Trade and investment: Asia and the Middle East
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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With the new wealth being generated in the Middle East as oil prices rise, new opportunities are arising for Asian trade and investment in the Middle East.
Today's article reviews developments in this area.
This is not the first time this has happened. During the oil crisis of the 1973 and 1979 a lot of new wealth was generated, so-called petrodollars, and a lot of this new wealth was invested in Asia.
This article provides a good overview of a theme that you will see developing in the news in the near future. Since these issues are important for Thailand's future economic development they are worth thinking in depth and debating about.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What regions of the world did the original Silk Road connect?
2. When did the original Silk Road exist?
3. What does the idea of the "New Silk Road" signify?
4. How many examples of large investments in Asian economies by oil rich Middle Eastern countries can you list?
(Either planned or recently made)
5. How many examples of large-scale efforts to sell Asian products and services to the Middle East can you list?
6. Why does the Middle East currently have a lot of money to invest overseas?
7. What percentage shift in investment from the west to Asia is likely to occur in the near future?
8. What Asian companies have emerged as major competitors in international markets in recent history?
9. What countries are these companies from?
(Note: Some additional research needed.)
10. What new infrastructure projects in the Middle East might Asia companies be able to obtain?
11. What is Islamic banking?
12. What areas of Asia have large muslim populations interested in Islamic banking?
13. Who is issuing the first Islamic bond in China?
14. What other non-business activities have potential for increasing trade and investment between the Middle East and Asia?
15. What measures taken recently have made it easier for Asian companies to invest in Gulf State companies?
Article
GLOBALInsights
The new Silk Road: Opportunities for Asia and the Gulf
DOMINIC BARTON, KITO DEBOER and GREGORY P. WILSON
The Silk Road between Asia and the Middle East was, until the 13th century, among the world's most important trade routes. Trade and investment are once again flowing between these regions after 700 years when merchants looked instead mainly to Europe and the Americas. Now it's up to the governments in both Asia and the Middle East to create a more hospitable investment climate that will allow this new Silk Road to achieve its potential.
While Asia's thirst for Middle Eastern oil is well understood, less often recognised is the increasing flow of direct and portfolio investment. Dubai's Crown Prince Sheikh Mohammed bin Rashid Al Maktoum used a recent state visit to Pakistan to announce a multi-billion-dollar package of infrastructure, property and other investments.
Prominent Saudis led by Prince Alwaleed bin Talal are paying $2 billion for a stake in China's second-largest state-owned bank. Bahrain's Gulf Finance House wants to invest up to $1 billion in Singapore's financial, health, tourism and leisure industries.
The traffic is not one-way. A seven-company alliance known as the Singapore Specialist Construction Consortium is pursuing Middle Eastern projects. Dubai is already home to Chinamex Mart, a mini-city of Chinese companies distributing their products throughout the region. In technology, Samsung is among the Asian companies intensively cultivating Middle Eastern markets.
From a macroeconomic perspective, these developments make perfect sense. From 2005-10, Asia is likely to require $1 trillion of foreign direct investment, half of which will go to China alone. With oil prices riding high, investors in the Gulf states have money to invest.
Recent interviews with more than a dozen Gulf investors who collectively control more than $300 billion in assets revealed that they are set to shift asset allocation toward Asia by 10-30%. We believe that up to $250 billion from the Gulf states will be available over the next five years. While the West would remain Asia's dominant source of investment, this shift represents an important change in the pattern of global capital flows.
Such a portfolio rebalancing would allow investors in the Gulf to benefit not only from Asia's strong internal growth but also from the emergence on the world stage of Asian companies such as Haier, Huawei, Lenovo, Petronas, Ranbaxy, Samsung and Sterlite Industries. Another straw in the wind: Etisalat, a telecoms group located in the United Arab Emirates, earlier this year acquired a controlling stake in Pakistan Telecommunications for $2.6 billion.
Some of these companies and other low-cost Asian players are in turn well positioned to help meet the Gulf's massive infrastructure needs. Electricity, highways, telecommunications, water, and other infrastructure - alongside agriculture, education, health care and IT initiatives - will consume some $500 billion over the next five years. Dubai alone is spending billions on a Wall Street-style financial centre, a million new homes, the world's largest airport, and 40 new tax- and duty-free "micro cities".
The two regions have more in common than a desire for trade and investment. Commercial links between Asia and the Gulf states should go hand in hand with the growth of Islamic banking in accordance with sharia law, which prohibits interest or speculation. Today almost 20% of private investors in the Gulf say they are prepared to accept lower-than-conventional market returns for full sharia compliance. Investors with similar attitudes live in Asian areas such as Indonesia, Malaysia, and even China.
This helps explain why Gulf banks, such as Al Rajhi Bank and Kuwait Finance House, have launched (or are about to launch) operations in Malaysia, why Malaysian and Singaporean banks are seeking to facilitate capital flows between Asia and the Gulf, and why Kuwait Finance House has secured a mandate to structure the first Islamic bond in China.
These are still early days for the new Silk Road, with a lot more opportunity than activity. It is difficult for companies and investors to shake long-held habits of focusing on Western markets, investing in Western companies and purchasing Western equities and bonds.
Asia and the Gulf need to improve mutual understanding through educational and political exchanges. Governments also need to move beyond symbolic events such as state visits by promoting a more welcoming climate for investment. This effort should entail dismantling barriers to competition, such as restrictive licensing rules and product regulations. It also means boosting the transparency of financial reporting, creating more effective markets for corporate control (so investors can readily use stock markets to pressure managers to perform) and improving corporate governance. Such measures would enhance the economic attractiveness of both regions and the efficiency of capital allocation.
