In recent years, the exodus of foreign investments and capital from China has become a clear trend, with those from the West, especially the Western and U.S. being the main driving force behind this outflow. However, in stark contrast to the movements of Western and U.S. investments and capital, those from the Middle East and Gulf countries has shown a different pattern. In recent years, Middle Eastern sovereign wealth funds, including Saudi Arabia's Public Investment Fund (PIF), have significantly increased their investments in China. In 2023, PIF's investment in China reached USD 22 billion, focusing on sectors such as technology, automotive, and healthcare. There is also the driving of bilateral investments through the of signing memoranda of understanding with Chinese financial institutions.

In 2024, Saudi Arabia's PIF reached a cooperation agreement worth USD 50 billion with six major Chinese financial institutions. Mubadala, an Emirati sovereign wealth fund, participated in a new round of equity financing for Chinese fashion giant Shein. JD Group's subgroup, JD Industry, also completed a new round of financing, with Mubadala and the Abu Dhabi-based holding company 42XFund jointly leading the investment. Additionally, Saudi Aramco has significantly strengthened its investment in China's oil and gas infrastructure.

In response, China's business and investment sectors have begun to place high hopes on Middle Eastern. Furthermore, industries related to new energy and infrastructure have taken the lead, as Chinese enterprises begin to increase investments in the Middle East. The trade volume between China and the Gulf Cooperation Council (GCC) countries has also surged, rising from USD 10 billion in 2000 to over USD 230 billion in 2021.

All in all, as foreign capital and investment gradually withdraws from China, with an accelerated pace in recent years, the Middle Eastern-Gulf countries are steadily becoming the new, crucial backers the Chinese market with large-scale, cross-sector investments. However, researchers at ANBOUND believe this view may be overly optimistic. Given a range of factors, the Middle East-Gulf countries are unlikely to become a strong "financial backer" for China in the long run.

Recently, the data analysis company MAGNiTT released its new MENA Venture Investment 2024 report, which outlines the venture capital landscape in the Middle East and North Africa (MENA) region for the entirety of 2024. MAGNiTT, a venture capital data platform headquartered in Dubai, focuses on emerging markets in the Middle East and other regions globally, analyzing venture capital and startups. Industry insiders believe that in recent years, the reports released by MAGNiTT have gained significant attention for their in-depth analysis, establishing a strong market influence.

Taking Saudi Arabia and the UAE, the two most influential financial backers in the Middle East-Gulf region, as examples, the report released by MAGNiTT in 2023 highlighted that, thanks to government support for innovation and the infusion of capital from financial institutions like the PIF, Saudi Arabia's tech sector has seen a surge in large-scale venture capital deals, such as those involving fintech companies like Tabby and Tamara. As a result, Saudi Arabian startups raised USD 1.4 billion in 2023, a 33% year-on-year increase, slightly surpassing half of the total venture capital raised in the MENA region that year. Notably, its venture capital fundraising exceeded that of the UAE in 2023, demonstrating a strong growth trend.

However, MAGNiTT's latest report points out that in 2024, venture capital in the MENA region declined by 29% year-on-year, dropping to under USD 1.9 billion. Among these, venture capital raised by Saudi Arabian startups plummeted by 44%, down to USD 750 million, marking the largest decrease in the MENA region. The situation in the UAE was slightly better than in Saudi Arabia. Although the number of venture capital transactions in the UAE increased by 9% compared to 2023, leading the MENA region with 188 transactions, the total venture capital raised fell to USD 613 million, a decrease of 8% year-on-year.

MAGNiTT pointed out that the main reasons for this phenomenon are twofold: at the macro level, it is primarily due to the high interest rate environment created by the U.S. Federal Reserve's delay in cutting interest rates; at the micro level, it is largely attributed to the generally inflated valuations of regional startups and the lack of well-established exit mechanisms. However, even without these factors, Middle Eastern-Gulf capital would likely still face challenges in making strong investments in China.

First, the negative economic trends in the major Middle Eastern-Gulf powers will continue to limit their capital's ability to invest in China. In recent years, due to the impact of the global macroeconomic slowdown, even the leading countries in the region have experienced significant volatility in their economic development. Data shows that from 2019 to 2023, Saudi Arabia, the regional leader, had annual economic growth rates of 0.33%, -4.14%, 3.24%, 8.5%, and -0.8%, respectively. The UAE, another major financial backer in the region, had annual economic growth rates of 1.7%, -4.2%, 3.8%, 7.9%, and 3.6%. Overall, the economic development of these two major countries shows a gradual decline over time.

At the same time, the fiscal revenue trends in these two countries also appear far from optimum. In Saudi Arabia’s case, the fiscal revenue for 2024 is projected to be SAR 1.23 trillion, while expenditures are expected to reach SAR 1.345 trillion, resulting in a deficit of SAR 115 billion, or 2.8% of GDP. This deficit is larger compared to 2023.

