China's VCs look to the Middle East for a U.S. dollar lifeline

cnbc.com:

BEIJING — Venture capitalists in China that once relied on U.S. investors are now holding court with Middle Eastern money.

A flurry of China-Middle East conferences and business visits in the last several months represent what's expected to be a growing trend in international capital flows.

Many Middle East investors have discussed deals with Chinese venture capital funds in the last 12 months, according to sources at three Chinese firms with U.S. dollar-denominated funds. They requested anonymity because they are not permitted to speak publicly about the fundraising talks.

Although the money isn't completely replacing U.S. investment, it's expected to account for about 20% of all U.S. dollar funding by Chinese VCs, one of the sources estimated.

Middle East investors are actively looking for China opportunities, then investing at a small scale to test the waters, the source told CNBC this week, noting frontier tech, new consumer trends and biotech were popular industries of interest.

Bolstering the investment trend is a confluence of diplomatic, financial and economic developments.

China's ties with the Middle East have warmed since Saudi Arabia and Iran restored diplomatic relations earlier this year — through discussions brokered by Beijing.

Meanwhile, U.S.-China tensions have simmered.

Those tensions and increased regulatory scrutiny in both countries prompted many U.S.-based investors to hold off on investments in Chinese venture capital funds. Those funds were typically denominated in U.S. dollars and invested startups would then go on to list on U.S. stock exchanges.

Middle East capital is looking to step in, especially as countries such as Saudi Arabia and Qatar look to diversify from dependence on fossil fuels.

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