Earlier in September (11-12), Hong Kong hosted its ninth Belt and Road Summit, where attendants from mainland China, Hong Kong and other Asian and European markets gathered to discuss trade and investment opportunities.
First raised by Chinese president Xi Jinping back in 2013, the Belt and Road Initiative (BRI) has now evolved into a cross-border infrastructure development strategy that encompasses central Asia, Southeast Asia, Europe and Africa.
As geopolitical tensions heat up with the US, the Chinese are eager to look for an alternative investment destination and trade partner, as well as to internationalise its own currency, with the Middle East becoming an important part of the mix.
For countries in the Gulf Cooperation Council (GCC), China brings along not only money, but know-how in sectors that they most urgently need, including clean energy and green technology.
Iqbal Khan is the chief executive officer (CEO) of Fajr Capital, a Dubai-based private equity (PE) investment firm focussing on Islamic finance, which has backing from sovereign wealth funds in Brunei and Abu Dhabi, as well as the strategic investment arm of Malaysia. Previously, Khan (pictured) was founding CEO of HSBC Amanah, the global bank’s Islamic banking subgroup.
FinanceAsia sat down with Khan during the Belt and Road Summit in Hong Kong, asking the finance veteran about trends in investments, currencies and finance products, and what the Chinese-Middle East collaboration should look like on the ground.
Excerpts have been edited for brevity and clarity.
FA: As a Dubai-based PE investor, what opportunities do you see amid the growing ties?
Khan: China has become a partner of choice for GCC countries as they try to diversify their economies. Chinese companies come in to provide technology know-how, especially in areas such as green transition, new energy infrastructure, payment processing, e-commerce, data analytics and data monetisation.
In April, we closed a billion-dollar healthcare transaction, in which one of our investors is a sovereign wealth fund from China. Meanwhile, we’ve seen various GCC sovereign wealth funds investing into China through government partnerships.
Meanwhile, the world is ging through ‘de-globalisation’, where military conflicts and sanctions prevail. Middle East’s collaboration with China is focussed on economic democracy instead of politics, a priority for the majority of leadership in the GCC. Past partnerships with the US and western European countries came with their own agenda.
FA: You suggested a new investment model for China-Middle East collaborations. Can you elaborate?
Khan: The Belt and Road Initiative started with government-to-government (G2G) propositions, which are subject to constant rescheduling and replanning, as shown by the case of development projects in countries like Sudan. Purely government-led initiatives have been facing backlashes where China is accused of taking over local economies, which in turn led to rescheduling and delay of projects. Local players need to take initiatives in these projects to protect our economies.
To avoid that from happening, it’s better to involve private sector players. For example, the Chinese government invests in 30% of a project, leaving the other 70% of share to both Chinese and local institutional investors. This ensures projects to be successfully carried out with local knowledge and private commitments. A leveraged structure, from a government perspective, helps enlarge the capital base while maintaining a leading position.
Therefore, China needs to bring in private players such as asset managers, venture capital (VC) firms, as well as small and medium-sized enterprises (SMEs) to the Middle East to invest in various sectors.
At the same time, Chinese institutions need to partner with indigenous institution such as a local asset manager in GCC countries. Ideally, projects are financed by a fund backed by governments and Chinese and local asset managers.
We are seeing a number of Chinese banks opening branches in the Middle East, but bigger impacts cannot be achieved without asset management platforms in place. The BRI needs to become an asset allocator with market-driven frameworks and vested interest for private institutions.
FA: Why should Chinese institutions familiarise themselves with Islamic finance*?
Khan: As examples, Chinese export credit agencies can offer Shariah-compliant Islamic risk management products. On a greater level, China should aim to obtain an observer status with the Islamic Development Bank (IDB) to create a political risk instrument.
Currency volatility is the biggest challenge that I see – nearly all currencies along the BRI headed south against dollar, bringing huge risks on investment returns.
To derisk, Chinese institutions should collaborate with credit enhancement players such as the IDB, or with risk management institutions such as the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC). Trading parties should come up with policies that protect BRI countries from currency risks.
FA: What’s your view on the de-dollarising drive within GCC countries, and how Renminbi comes into play?
Khan: GCC currencies will have to move from pegging to a single currency to pegging to multiple currencies, and Renminbi will be part of it.
Dollar remains dominant because oil trade is denominated in dollar, and our currencies are pegged to it. But as world trade patterns change and ties with China deepen, we are seeing a de-dollarisation drive, and a gradual increase of Renminbi usage.
The process can be slow when a new currency comes into the market, and taking on currency risks could be dangerous for local investors. Therefore, for the time being, BRI projects focus only on dollarised assets, which won’t help solve the problem of local economies.
The BRI should look at a portfolio of both dollarised and non-dollarised assets, managed through independent processes, and leverage an equity investment structure as a beginning. Partnerships could start with a certain percentage of Renminbi exposure, and gradually increase the portion when the Chinese currency becomes more stable and reliable.
FA: In which other areas are you seeing growth potential?
Khan: The internationalisation of second-tier Chinese companies is a big opportunity for financial advisors. Aside from the largest Chinese firms who already have presence internationally, second-tier Chinese companies are also world-class players with technology know-how, integrity and competence. Bringing them to the Middle East and creating corporate partnerships would be phenomenal to increase economic ties.
Dual listing on the stock markets is another major development. We are seeing more interest for Chinese companies to list on Saudi and the United Arab Emirates (UAE) bourses, as well as Middle East-based companies listing in Hong Kong.
But to make these happen, we need more talent. People-to-people connection is very important, and we are seeing more collaborations between some of the best institutions in China and the UAE to familiarise with each other’s markets. We need to build a culture that is open and fair to grow together.
*Islamic finance refers to financing activities that are compliant with Shariah rules. Major asset classes include Islamic banking, Sukuk issuance (Islamic bonds), Islamic funds and takaful (Islamic insurance). In the case of Takaful, all parties entre an agreement to guarantee each other by contributing to a pooled mutual fund, instead of paying premiums.
