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Huang Zixiao, a reporter from 21st Century Business Herald, reports from Shenzhen

In mid-July, two Saudi ETFs were listed in China for the first time and have raked in tens of billions of yuan in trading volume so far. Both products track the FTSE Saudi Arabia Index, but what surprised investors is that the largest holdings in the index are not energy stocks with a larger market value, but financial stocks represented by banks, which account for more than 40%.

"ETF is a comprehensive evaluation of investment portfolios. Saudi Arabia may want to make the non-oil economy more prominent," said Fu Chenggang, chairman of Chengdu Innovation Finance Research Institute, in an exclusive interview with 21st Century Business Herald. It is reported that Fu Chenggang was the chief representative of Abu Dhabi Global Financial Center and Financial Services Regulatory Authority in China, and currently serves as a senior economic adviser to the government of a Middle Eastern country.

He said that the financial systems of Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and other countries are already very secular, and the operation of their modern financial sectors is not constrained by local financial culture and is dominant in the entire financial industry. In fact, the national economies of many Gulf countries are based on the oil economy and driven by the financial industry dominated by the banking industry.

The 21st Century Business Herald reporter learned that in recent years, Middle Eastern countries have made significant progress in "de-oiling" and economic diversification. For the first time in history, Saudi Arabia's non-oil industry accounted for 50% of the country's GDP. On the other hand, Chinese companies in the fields of financial technology, infrastructure, smart manufacturing, new energy, biopharmaceuticals, e-commerce, etc. are also actively seeking to expand into the Middle East.

The Middle East continues to "de-oil", and the financial industry is an important direction of transformation

On July 26, Saudi Arabia's National Industrial Development and Logistics Program (NIDLP) released its 2023 annual report. The report shows that in 2023, Saudi Arabia's non-oil industry will account for 50% of the country's GDP for the first time in history, a jump of 74% compared to 2022. This means that Saudi Arabia's economic diversification has reached a critical milestone.

According to data from the UAE Competitiveness and Statistics Center, the UAE GDP (constant price) reached 1.68 trillion dirhams in 2023, while the non-oil sector grew higher than expected, increasing by 6.2% year-on-year to 1.25 trillion dirhams, among which the financial services industry grew the fastest, increasing by 14.3% year-on-year.

Fu Chenggang said that the national economies of many Gulf countries are increasingly driven by financial services such as banking and asset management. Among them, the financial systems of economically developed countries such as Saudi Arabia, the United Arab Emirates, Qatar, and Bahrain are already very modernized and secularized. The operation of this part of the dominant business is not constrained by local financial culture, and its operating logic is no different from the maximization of shareholder profits of modern corporate governance.At the same time, the financial services industry is currently one of the important directions of economic transformation in the Middle East.

However, Fu Chenggang also said that the Middle East did not change its oil-based economic structure during its transformation. Therefore, changes in oil prices and supply and demand will still have a significant impact on the economic growth and social development of Middle Eastern countries.

At the same time, the proportion and speed of optimizing the economic structure depend on the level of oil endowment and the national strategic priority arrangement. He said that among the six GCC countries, the UAE started its transformation the earliest. Most of the country's oil and gas reserves are located in Abu Dhabi. Dubai's reserves are not much, so the latter has not experienced the so-called "transformation" and has developed the proportion of non-oil economy to more than 90%. Abu Dhabi's economic transformation is more representative. It has achieved non-oil economy exceeding oil economy five years ago, and is currently gradually increasing this proportion.

Fu Chenggang said that Saudi Arabia has also achieved this goal, which is even more significant because Saudi Arabia is the undisputed and absolute leading economy in the Arab world. In addition, in terms of the main direction of economic transformation in the Middle East and the new industries that are intended to be introduced, financial services, aviation logistics, cultural tourism and exhibitions, high-end manufacturing, new energy, new agriculture, education, etc. are its main transformation directions.

Middle Eastern regulators view cryptocurrencies as financial innovations

According to the official website of the Commercial and Economic Affairs Office of the Chinese Embassy in the UAE, citing a report by blockchain research organization Chainalysis, the Middle East is one of the fastest growing cryptocurrency markets in the world. According to data from the cryptocurrency trading platform Bitget, there are about 500,000 traders in the region every day. Among them, Gulf countries such as the UAE and Bahrain have invested a lot of resources to create the image of an emerging crypto-asset-friendly center. And attracted leading companies in the industry, including Binance and OKX, to enter.

