Why is the U.S. Scrutinizing Middle Eastern Sovereign Wealth Funds When it Comes to China?
Posted on 11/27/2023
Years ago, Canadian public pension funds like the Canadian Pension Plan Investment Board (CPPIB) and sovereign wealth funds could not get enough of mainland China investing. Alibaba founder Jack Ma was telling his origin stories at the World Economic Forum, while many Chinese tech companies like Tencent Holdings Limited kept growing rapidly by entering new business verticals, disrupting the powers at be. The Chinese government reigned these vehicles in, creating some panic among shareholders, including pension investors, of these very tech companies. The pendulum has swung, as these once frothy institutional investors have pulled back their activities from Chinese-moves to regulate entities like Ant Group and stricter geopolitical measures by the world’s superpowers. Norges Bank Investment Management, which manages the trillion plus Norway Government Pension Fund Global, closed its Shanghai office in 2023 in favor of moving those Sino operations to Singapore, while Mubadala Investment Company opened an office in Beijing in 2023. The Abu Dhabi Investment Authority (ADIA) opened its Hong Kong office in 2016. Chinese President Xi Jinping has been on a crusade to lure investment back into China and promote the silk road initiatives.
Xi’s American counterpart, the U.S., is exerting its economic influence on the Gulf states. The Biden administration is taking a look at Middle Eastern SWF investments in the U.S. as these SWFs also invest in mainland China and the Asian periphery. The Gulf states, as well as city-states such as Singapore are straddled dealing with both the U.S. and China – two major superpowers. Sovereign wealth funds from both Asia and the Middle East have found the U.S. as a safe destination to park assets, invest in public and private funds, allocate capital to startups, and invest in real estate. Wealth funds like Mubadala Investment Company and GIC Private Limited are not ignoring China’s technological AI ascendancy.
The U.S. is using its elephantine weight to scrutinize foreign investors including name-brand venture capitalists and sovereign wealth funds that have closer ties with China, especially in the opportunistic technology sector. This has been in the works since the Trump administration, but has worked its way throughout the D.C. apparatus. The Committee on Foreign Investment in the United States (CFIUS) is reviewing a number of deals made by Gulf-based sovereign investors that could be considered national security risks. Obviously, there is tremendous controversy over the Saudi Arabia Public Investment Fund (PIF) potentially taking over and having a level of influence of the PGA tour. To illustrate further, Saudi Arabia’s PIF has more than US$ 35 billion in U.S. companies like Amazon, Walmart, rideshare and the food delivery company Uber Technologies. Mubadala has dabbled in a number of industries including semiconductors, cybersecurity, and machine learning. One can think of G42. Other wealth funds being looked at include the Abu Dhabi Investment Authority, GIC Private Limited, and Mubadala Investment Company.
Chinese President Xi Jinping touted plans for the new silk road that connects China to the West, with the Middle East being a major component. Despite Xi’s pleas, the U.S. remains the key destination for Middle Eastern sovereign investor capital. The value of deals and investments in China by Middle East sovereign funds increased from around US$ 2.6 billion from the first 10 months of 2023 versus around US$ 246 million in 2022, according to data from the Sovereign Wealth Fund Institute (SWFI), a research organization founded in 2008.
Middle Eastern Sovereign Wealth Funds Investing in Mainland China
|Amount of Direct Transactions in USD
Source: SWFI.com (reach out to SWFI support to re-create on that platform).
Why are Middle East Sovereign Funds Investing in China?
Besides some of the usual commercial and diversification reasons, these sovereign investors see opportunity in technology investments, just as they see value in Silicon Valley. For example, Mubadala has substantial capital to potentially deploy, with total assets of US$ 276 billion. Energy, infrastructure, IT, and financial services are some areas of interest. In addition, geopolitically for the Middle East, the governments want to form a more vibrant trade relationship with China. China is a consumer of Middle East oil. In addition, China is keen on promoting the flailing petroyuan and taking aim at the U.S. hegemonic petrodollar, while reducing its dependence on the United States. The U.S. dollar has major advantages of being fully convertible, which drastically hurts the petroyuan narrative. There is an expectation of some oil money from the Middle East to flow into Chinese A shares. The Kuwait Investment Authority (KIA), QIA, Mubadala, ADIA, and other gulf-based government funds are keen on entering listed Chinese equities for liquidity and exposure as trade and diplomatic relations between the two regions improve. For example, ADIA has increased its ownership in a number of listed mainland Chinese firms such as China Shenhua Energy and Zijin Mining. SWFs are also party to the United Nations’ energy transition plans in which China’s Zijin Mining recently got a license for a lithium mine in Congo.
As Western money remains slightly cautious among the geopolitical risks around Taiwan and China and a new security law for foreigners, the role of technology sharing is becoming paramount for both super powers.
The Biden administration has expressed mounting concerns that critical technology, infrastructure and data, that ends up in countries like Singapore, the United Arab Emirates, and Saudi Arabia, could find its way into China. CFIUS is an inter-agency committee authorized to review foreign direct investment in the United States and block transactions or impose measures to mitigate any threats to U.S. national security. CFIUS reviews focus solely on national security concerns. In 2018, U.S. President Trump pushed through the 2018, Foreign Investment Risk Review and Modernization Act (FIRRMA) which expanded the categories of covered transactions. CFIUS review now includes certain foreign non-controlling (equity) investments in U.S. businesses that deal with critical technology, critical infrastructure, or the sensitive personal data of U.S. citizens. The U.S. typically defines a national security risk in three stages. Is it a threat? What is the vulnerability it has to which the nature, location, or relationships of the U.S. business presents susceptibility to impairment of national security. The third stage is consequences – what is the impact on national security from the exploitation of the vulnerability. Part of this process involves the National Intelligence Council creating a classified National Security Threat Assessment (NSTA) for transactions under CFIUS review.
Sovereign wealth funds even may want to be more cautious in co-investing or buying TID U.S. businesses. A TID U.S. business is a business that produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies; performs the functions as set forth in column 2 of appendix A to this part with respect to covered investment critical infrastructure; or maintains or collects, directly or indirectly, sensitive personal data of U.S. citizens. This could rule out a sovereign wealth fund buying a U.S technology startup or large data company.
All in all, sovereign wealth funds in the Middle East and even Singapore, may have to make tougher decisions on where they allocate capital if U.S. and China relations worsen.