In the case of the UAE, although fiscal revenue has increased through the implementation of corporate income tax, economic activity in its non-oil sectors has gradually weakened, a trend also observed in Saudi Arabia. The continued weakness of global oil prices in 2024 has affected the financial capacity of the two leading countries. While international oil prices have been rising this year, the actions taken by U.S. President Donald Trump to boost U.S. oil and gas production, combined with the still sluggish global demand, are likely to continue exerting a negative effect on global oil prices, thereby impacting the economic and fiscal strength of Gulf and Middle Eastern countries. It can be observed that, as the centerpiece of Saudi Arabia's economic transformation, the scale of Saudi Vision 2030 has been repeatedly reduced, with instances of funds not being allocated for projects as planned. The economic and fiscal uncertainty will, in practice, limit the investment capacity and willingness of Middle Eastern-Gulf countries toward China.

Secondly, in the crucial advanced technology sectors, such as semiconductors and artificial intelligence (AI), Middle Eastern-Gulf powers is likely to continue facing obstacles in cooperation with China. From the first Trump administration to the Biden era, the U.S. government's consistent stance has been to suppress the development of China’s advanced technology, with the semiconductor and AI industries becoming key targets of this pressure. According to research conducted by ANBOUND, the U.S. government's "small yard, high fence" policy has gradually evolved into a "large yard, giant fence", and as the focus of suppression has expanded from advanced processes to mature processes. Recently, U.S. semiconductor giants have even started a price war in China’s market for mature process chips. Due to the critical and sensitive nature of advanced technologies, during the Trump 2.0 era, there is still some room for transactions and exchanges between China and Middle Eastern-Gulf countries (e.g., mature process chips), but the potential for comprehensive expansion, especially in advanced processes, remained limited. In terms of international investments in these fields, Western enterprises are also facing increasing restrictions. Therefore, it is likely that the leading countries in the Middle East-Gulf region will become more cautious in this area. Notably, Gulf tech giant G42 fully withdrew from the Chinese market in the first half of 2024.

Furthermore, Western capital is intensifying its efforts to attract Middle Eastern-Gulf capital. It is clear that the West has always been the primary destination for investments from the Middle Eastern-Gulf powers, and this has not significantly changed over the past few decades. Currently, many emerging market economies, including China, are experiencing slower economic growth, which has weakened their investment appeal, while Western countries are stepping up their efforts to attract Middle Eastern-Gulf capital.

In recent years, BlackRock, Golden Gate Ventures, and Polen Capital have laid the groundwork for further expansion by establishing offices and obtaining licenses in the UAE, Saudi Arabia, and Qatar. In addition to strengthening capital investments in the Middle East-Gulf region, another key goal is to secure further cooperation with Middle Eastern-Gulf capital. One noticeable trend is that, in recent years, Middle Eastern-Gulf capital has increasingly strengthened its cooperation with Western capital, particularly in projects such as Africa's carbon reduction initiatives, which involve "greenwashing" operations. Moreover, amid the continued trend of de-globalization, ethnic and religious conflicts in the Middle East are likely to persist. In this context, the regions with relatively stable global situations are primarily concentrated in Western Europe and North America. The strong economic performance of the U.S. further enhances its appeal, drawing Middle Eastern-Gulf capital to invest.

In addition, research by experts such as Mohammed Alsudairi, a lecturer on China and the Middle East at Australian National University, points out that Middle Eastern-Gulf capital is more familiar with the legal regulations and operational practices of Western markets. However, their familiarity with the specific operations and institutional compatibility of the Chinese market remains relatively low. The negative effects of geopolitical factors, such as the confrontational nature of U.S.-China relations, are still very apparent. These factors will continue to pose significant obstacles to Middle Eastern-Gulf capital increasing its investments in China.

Final analysis conclusion:

At the beginning of this year, a report by the South China Morning Post indicated that global sovereign wealth and public funds' investments in China increased from USD 8.5 billion in 2023 to USD 10.3 billion in 2024, marking a growth rate of 21%, with Middle Eastern-Gulf capital taking the leading share. However, Mohammed Alsudairi's analysis suggests that, due to various factors, investments from Middle Eastern-Gulf capital in China likely peaked between 2023 and 2024. In summary, constrained by their own economic and fiscal fundamentals, the overall global geopolitical situation, and the continued need for cooperation with Western markets, Middle Eastern-Gulf capital is likely to become increasingly cautious, making it unlikely to remain a strong financial backer for China.

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Zhou Chao is a Research Fellow for Geopolitical Strategy programme at ANBOUND, an independent think tank.