Gulf investors are diving into China, pouring billions into a market that promises more than fast returns. It’s a measured move, balancing optimism with caution, as they navigate a complex market that’s as challenging as promising.

In 2023, sovereign wealth funds from the Gulf injected $2.3 billion into the Chinese economy, a big leap from just $100 million the previous year. 

This surge reflects a strategic pivot. As Western firms pull back, these cash-rich nations are keen to diversify their portfolios beyond oil and into tech and infrastructure. 

THE REASONS

It’s a broader strategy to navigate shifting global geopolitics and elevate their global influence, says Alice Usanase, Young Global Leader, World Economic Forum.

As the world moves toward a multipolar order, where the rise of emerging markets challenges Western economic dominance, Gulf Cooperation Council (GCC) countries see an opportunity to strengthen their ties with China, economically and strategically.  China’s push for leadership in green energy, technology, and advanced manufacturing aligns with the Middle East’s vision for economic diversification and innovation.

The Belt and Road Initiative (BRI) and increasing bilateral agreements deepen economic interdependence, allowing Middle Eastern investors to hedge against Western market volatility and geopolitical shifts, such as US-China tensions.

Usanase adds, “By investing in China, GCC countries are positioning themselves as key players in a new world order, fostering alliances that could reshape global trade and energy dynamics.”

Simultaneously, the internationalization of the yuan offers Middle Eastern investors financial flexibility beyond the US dollar, enhancing their ability to influence global markets. 

Chinese enterprises have been encouraged to invest in the Gulf in new energy, information and communication, and digital and green economies, says Mohammed Soliman, Manager, McLarty Associates. 

The factors that once fueled China’s GDP growth, such as real estate and high export volumes, are waning. Instead, Soliman believes that advanced technology and manufacturing are increasingly driving its economic expansion. “These new focus areas align with the Gulf’s digital transformation, presenting attractive investment opportunities.”

Green hydrogen and renewable energy are also central, as China’s advancements in wind, solar, and hydrogen technologies complement the Gulf’s ambitions to lead in clean energy, highlights Usanase. 

For example, Saudi Arabia’s ACWA Power is actively exploring joint projects in China’s green energy space. Electric vehicles (EVs) and battery technology also present a significant draw, with the UAE’s Mubadala investing in firms like CATL, capitalizing on China’s dominance in this sector as the Gulf shifts toward future mobility solutions.

The health tech and biotech sectors, spurred by the pandemic, offer compelling opportunities. Gulf sovereign wealth funds are increasingly partnering with Chinese biotech firms, capitalizing on genomics and medical AI breakthroughs. Meanwhile, agricultural technology (agritech) is gaining attention, with Middle Eastern countries looking to China’s innovations in precision agriculture and vertical farming to address food security challenges.

China’s smart city development and digital infrastructure efforts align closely with the Middle East’s urbanization projects, such as Saudi Arabia’s NEOM and Abu Dhabi’s Masdar City, which also integrate AI, IoT, and sustainability. Lastly, fintech, particularly in digital payment, such as the recent partnership with Ant Group, and blockchain, presents valuable collaboration opportunities. 

THE VALUATION

Despite structural challenges, China today is different from the China of the 1990s and 2000s, believes Soliman. However, valuations remain attractive compared to other regions due to attractive valuations, a stabilizing macro picture, and solid earnings.

Chinese assets are undervalued due to factors such as domestic liquidity tightening, a real estate slowdown, and regulatory pressures in areas like tech. These have pushed valuations down across many sectors, creating an attractive entry point for investors seeking long-term opportunities.

For prospective investors, the most compelling opportunities lie in growth sectors such as clean energy, advanced semiconductors, and biotech, where China is investing heavily to become more self-sufficient, says Usanase. These sectors are underpriced relative to their growth potential, bolstered by strong government support. Additionally, China’s leadership in AI-driven industrial automation and the growing adoption of the digital yuan create unique opportunities in under-the-radar areas with high growth potential but less market attention.

For Middle Eastern investors, this is particularly advantageous. 

Usanase says, “By entering at this stage, you can gain exposure to sectors that align with long-term global trends, such as sustainability and technological innovation, while benefiting from China’s recovery as government stimulus and reforms start to stabilize the economy.”

Investments in these areas could yield significant returns, especially as China moves toward greater self-reliance in critical industries.

THE CAPITAL 

Middle Eastern investors target high-growth sectors in China that align with their long-term goals of diversification and sustainability.

Technology has emerged as a top investment sector for Gulf countries in China, highlights Soliman. Advanced technologies like AI, EVs, automation, and autonomous vehicles, critical for the Gulf’s digital transformation, are drawing significant interest. Sovereign wealth funds in the Gulf seek not only financial returns but also technology transfer, talent, and reinvestment from China as well as other Asian giants such as Korea and Japan.

