regulatory compliance with Islamic finance in the Middle East can be unfamiliar territory for many Hong Kong companies,” Au says.
This is where professional accountants and auditors can come in, says Au, to guide companies in understanding regional rules and requirements, reviewing contracts, handling day-to-day administration and navigating cross-border operations smoothly.
Islamic finance shares many of the same principles and goals as sustainable investing. At its core, it’s about generating shared and equitable prosperity for all stakeholders.
The oil-rich nations of the Middle East are “eager to become the largest providers of renewable energy to meet their ambitious climate targets and reduce reliance on oil and gas,” the Hong Kong General Chamber of Commerce told A Plus.
Attracting foreign investment is a key part of Saudi Arabia’s “Vision 2030” plan. Saudi Arabia, the largest economy in the Gulf region, launched the plan in 2016 to transform its economy from oil-dependent to one driven by modern, digital industries and services, with a focus on boosting its nuclear and renewable energy capacity and production of clean hydrogen and electric vehicles.
“Middle Eastern investors have shown interest in Hong Kong’s mega projects, such as the Northern Metropolis, with the government exploring the establishment of an infrastructure bond scheme for public subscription.”
The UAE, the second largest Gulf economy, has parallel goals under its Net Zero by 2050 strategic initiative. As part of this, the country has earmarked US$160 billion for renewable energy investments to help achieve carbon neutrality by 2050.
The Middle East’s national commitment to sustainability and religious emphasis on corporate social responsibility has made clean technology and renewables in China high on the list of priorities. “China is a leader in the sector, valuations are reasonable, and Middle East investors are less likely to be concerned with geopolitical tensions,” Simpfendorfer says.
As a premier hub for green bonds and other climate-focused financial instruments, and with its large pool of skilled professionals supported by robust financial infrastructure, Hong Kong possesses the capabilities to finance many of the major energy transition projects underway across the Middle East, according to Au.
Enhancing food security
For many Middle Eastern countries, a near-term challenge is their dependence on food imports, as they import more food than they export, making their food systems vulnerable to supply chain disruptions. The need for agricultural technology (agritech) solutions became stark during the COVID-19 pandemic.
According to PwC, Saudi Arabia imported US$10.5 billion worth of key agricultural and food products in 2019 while only exporting US$1.7 billion, resulting in a US$8.8 billion trade deficit. Crop yields in the Middle East are also significantly lower than global averages due to climate change impacts like soil salinity and limited access to resources such as arable land, water and agricultural labour.
In a bid to enhance long-term food security and develop more sustainable, productive agricultural sectors, there are opportunities for Hong Kong to help bridge the gap in helping the Middle East adopt cutting-edge agritech at scale.
Despite the small size of domestic agriculture, higher education institutions in Hong Kong have developed strong expertise across the agritech field, from crop genomics research to analytical food testing, said the HKTDC.
There is untapped potential for Hong Kong agrictech companies and trained workforce to export their knowledge and services. The Middle East is one promising export market where Hong Kong’s agritech experts can commercialize their research while aiding the development of local farming, added the HKTDC.
Flourishing digital economy
The digital economy in the Middle East is expected to grow exponentially from US$180 billion in 2022 to US$780 billion by 2030, according to estimates from UBS.
However, digital penetration rates in the region remain well below global levels, at just 4.1 percent in 2022 compared to 10.5 percent worldwide, indicating huge potential in software, internet and data centres as the Middle East works to close this gap, as per UBS analysis.
This presents an opportunity for Hong Kong’s robust innovation ecosystem to engage with the region. Ng says that InvestHK has observed growing interest from the Middle East in Hong Kong’s vibrant fintech sector, driven by demand for innovative cross-border payment solutions to facilitate the region’s trade flows.
Hong Kong-based companies have found success partnering with local organizations in the Middle East to expand into new markets.
In 2009, Octopus helped launch Dubai’s “nol” contactless smart card system to support the expansion of the UAE’s transportation infrastructure. Over 47 million “nol” cards have since been issued, processing an average of two million daily transactions.
Meeting local operational and compliance needs was key to this success, according to Nora Tang, General Manager of Technical Department and International Projects at Octopus, who discussed the project with HKTDC.
“When a company enters uncharted waters, the local business partner can lead the way and facilitate business negotiations, particularly for an overseas company with a totally different religious or cultural background,” says the HKTDC. “With the help of a local business partner, a company can win the trust of local people more easily and business negotiations can run more smoothly.”
Opening new avenues
As economic ties between the Middle East and China continue to grow, Simpfendorfer expects significant investment opportunities to emerge as a result. “SWFs and larger investors will set up financial platforms that invest in multiple companies across a range of geographies, and then find synergies between those investments,” he says.
More Middle Eastern investors will acquire Chinese firms, using hubs like Dubai or Riyadh to then launch those companies into the broader Middle East and African markets, Simpfendorfer adds.
“As a premier hub for green bonds and other climate-focused financial instruments... Hong Kong possesses
the capabilities to finance many of the major energy transition projects underway across the Middle East.”
Under a new strategic partnership agreement signed in May, the FSDC and Qatar Financial Centre Authority will conduct joint capacity building initiatives, share regulatory updates and market insights, and organize promotional events to pursue win-win opportunities.
The Qatar Financial Centre acts as the country’s business and financial hub, providing a competitive operating environment to attract international firms. “Together, we can drive positive change and contribute to the continued advancement of the financial services industry,” says Yousuf Mohamed Al-Jaida, Chief Executive Officer of Qatar Financial Centre, in a press release.
“Around 50 delegates from 35 Hong Kong fintech and financial firms joined the Middle East delegation led by the Financial Services and the Treasury Bureau, FSDC and InvestHK in May. Quite a number of them have engaged in follow up discussion with potential clients and partners in the region afterwards,” says Au. “We are constantly learning from each other and this really opens up great chances for Hong Kong to showcase its superior connectivity.”
In February 2023, during a visit to the Middle East region, a Hong Kong business delegation led by Hong Kong’s Chief Executive signed 13 memorandums of understanding and letters of intent with Saudi Arabia and United Arab Emirates organizations.
