Closer diplomatic and economic ties between China and Middle Eastern nations have sparked talk of growing prospects for fund firms hoping to play a role in managing the abundant wealth of sovereigns and wealthy individuals from the region.

Industry experts warn, however, that Middle Eastern wealth could be hard to unlock and long-term commitment to building onshore operations and developing partnerships in the region would be required for Chinese asset managers to realise the opportunity.

Traditionally, Middle East investors have invested in Asia indirectly through European and U.S. asset managers, using global allocation services in London or New York. But the growing wealth, offshore exposure and need for expertise offers cross-border possibilities for more firms to work with Middle Eastern investors.

A landmark visit by Chinese president Xi Jinping to Saudi Arabia in 2022 has been followed by regular visits from senior executives from the Hong Kong subsidiaries of Chinese fund firms to the Middle East to woo local investors.

But Zheng Chen, policy analyst at CLSA, tells Ignites Asia that while expectations for Middle East investment opportunities have grown alongside political relations and renminbi internationalisation, these two factors have not been “translated into real investment opportunity so far”.

Zheng adds that another immediate problem is that other Asia markets like India have been offering better returns than China, so Middle East investors are also hesitant about allocating to the market right now.

Large global asset managers such as BlackRock, Wellington Management and most recently PGIM have established offices in the Middle East.

Some Chinese wealth managers are setting up offices in the region too, but major Chinese asset managers have yet to launch on-the-ground operations which is necessary for registering a foreign public fund for retail distribution in places like the United Arab Emirates.

Muneer Khan, Middle East regional head at law firm Simmons & Simmons, says he has had more enquiries from asset managers in Hong Kong, many of which are Chinese firms, interested in tapping the local retail markets, but few have made the move to set up a local presence yet.

This compares with the many large global traditional managers and hedge funds that have seen set up in the Middle East over the past five years and already have the advantage of existing long-standing relationships with investors.

“At the retail level, the established international players have a significant head start, and they have brand awareness,” says Khan.

There are bigger opportunities for more “niche” Chinese and Asian managers selling emerging market strategies to family offices or high-net-worth individuals looking at diversifying portfolios in terms of markets and managers, according to Khan.

A common starting point for developing brand awareness and growing market share is working with a local partner or locally licensed intermediary to help distribute funds in the region.

Fullgoal Fund Management (Hong Kong) is one fund firm that has established links with a local partner, SC Capital, to offer funds in the Middle East. Its partner launched the first Luxembourg UCITS Shariah China Equity Fund, SC Chinese Equity Fund, which invests in A-shares and H-shares, in November 2023.

The Chinese firm, which is the investment advisor for the firm, has been making preparing for the launch since 2015.

Jessica Wong, founder and managing partner at eWTP Arabia Capital, which is backed by Saudi Arabia’s Public Investment Fund, says it is crucial that Chinese fund companies understand the local market and what they could bring to it.

Chinese asset managers eyeing opportunities in the Middle East need to think about “value creation” and need to be clear if they just want the money or if they want to localise, says Wong.

“Chinese asset managers need to think about if the specialty they can provide is what is needed locally now. It is very important to learn from local partners,” she says.

The closer high-level relations between Hong Kong and Middle East markets have resulted in some significant collaborations between asset managers and large sovereign investors, but the major developments have occurred outside the Middle East.

CSOP Asset Management in November launched the first exchange-traded fund on the Hong Kong exchange investing in the Saudi Arabian market and secured a significant investment from the kingdom’s US$700 billion sovereign wealth fund, the Public Investment Fund. A similar ETF is also predicted to be launched in the Chinese mainland.

Some experts suggest that such deals that have stemmed from closer political ties have been more about Middle East authorities setting up new avenues for money to flow into their own capital markets than the other way around.

Edmond Christou, senior research analyst of banks, insurers and real estate at Bloomberg Intelligence, says that from the perspective of Chinese investors, it is worth noting that Saudi Arabia is seeking to enhance liquidity to support its Vision 2030 objectives.

“Thus, initiatives that facilitate international capital flows are critical for the Kingdom,” he adds.

Christou suggests that other oil-rich countries like the UAE or Qatar could potentially be following the Saudi lead, establish partnerships and attract money to boost liquidity in their own markets.

He suggests that it is unclear what steps Saudi authorities may make to take such investment partnerships, but it is too early to think about a real “two-way” flow of capital, with money flowing from the Middle East into Hong Kong and China.

Simmons and Simmons’ Khan says that even with closer political relations, ultimately it comes down to a commercial imperative over whether Chinese asset managers think there is a big enough opportunity and if they can commit the time and capital to compete.

“I think more effort, investment and consistency will probably be required in order to unlock the opportunity,” he adds.