A Sino-American rift is driving Asia’s largest economy to pursue Gulf connections.

Donald Trump’s return to the White House is further encouraging China to build closer financial ties with the Middle East despite growing concerns about the Gulf region’s stability.

In the same week tens of millions of Americans cast their votes for the next US president, China’s Ministry of Finance announced it will sell up to USD 2 billion of debt in Saudi Arabia, marking Beijing’s first US dollar sovereign debt issuance in three years. The debt was issued in two tranches, at USD 1.25 billion maturing in 2027 with a 4.284% coupon and USD 750 million maturing in 2029 with a 4.34% coupon. The issuance was almost 20 times oversubscribed. There was strong demand on the first day of trading, said Billy Kewley, an emerging market credit trader at StoneX.

While the choice of Saudi Arabia is unusual—Hong Kong, New York, and London are the traditional go-to choices for China’s dollar-denominated sovereign bond issuances—it marks growing ties between the kingdom and China. Earlier this year, Investcorp, the Middle East’s largest alternative investor, set up a USD 1 billion fund with investors from China Investment Corporation, a Chinese sovereign fund. Next year, the Hong Kong stock exchange operator will open an office in the Saudi capital Riyadh.

Saudi Arabia, which is trying to transform its oil-reliant economy, benefits from the leg up China is giving to its capital markets. For China, which is trying to export its way out of overcapacity problems and is facing difficulties accessing Western capital, the deal gives it a new base to attract foreign money.

The Ministry of Finance said 68% of the investors of the new bond came from Asia, followed by 20% from Europe, 4% from the US, and 8% from the Middle East, which marks “a record high participation.”

Issuing dollar bonds in Saudi Arabia helps cultivate the China-Middle East relationship, said Joseph Chan, founding partner of Oriental Patron, a financial services company in Hong Kong.

“It’s a testing bed for both the Middle East and China,” Chan said. Saudi Arabia can utilize dollars earned from exporting oil to China and at the same time incentivize more Chinese businesses to help realize its 2030 vision, which includes building a mega city that could require over a trillion dollars.

The issuance is a “formality” for China and the Middle East to promote each other’s cross-border flows and capital markets, said an Asia fixed-income head for a US asset manager. In September, China broke a three-year hiatus from issuing sovereign bonds in the international market. That month the Ministry of Finance sold EUR 2 billion (USD 2.1 billion) of sovereign debt in Paris. The issuance was oversubscribed by 8.8 times. China now is likely to press pause on further foreign issuances to “further enhance the rarity value” of the latest one, StoneX’s Kewley said.

Many Chinese and Hong Kong businesses have been increasingly pivoting to Middle Eastern markets. In late October, Hong Kong-based CSOP Asset Management and Hang Seng Bank’s investment arm listed two exchange-traded funds in Riyadh with a combined size of over USD 1.5 billion. The funds hold shares in Hong Kong-listed companies.

The Albilad CSOP MSCI Hong Kong China Equity ETF, which had an original size of $1.3 billion, recorded turnover of about SAR 1.92 million (USD 510,000) on listing day, accounting for over 70% of the total trade value of ETFs listed on the Tadawul stock exchange that day.

Since its listing, the product has attracted about USD 14 million of net new investments, mostly from local Saudi investors, Chen Ding, CEO of CSOP Asset Management, told Nikkei Asia.

The Hong Kong market is currently being dragged down by concerns of China hawk Marco Rubio being nominated by Trump as the next US secretary of state and by the lack of consumer and property policies in China’s latest stimulus package, which has disappointed investors.

A year ago, CSOP launched a Hong Kong-listed HKD 10 billion (USD 1.3 billion) fund investing in Saudi-listed companies with seed capital from the Public Investment Fund, a Saudi sovereign wealth fund. Asian regional investors have yet to put money into the product as they await a pullback of oil prices to lower the entry point. And in recent months, mainland investors’ initial enthusiasm for investing in the fund has faded as some focus on chasing Hong Kong and China rallies, Ding said.

Ding said “institutions” are seeders of the Saudi-listed fund, but declined to elaborate, citing confidentiality. A person familiar with the ETF launches, however, said that the Hong Kong Monetary Authority’s Exchange Fund is a seeder of the CSOP fund. A HKMA spokesperson said the products help investors access each other’s markets. He declined to comment on allocations.

“We all need to do some diversification against the backdrop of superpower battles and geopolitical uncertainties,” Ding said when asked about the potential escalation of the China-US decoupling and if the situation would bring China and the Middle East closer. This year, Ding herself has visited the Middle East three times.

Simon Webster, CEO of Vistra, a multinational business services firm, told Nikkei Asia that, when Chinese companies expand, they typically look to the ASEAN market and then to Europe. However, the Middle East is now becoming more interesting as the next location for Chinese companies to consider, with the UAE acting as a gateway into the region and even North Africa. China becoming a significant partner in Saudi Arabia’s Vision 2030 has also attracted attention.

“The growing economic tie enables China and Middle East financial centers, including Riyadh, to somewhat offset the influence of the US, and uncertainty following the US election results further underscores the benefits of this alternative for both China and Saudi Arabia,” Webster said. He also said Chinese e-commerce companies are looking at Saudi Arabia and the UAE.

Webster added that deepening financial ties between China and Saudi Arabia would also further China’s goal of challenging the US dollar’s dominance, as the Saudi oil trade is denominated by the US dollar.

Even foreign businesses with a heavy China focus are tapping into the warming relationship. In its latest restructuring, London-headquartered HSBC Holdings combined Asia Pacific and Middle East businesses in an “eastern markets” group, noting that it has observed growing trade corridors connecting these regions.

Because of increasing difficulties accessing US clients due to tariffs or the threat of further tariffs, some businesses this year began pivoting to the Middle East.

Ben Chu runs a five-man Hong Kong-headquartered trade office, exporting China-made gloves and bed pad products to US customers. In 2023, his company had revenue of RMB 20 million (USD 2.7 million). This year, he said, he started to source power banks for a Dubai supermarket brand after a key US client dropped him due to tariff concerns.

Saying “of course” US-China-Middle East geopolitics impacts his business, Chu predicts low-end, China-made goods like power banks will find customers among Dubai’s foreign workers. He added that his company will earn RMB 5 million (USD 690,000) in revenue from such trade by the end of the year.

#ChinaMiddleEastTies #Geopolitics #GlobalFinance #Vision2030 #EconomicShift #Ifvex