The Middle East is buying into Asia

By Heather Timmons / The New York Times
Published: November 30, 2006

LONDON: When the Bank of China began promoting a $10 billion stock offering last year, Prince Alwaleed bin Talal of Saudi Arabia was interested, according to an adviser.

But the prince, a big shareholder of Citigroup, was not sought as an important potential investor. The Chinese instead planned to focus their marketing of the shares in London and New York, the traditional centers of capital.

A year later, it is the Saudis and other Middle Eastern investors to whom the Chinese often go first.

While China has long sought to cultivate closer ties with Saudi Arabia and other Gulf countries because of its need for oil, a state visit to Riyadh by President Hu Jintao in April and other efforts by Chinese officials have done much to spur nonoil financial transactions between the two countries. Now Prince Alwaleed and other Middle Eastern investors have become some of the biggest buyers of Chinese initial public offerings.

The financial ties between the Middle East and Asia are strengthening by the day, creating a phenomenon that the bank giant HSBC calls "east-east" transactions, or deals between the Middle East and what the West has long thought of as the Far East: China, Japan, Southeast Asia, as well as India and Pakistan. The traditional destinations for Middle Eastern petrodollars - the United States and Europe - may see some investment money dry up as a result, some academics say.

The trend has spurred Wall Street and London-based banks to scramble to bulk up their presence in the Middle East. The banks estimate that Middle East buyers will snap up some $20 billion to $30 billion in Asian assets in the next year, with a focus on real estate and industrial companies.

By comparison, a 2006 report by the U.S. Congressional Research Service found that Middle Eastern countries accounted for less than 1 percent of $1.5 trillion of foreign direct investment in American businesses and real estate, behind the Netherlands and France. Middle Eastern buyers have completed high-profile deals in Europe recently, including a Dubai investment firm's $1.5 billion purchase of Madame Tussaud, an entertainment company.

When advisers talk to the investment authorities, wealthy investors, corporations and local banks in the Middle East, "most of what they want to talk about is Asia," said Gaby Abdelnour, the chief executive for the Asia Pacific region at J.P. Morgan Chase.

The big banks are already profiting from financing and clearing business between the two regions. But Middle Eastern investors are also setting up Asia-focused real estate investment funds, buying equity stakes in companies or shopping for acquisitions in the region - creating more potential business for Wall Street.

"People are waking up to the opportunities and pushing hard" to find deals, he said.

So far, the deal flow has been sporadic, and because many of the transactions involve private companies on either side, it is unclear how large the deal volume of has been. Emirates Telecommunications' purchase of Pakistan Telecommunications for $2.6 billion and Orascom Telecom's $1.3 billion deal for Hutchison Telecom of Hong Kong are among the largest transactions.

But bankers who work in the Middle East and Asia say they are looking at a promising pipeline of pending mergers, and negotiations are just beginning on dozens of others.

"We're definitely seeing a big jump in terms of deal flow between the Middle East and Asia, and Southeast Asia and China in particular," said Georges Makhoul, president at Morgan Stanley for the Middle East and North Africa. "People are looking at India, Indonesia and Malaysia as emerging opportunities." Morgan Stanley plans by March to nearly double to 40 the number of investment bankers it has in Dubai.

Some of this deal flow is certain to come at a cost to deals in the Western world. Jeffrey Culpepper, Merrill Lynch's head of global markets and investment banking in the Middle East and North Africa, said, "I don't think we're seeing investors withdraw money from the United States, but a lot of new money from higher oil prices is not going into North America."

It may be easy to find political reasons for this investment shift. For one, the war in Iraq is unpopular in the Middle East. But many bankers say Middle Eastern investors who are focusing on Asia are practical: they are responding in part to the backlash that forced Dubai's port company to sell off American holdings after it bought the British port operator P&O. After "the Dubai ports fiasco, they're saying 'We don't need the hassle'" of investing in the United States, Makhoul said.

The deals between Asia and the Middle East are happening for one of the simplest reasons imaginable: "Both sides have something the other side wants," said Peter Burnett, UBS's chairman of investment banking in the Middle East.

The Middle East's oil and natural gas is vital for China, Japan and all the fast- growing markets in the Asia-Pacific region. And the Middle East's capital and liquidity generated by that oil wealth is driving a search for investments with high returns, rather than low-return government bonds like U.S. Treasury securities.

Middle East investors "are looking for outperformance rather than hoping to maintain balanced financial markets around the world," Burnett said. "What better place to go than India and China and beyond?"

Trading relationships between the Middle East and parts of Asia, particularly India, go back hundreds of years. But the governments of the Middle East have lately been focused on strengthening them in the future.

A number of countries in the Gulf and the Gulf Cooperation Council have developed an Asia strategy that looks far beyond energy trade, Adnan Shihab- Eldin, a former OPEC director of research, said in a report prepared for an International Monetary Fund meeting in Singapore this September. Already there are several free trade agreements pending between the Gulf council and China, India and other Asian countries. They are expected to be signed long before a free trade agreement between the Gulf and the European Union, he noted.

Trade between the Middle East and Asia more than doubled between 2000 and 2005, reaching $240 billion last year. That number reflects rising oil consumption and prices, but it also includes tripling exports from China, India and Pakistan to the Gulf.

Asian countries, particularly China and India, have made their own strategic plans clear in the Middle East as well.

The Chinese have had a "strategy to woo Middle East investors," Culpepper of Merrill Lynch said.

Senior management and politicians throughout Asia now "regularly tour the Middle East," he said.

Most banks are also concentrating on hiring and moving bankers to handle the deals.