Middle East Money Starts Flowing to Asia

Arab investors have typically looked West, rather than to China and India. But with oil at over $100 a barrel, that's changing in a big way

Standard Chartered banker V. Shankar, head of corporate finance and private banking in Singapore, these days spends much of his time focused on the Middle East. Three years ago, he says, he didn't have a single M&A or project finance banker in the Gulf. Today, Standard Chartered has a team of 50 scouring the region for deals. And they're going to get busier, he predicts, as more investors from oil and gas-rich states in the Gulf look to Asia's giant emerging economies. "This is really the beginning," says Shankar. "You will see a lot of this happening."

The deals are already starting to flow. For instance, on Apr. 8, Saudi-based Al Futtaim , advised by Standard Chartered, agreed to pay $436 million for a 95% stake in Singapore retailer Robinson. Last year the bank advised Saudi Telecom in its investment of $3 billion in telecom operators in Malaysia and Indonesia. And the bank is now teaming up with Istithmar, the private-equity arm of Dubai World, on a $1 billion real estate fund that will invest in China, India, and Southeast Asia.

The emerging Middle East-Asian investment axis got another boost on Apr. 14. That's when Dubai International Capital announced a partnership with Hong Kong-based First Eastern Investment Group for a $1 billion fund focused on China. The two plan to invest in Chinese companies and try to take them public in Dubai.

Backlash Against the West

Typically Arab investors have looked west to the U.S. and Europe, rather than east to China and India, but that's starting to change, says Ashraf Zeitoon, director of special projects for the Mohammed bin Rashid al Maktoum Foundation in Dubai. Zeitoon, like Shankar, was one of several hundred business leaders from the Middle East and Asia to attend a two-day conference in Dubai on Apr. 15 and 16 organized by BusinessWeek. "There's tremendous interest in China across the Arab world," says Zeitoon, whose foundation plans to start sending MBA exchange students from Arab countries to Chinese universities. "There are a lot of synergies between our region and Asia."

The attention to Asia is in part a reaction to a backlash in the West against investment from Arab countries, says Nabil Ali Alyousuf, executive director-general of the Dubai School of Government. "One of the reasons is investors face difficulties and are treated with suspicion, when investing in the U.S. and Europe, of being tied to terrorism," he says.

Not a lot of Middle Eastern money has gone to China and India so far. Most of China's $70 billion in foreign direct investment comes from nearby Asian countries or from the West. India had $25 billion in foreign direct investment last year, says Anil Gupta, a professor at the University of Maryland's Robert H. Smith School of Business, but less than $5 billion came from the Middle East. With oil prices over $100 a barrel, though, the investment figures are bound to jump, he predicts. According to a McKinsey estimate, countries from the Gulf will have $9 trillion to invest by 2020. "There is no way the Middle East region could absorb that," says Gupta. "A good chunk of it will probably find its way to India."

China Has More Cash

The Indian government, which wants to spend $500 billion over the next five years to improve the country's creaky infrastructure, needs the influx of cash from the Middle East. But China, which has set up its own sovereign wealth funds to invest overseas, already has abundant capital of its own and has less need for support from the Gulf.

On the other hand, China's leaders are very concerned about finding steady supplies of oil and gas for the Chinese economy. That's why Beijing has been a big investor in Sudan, for instance, despite the controversy surrounding the Sudanese regime's policies in Darfur (BusinessWeek.com, 2/13/08)

And it's a reason the Chinese are likely to find more ways to cooperate with investors from the Middle East. "Oil supply is a humongous issue," says Ronnie Chan, chairman of Hong Kong-based developer Hang Lung Properties. If you are a Chinese leader, finding ways to help investors from the Gulf get a piece of the Chinese growth story makes sense. "You need to build bridges with this part of the world in order to have leverage," says Chan.

Arab Investors Face China Challenges

For their part, some Arab investors might have political reasons to be focusing more on Asia, too. Not everyone in the West is happy about the idea of investment from the Middle East. Politicians in the U.S., for example, have complained about proposed Dubai investment in American ports. Gulf investors are unlikely to face similar problems in Asia. China, for one, doesn't have a free press and is a one-party state. India has a large Muslim population and close ties to the Mideast region. "Capital is like a river," says Standard Chartered's Shankar. "It flows. And when it finds a rock, it goes around the rock. The rock is the Western markets that resist some of these funds."

That doesn't mean the flow to Asia will go unimpeded, though. Alyousuf, of the Dubai School of Government, says that would-be investors from the Gulf face challenges trying to break into China. "We are a big importer of Chinese products. However I don't think there is much going the other way," he says, pointing out that when it comes to doing business in the West, investors from the Gulf already have the contacts and players. India, because of its proximity and tradition of trade ties with the Middle East, is not too difficult, either. Gulf region investors are on far less familiar ground in China, though. "China is still a mystery to a lot of people in this part of the world," he says.

Hang Lung's Chan agrees that Middle Eastern investors will face challenges in China. "The knowledge of China has been wanting," he says. As more businesses from the Gulf focus on Chinese deals, "the learning curve will be steep."

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