In renewable energy, Saudi Arabia’s ACWA Power is expanding investments in China’s solar and wind projects, capitalizing on China’s leadership in green energy, which is expected to contribute significantly to its goal of reaching carbon neutrality by 2060. This complements the Gulf’s energy transition, with Saudi Arabia aiming to generate 50% of its energy from renewables by 2030.

In the EV and battery space, the UAE’s Mubadala Investment Company has invested in CATL, one of China’s leading EV battery makers. China currently produces nearly 60% of global EV batteries, positioning itself as the key player in the future of mobility. This is strategically relevant for Gulf nations, particularly Saudi Arabia’s NEOM project, which is integrating advanced mobility solutions as part of its $500 billion smart city initiative.

China’s biotech and health tech sectors are forecasted to grow 12% annually, and they are also attracting capital. For example, Qatar Investment Authority has increased its stake in Wuxi Biologics, a biologics R&D and manufacturing company, as the Gulf seeks to strengthen healthcare innovation. China’s healthcare market is projected to reach $2.7 trillion by 2030, offering significant upside potential.

Agritech is another emerging area, believes Usanase, with Middle Eastern investors exploring partnerships in precision agriculture and sustainable farming techniques to tackle shared food security challenges. China’s Agritech sector is expected to see 9% annual growth, making it an attractive investment, particularly for Gulf nations heavily reliant on food imports.

THE GLOBAL ECONOMY

According to Usanase, rising global interest rates, particularly in the US and Europe, may limit capital availability for large-scale projects, but China’s lower rates and potential fiscal stimulus could make it an attractive alternative destination for capital in sectors like clean energy and advanced manufacturing. 

Energy market dynamics are also pivotal. Higher oil prices would increase liquidity for Gulf sovereign wealth funds, enabling more aggressive investments in China, while lower prices might constrain their ability to diversify at the required scale.

Soliman highlights that despite efforts to shift the focus of the relationship beyond energy, energy remains a key pillar of trade between the Gulf and China. A decline in energy prices could also limit the Gulf’s fiscal flexibility, potentially impacting their ability to invest in specific technological fields and driving the relationship away from energy—presenting an economic paradox.

Geopolitical tensions, particularly between the US and China, may limit access to sensitive sectors like semiconductors and advanced tech, but also present opportunities as China increasingly looks to diversify its investment partners, making the Middle East a strategically important ally. With a weaker yuan, currency fluctuations could offer attractive entry points, allowing dollar-based investors to acquire Chinese assets at a lower cost. At the same time, global supply chain disruptions could hinder sectors reliant on cross-border integration, such as EVs and tech. However, this could also drive investments into China’s efforts to bolster self-sufficiency in manufacturing.

THE MIDDLE EAST-CHINA INVESTMENT

In the next decade, the Middle East-China investment relationship is set to evolve within a broader context of South-South cooperation, where emerging economies increasingly collaborate to reshape global trade and financial systems, says Usanase. 

Saudi Arabia’s move to sell oil to China in yuan exemplifies this shift, challenging the dominance of the US dollar and signaling a new order in global finance. This deal strengthens bilateral ties and positions both regions to leverage alternative economic alliances that could redefine international trade patterns.

As the Middle East and China prioritize energy transition, joint investments in renewable energy and green hydrogen are central to their partnership. China’s expertise and Saudi Arabia’s ambition for sustainable development align closely. This cooperation extends into technology as well, with China poised to invest in the Middle East’s growing tech hubs, such as Dubai Silicon Oasis, focusing on AI, 5G, and EV development.

However, China and the Gulf states have agency in deepening their bilateral relations beyond energy, highlights Soliman. 

As a relevant third-party actor, the US plays a significant role in the China-Gulf investment relationship. Washington is leveraging its position as an economic and technological chokepoint to limit its partners and allies’ exposure to China regarding technology and security. 

In the past, the Biden Administration was at the forefront of the Microsoft-G42 deal, which aimed to safeguard American intellectual property from any potential spillover into China. Similarly, the Trump administration launched the Clean Network Initiative to compel allies and partners to remove Chinese technology from 5G networks. 

Soliman adds, “Hong Kong also can offer overseas investors access to mainland Chinese markets through initiatives like Stock Connect and Bond Connect. The city’s significance as a financial center is reflected in its role in internationalizing the yuan, facilitating corporate fundraising, and managing assets and wealth.”

The BRI further accelerates infrastructure development in the Middle East, establishing the region as a key logistics and trade hub in China’s global network. Usanase says, “These developments are emblematic of a broader trend toward South-South cooperation, where emerging economies if strategically aligned, can bypass traditional Western-dominated systems and create new growth opportunities.”