The good news is that there are signs of progress. Saudi Arabia recently joined Dubai and Bahrain (historically the financial capital of the Gulf) in allowing foreigners to invest directly in local companies through the stock exchange. Similarly, the Gulf Co-operation Council (GCC) is strengthening capital markets through modern laws and exchanges.
Improving capital markets and corporate governance in Asia and the Gulf states would be valuable under any circumstances. At a time when companies and investors are just starting to build a new Silk Road, the need for reform has never been greater.
Dominic Barton is a director in McKinsey's Shanghai office, Kito de Boer is a director in Dubai, and Greg Wilson is an alumnus of the Washington DC office. This article is adapted from one published in The McKinsey Quarterly, www.mckinseyquarterly.com. Copyright (c) 2006. All rights reserved. Reprinted by permission. For additional Quarterly articles related to this topic, see www.bangkokpost.com/mckinsey/
Vocabulary (in discussion above)
climate for investment - how easy and safe it is to make an investment
hospitable investment climate - when a country, region, or city welcomes investment (usually with laws that provide investors an incentive to invest locally and then protect the investments after they are made)
direct investment - investing in the assets of a business
portfolio investment - buying the stock and bonds issued by a company (indirect investment in a business)
infrastructure - services and facilities such as water, electricity, waste disposal, roads and other forms of transportation in a country that all businesses rely on to do business
prominent - well-known and important
cultivating markets - building markets, gaining customers in markets, increasing market share, making sales
foreign direct investment - direct investment in local businesses by foreigners (in assets like land and factories, rather than just stocks and bonds)
go hand in hand with - go along with, accompanied by
Islamic banking - banking that follows Islamic laws (See Wikipedia)
Sharia law - Islamic law (See Wikipedia)
lower-than-conventional market returns - the annual money one receives from your investment is lower than usual
full compliance - follows all the rules (strictly, no exceptions)
to secure a mandate -
symbolic events - events that people see as meaningful, but don't directly result in any benefit
x entails y - x implies y, if x then y
restrictive licensing rules - the contract that a company makes to use a new technology restricts the use of this technology severely
transparency of financial reporting - the annual reports issued by a company show everything important happening in that company that an investor should know about (nothing hidden)
corporate governance - the highest level of decisionmaking in a large company that sets overall policy about the way a company does business (See Wikipedia)
efficiency of capital allocation - the degree to which the companies that can best use investment money receive this investment money (this might be measured by the overall return on investment after risk is taken into account)
Answer Key:
1. What regions of the world did the original Silk Road connect?
The original Silk Road connected the Middle East with Asia.
2. When did the original Silk Road exist?
Up until the 13th century
(13th century = 1200-1300).
3. What does the idea of the "New Silk Road" signify?
For hundreds of years merchants in Asia and the Middle East have looked to Europe and the Americas for business.
Trade and investment are now flowing in large quantities again between Asia and the Middle East.
Note again that the the oil crises of the 1970s created similar "petrodollar" flows of investment into Asia.
4. How many examples of large investments in Asian economies by oil rich Middle Eastern countries can you list? (Either planned or recently made)
a. Dubai has invested in Pakistani infrastructure and property.
b. Saudis have invested in China's second largest
state-owned bank.
c. Bahrain is investing in Singapore's financial, health, tourism, and leisure industries.
d. A United Arb Emirates (UAE) telecommunications company name Etisalat "acquired a controlling stake in Pakistan Telecommunications."
5. How many examples of large-scale efforts to sell Asian products and services to the Middle East can you list?
a. A large consortium of construction companies is trying to get construction projects in the Middle East.
b. Chinese companies seeking a Middle Eastern market for their products have set up an exhibition center name Chinamex Mart in Dubai.
c. Samsung is trying to gain market share in Middle Eastern technology markets.
6. Why does the Middle East currently have a lot
of money to invest overseas?
High oil prices.
7. What percentage shift in investment from the west to Asia is likely to occur in the near future?
A shift from Western to Asian investments of about %10 to %30 is predicted to occur in the near future.
8. What Asian companies have emerged as major competitors in international markets in recent history?
Haier, Huawei, Lenovo, Petronas, Ranbaxy, Samsung and Sterlite Industries
9. What countries are these companies from?
(Note: Some additional research needed.)
Haier, Huawei, Lenovo, Petronas, Ranbaxy, Samsung (South Korea) and Sterlite Industries
10. What new infrastructure projects in the Middle East might Asia companies be able to obtain?
Electricity, highways, telecommunications, water, agriculture, education, health care, IT, a financial centre, new homes, airports, and special tax and duty free micro cities.
11. What is Islamic banking?
Islamic banking is banking that complies with Islamic Sharia law which prohibits interest and speculation and in return for this guarantee pays depositors "lower-than-conventional market returns."
12. What areas of Asia have large muslim populations interested in Islamic banking?
Indonesia, Malaysia, China and, although it is not listed in the article, Islamic banking also exists in Thailand.
13. Who is issuing the first Islamic bond in China?
Kuwait Finance House.
14. What other non-business activities have potential for increasing trade and investment between the Middle East and Asia?
Educational and political exchanges can help create mutual understanding. Eliminating barriers to competition such as "restrictive licensing rules and product regulations" may help increase trade. Increasing the transparency of financial reporting and "creating more effective markets for corporate control...so investors can readily use stock markets to pressure managers to perform" may help increase investment.
15. What measures taken recently have made it easier for Asian companies to invest in Gulf State companies?
Saudi Arabia, Dubai, and Bahrain have allowed foreigners to invest directly in local companies through the stock exchange.
The Gulf Co-operation Council (GCC) has strengthened capital markets through "modern laws and financial exchanges."
