CRACKING THE KINGDOM
China has embarked on new diplomatic outreaches in the post-pandemic era, and the Kingdom of Saudi Arabia is beginning to play an increasingly important role, becoming a new destination of choice for Chinese companies keen to invest overseas. Legal experts, however, caution that despite the abundant opportunities there, prospective investors must prepare early for risks.
The Middle East stretches from the southern and eastern parts of the Mediterranean to the coast of the Persian Gulf, among which the Gulf Cooperation Council (GCC) countries, comprising the United Arab Emirates (UAE), Oman, Bahrain, Qatar, Kuwait, and Saudi Arabia, have the greatest potential for investment cooperation. According to the latest report from Investment Monitor, the region continued to attract foreign capital inflows over the past three years, registering FDI growth of 13.6 per cent in 2022.
Against this backdrop, the Middle East has also become a hot destination for Chinese companies venturing abroad. A 2022 report by PricewaterhouseCoopers states that as the Middle East is an important region for cooperation under the Belt and Road Initiative, Chinese companies have been gradually deepening partnership with companies there, and that nearly half of the 118 Chinese companies covered in the report have been operating in the Middle East for over a decade.
In particular, Saudi Arabia, the largest economy in the Middle East, has now become one of the two major investment destinations there alongside the UAE. eWTP Arabia Capital, a local Chinese investment firm based in Saudi Arabia, welcomed more than 500 visiting Chinese companies and institutions last year, and the cooperation between China and Saudi Arabia is expected to reach new heights this year.
Lin Wei, Managing Partner of P.C. Woo & Zhonglun W.D. LLP, has similar observations. "Saudi Arabia is an important economy in the Middle East, registering GDP of $1.1 trillion billion in 2022. In addition, the country is rich in natural resources, and has a vast market and great potential, which explains the sustained interest of Chinese investors in recent years."
In addition, during the China-Arab Summit last December, leaders of China and Saudi Arabia signed the first Comprehensive Strategic Partnership Agreement between the People's Republic of China and the Kingdom of Saudi Arabia. With China's Belt and Road Initiative and Saudi Arabia's Vision 2030 strategies in increasing alignment, the level of cooperation between the two countries in multiple areas has also been at historical highs.
According to Lin, Chinese investors usually invest in five areas in Saudi Arabia. "The first is oil and natural gas; the second is infrastructure construction; the third is real estate, with Chinese investment playing an important role in the Saudi property market."
"The fourth is science and technology where Chinese investors mainly invest in AI, cloud computing, big data, Internet of Things, etc.; and the fifth is education where Chinese investors have made huge investment in language training, overseas education, etc."
"Chinese investment covers a wide range of fields in Saudi Arabia, and is growing year by year. In terms of industry, both sides are eager to leverage each other's advantages. The main focus of Chinese enterprises is on obtaining energy and infrastructure profits, while that of Saudi Arabia is to access more Chinese technology and human resources. The near future will be the honeymoon period of the partnership between China and Saudi Arabia, and there will be great growth potential going forward."
—Lin Wei, P.C. Woo & Zhonglun W.D. LLP
"Chinese investment covers a wide range of fields in Saudi Arabia, and is growing year by year. In terms of industry, both sides are eager to leverage each other's advantages. The main focus of Chinese enterprises is on obtaining energy and infrastructure profits, while that of Saudi Arabia is to access more Chinese technology and human resources. The near future will be the honeymoon period of the partnership between China and Saudi Arabia, and there will be great growth potential going forward," adds Lin.
UNIQUE LEGAL, SOCIAL ISSUES
However, Chinese investors also face challenges when venturing to Saudi Arabia. Speaking of the legal risks that require special attention, Lin says that investors should first learn about the basic information and concepts of Saudi law.
"The Saudi legal system is based on Islamic law which is derived from the Qur'an and the Sunnah of the Islamic prophet Muhammad. Saudi royal decrees are another major source of law, but they are called 'regulation' rather than 'law' to indicate they are subordinate to Shariah law. Such regulations complement Shariah law in areas such as labor, commercial and company law," says Lin.
"Other forms of regulations include Royal Orders, Council of Ministers Resolutions, Ministerial Resolutions and Ministerial Circulars, all of which are subordinate to Shariah law. At the same time, traditional tribal laws and customs are equally important. The Shariah court system constitutes the basic judicial system in Saudi Arabia and has general jurisdiction over most civil and criminal cases."
Specifically, Lin says that the legal risks of investing in Saudi Arabia mainly exist in compliance, politics, social culture and finance.