Behind the rapid growth rate of usage, there are also doubts about the loose regulation of cryptocurrencies in the Middle East.

Fu Chenggang, who once worked in the UAE financial regulatory department, said that the so-called regulatory depression does not mean a low level of supervision. The regulatory level in the Middle East is comparable to that in Europe, but there is a difference in the degree of relaxation.

He explained that the leading players in crypto assets face two problems: the first is to maintain good risk control while growing; the second is to seek regulatory compliance and legalization, which will naturally lead them to "regulatory lows."

From the perspective of wealth management, Fu Chenggang said that the Middle East has "both big money and scattered money". Both the national team and residents are making global allocations, and naturally they will take the prosperity of crypto assets as an opportunity for wealth management and asset allocation. At the same time, regulators are also happy to see the inflow of wealth and the activeness of subdivided specialty industries.

More importantly, some Middle Eastern countries view blockchain-based crypto assets as part of financial innovation.

"Financial services are a very important direction in the economic transformation of the Middle East. Including financial technology, sustainable finance and cryptocurrencies that are regarded as virtual assets, regulators regard them as part of financial innovation. Although there are risks, they will also help economic growth and have relatively considerable use scenarios in actual applications." Fu Chenggang said.

He also mentioned that Binance’s first license in the Middle East was issued by the Central Bank of Bahrain. Currently, the Dubai Financial Services Authority (DFSA), the Dubai Virtual Asset Regulatory Authority (VARA) and the Financial Services Regulatory Authority of the Abu Dhabi Global Market are some of the most influential crypto asset regulatory agencies in the Middle East.

Chinese companies need more patience to expand into the Middle East

Thousands of years ago, the Middle East was a must-go place on the Silk Road. Today, the Middle East is still a hot spot for Chinese companies to expand overseas.

In recent years, the Gulf countries have made remarkable progress in economic transformation around diversification and sustainable strategies, which has led many Chinese companies to seek "new blue oceans" in the Middle East.

On July 16, three Chinese new energy companies, JinkoSolar, TCL Zhonghuan and Envision Technology Group, announced on the same day that they plan to set up joint ventures and establish production lines in Saudi Arabia.

In terms of financial institutions going overseas, according to public information, the four major state-owned banks have all established branches in Dubai. In 2023, ICBC's Jeddah Branch in Saudi Arabia and Bank of China's Riyadh Branch opened successively. In March this year, China Merchants Bank issued an announcement that it plans to establish a Dubai branch in the Dubai International Financial Center (DIFC).

Fu Chenggang said that Chinese banks operating in the Middle East generally focus on serving Chinese customers in the first stage, play a role in enabling industries to go overseas, and then gradually cover local customers. He also revealed to reporters that a leading Chinese securities company is applying for an investment banking license in Dubai.

The focus shifts to the Greater Bay Area. Shenzhen and other cities in the Greater Bay Area have large-scale industrial chains in the fields of new energy, semiconductors, information technology, etc. Fu Chenggang believes that Shenzhen has advantages in going overseas in terms of proximity to Hong Kong and Macao, technological openness, talent base, and commercial supporting facilities.

"It is possible for Shenzhen companies to work together to expand into the Middle East and create a small Futian, a small Nanshan, or a small Songshan Lake. After all, 1% of Shenzhen's size is already very large in the Middle East, not to mention the size and quality of companies in the entire Greater Bay Area," said Fu Chenggang.

Finally, while the trend of Chinese companies going overseas to the Middle East has become a trend, there are still many issues and details that need to be paid attention to.

Fu Chenggang said that first of all, there are some unstable factors in the Middle East, so a more patient strategy is needed, including the assessment of risks such as politics, market, supervision, compliance, and investment returns. However, the "reconciliation tide" and "economic priority" in the Middle East have become a trend, and domestic enterprises can choose relatively stable markets and countries for layout. Second, in the era of "de-oiling" in the Middle East, it is still necessary to pay attention to the changes in the oil economy and oil prices, which are still important factors affecting the economy of the Gulf countries. Third, it is necessary to pay attention to avoiding contract traps and delivery management, and make full responses in terms of legal affairs and international standards. Fourth, the business culture in the Middle East has the characteristics of combining fast and slow, and we should learn to control it. Key countries such as Saudi Arabia have the fastest pace recently and the strongest willingness to cooperate, so we must seize the opportunity; the UAE is more familiar with China, so we must prepare more in advance.