"First, the Saudi government imposes many restrictions and reviews on foreign investment. So it is necessary to understand and abide by Saudi laws and regulations, especially provisions on foreign shareholding percentages and national security; second, the Saudi region suffers certain risks of political stability, which requires investors to pay attention to changes and policy adjustments in the Saudi political landscape, as well as the measures the government may take in relation to investment."
"Third, Saudi Arabia is a conservative country with a profound Islamic culture. Investors should respect local social and cultural habits to avoid legal risks caused by cultural differences. Finally, Saudi Arabia has special economic conditions, and prices there can fluctuate greatly. Investors therefore must watch changes in the global economy and the Saudi economy, as well as fluctuations in the exchange rate of riyal, the local currency."
Therefore, Lin advises investors to gain a comprehensive understanding of local laws, culture, social environment, religious customs, etc., before investing in Saudi Arabia, carefully assess risks, conduct feasibility studies of investment projects, and work with local lawyers to effectively manage risks.
The various particularities of the Saudi legal system and social conditions also raise higher requirements for Chinese firms and lawyers that serve Saudi investment needs. To Lin, working closely with Saudi firms and lawyers and building long-term, smooth communications to understand each other's work habits ensure that lawyers can provide clients with high-quality services.
Besides its commercial market, Saudi Arabia has also liberalised its legal services market. Earlier this year, Saudi Arabia promulgated a new law to encourage foreign firms to set up shop there.
According to Lin, a small number of full-service cross-border firms have set up a presence in Saudi Arabia. This March, Clifford Chance, Herbert Smith Freehills, and Latham & Watkins became the first batch of international firms licensed to practice in Saudi Arabia. He also says that before the market liberalisation, many foreign firms also operated through long-term strategic cooperation with Saudi boutique firms.
According to media reports, Saudi Arabia hopes to take advantage of the investment boom to retain large deals locally and create more opportunities for Saudi lawyers. However, a foreign firm must follow a slew of requirements to establish a Saudi office. Examples include that two representative partners must reside in Saudi Arabia; at least half of the lawyers of the Saudi office must be Saudi nationals; business related to Saudi law cannot be transferred to other offices; thirty percent of the revenue obtained by the Saudi office cannot flow outside of Saudi; and the business license must be renewed every five years, etc.
International firms are not the only ones who are eyeing the Middle East. According to Lin, some Chinese firms have begun exploring the Middle East, although the market is still small overall.
"Fortunately, our firm set up an office in Riyadh, the capital of Saudi Arabia, as early as 2010 and has established a long-term and effective network in the Middle East, including Saudi Arabia, accumulating rich hands-on experience in supporting Chinese companies."
Over a decade of close cooperation with the local legal industry and clients has earned P. C. Woo & Zhonglun W.D. LLP significant "first mover advantages". "We are exploring more extensive and closer cooperation with local firms. The fundamental goal is to promote mutual understanding and solve differences in work style and culture to better understand the differences in client needs and provide clients with higher quality services."
BEYOND THE KINGDOM
While Saudi Arabia is the largest economy in the region, Chinese companies are also looking elsewhere in the Middle East, and Lin has observed inquiries from Chinese clients about other countries and regions.
Among the inquiries, multinational companies interested in the UAE cover a wide range of industries, focusing on wholesale and retail, real estate, financial services and insurance, mining, etc.; the interest in Qatar mainly lands on upstream oil and natural gas development and petrochemical projects; and, for Iran, investors are mainly eyeing crude oil, natural gas, automobiles, minerals, petrochemicals, food and pharmaceuticals.
In addition, other MENA countries, such as Egypt, Jordan, Iraq, Kuwait, Syria, Turkey, etc., have also gradually gained the attention of Chinese clients.
"Despite the lingering impact of the pandemic, the potential and prospects of the Middle East remain very attractive to Chinese investors. The gradual recovery of the Middle East economy and, in particular, the political rapprochement between Saudi Arabia and Iran under China’s leadership have created a good political climate for further improvement of the economic environment. The investment enthusiasm of Chinese companies is expected to reach a historical high in 2023."
P. C. Woo & Zhonglun W.D. LLP has accordingly established a new Middle East and Islamic Legal Affairs Department. Considering Dubai's excellent strategic location in the UAE and its active free trade zone, the firm has sent Li Tao, head of the department, for a series of visits to the Dubai IFZA Free Trade Zone, in an effort to continue to provide personalised solutions for Chinese companies venturing to the Middle East through professional partners and the government institutional network.