After MSCI upgrade, Tadawul chief turns to the next challenge for Saudi Arabia

Khalid Al-Hussan. (Illustration: Luis Grañena)
Updated 23 June 2018

After MSCI upgrade, Tadawul chief turns to the next challenge for Saudi Arabia

DUBAI: Khalid Al-Hussan seemed to be enjoying himself last Thursday at the Riyadh headquarters of Tadawul, the Saudi Arabia stock exchange, of which he is chief executive. In fact, a quiet smile of satisfaction rarely left his face, even under the bright glare of the television lights of the international media.
“We’ve all worked very hard and we’re very pleased,” he told Arab News once the TV cameras had left, adding that it had been “one of the best days” of his professional career.
Al-Hussan had just left the podium of a press conference — shared with Tadawul chairperson Sarah Al-Suhaimi and the chairman of the Capital Markets Authority, Mohammed Al-Kuwaiz — to announce the fact that, after three years of preparation, Saudi Arabia had finally been included in MSCI’s Emerging Markets index.
It was actually more of a celebration than an announcement. MSCI had broken the news some hours earlier that Saudi Arabia was to be classed as an emerging market (EM), rather than a frontier market, putting the Kingdom on the radar of international investors in a big way. All three of the market dignitaries were in effusive mood, gratefully accepting multiple “mabrouks” from the media pack.
The move by MSCI, it is estimated, will pull in as much as $45 billion in foreign investment to the Saudi exchange; that figure could rise sharply if the Saudi Aramco listing goes ahead on the bourse. That is a huge boost for a market with a current market capitalization of about $520 billion.
It has already been quite a year for the Tadawul chief, with a lot of the hard work of his previous three years in the job paying off handsomely. In March, another international index compiler, FTSE Russell, had also upgraded Saudi to emerging market status, and there have been launches and bolt-ons of other services essential for a modern stock market, such as a central clearing system.
Perhaps most importantly of all, the Tadawul has been one of the best-performing markets in the world in 2018, with a 13 percent rise in the first six months. “It has been one of the best years, rather than just a good day today,” Al-Hussan said.
“MSCI inclusion is a reflection of how our reforms have been widely accepted, by local and international markets. It was designed as a plan to achieve what we have today,” he added.
The Riyadh exchange has always been the biggest in the Arabian Gulf region, but since 2015 it has been transformed into one of the most modern and efficient too.
New, internationally recognized settlement systems have been introduced, governance systems upgraded, and foreign investors welcomed. The status upgrades by global investing organizations — there is another due from S&P before the end of the year — are the logical end of all this work.
It has not been without its challenges, Al-Hussan remarked. “To balance the needs of international and local investors was sometimes a challenge, especially in the move to new settlements systems. But if you understand the market, and know where you’re trying to get to, it’s possible to get both of them working together,” he said.
There is another challenge, which in some ways the MSCI upgrade is designed to overcome: the nature of share trading and stock markets within the broader economic context of Saudi Arabia and the Arabian Gulf. It is an issue of the perception of the region in the world as much as anything else.
While analysts generally welcomed news of the MSCI upgrade, some delivered the opinion that inclusion in international indices was not in itself so significant for regional markets, and the Saudi market in particular.
Other factors ultimately determined the health and appeal of Gulf markets, the theory went, in a part of the world where the oil price is the single most important economic factor, and regional geopolitical events color global investors’ overall views. Foreign confidence in Saudi Arabia was also hesitant, given the sheer pace of the change going on in the Kingdom under the Vision 2030 strategy, it had been argued.
It is a line Al-Hussan has heard before, and he has a ready answer. “I disagree that MSCI inclusion is less important than these other factors. It is a sign of the confidence of international investors in the Saudi market, and a reflection of how confident they feel here,” he said.
“The new cash that we can expect from international investors — around $40 billion — is not small or insignificant, and these people will not take risks lightly. The people at MSCI are pretty intelligent too. They have never moved a country from the watchlist to full EM status so fast — in just 12 months — so that tells you about their confidence, and the confidence of their clients, in Saudi Arabia,” he added.
And, finally, there is the clinching argument that non-market factors can always have a profound effect on financial markets, and not just in Saudi Arabia or the Gulf countries. “Economic and geopolitical factors could have an effect on markets anywhere in the world, not just here,” he said.
An engineer by training, Al-Hussan was educated in the US to MBA standard, and qualified as a certified entrepreneur from the University of Colorado. His previous career in the insurance industry made him aware of the need to weigh risk; 10 years at Tadawul — working across virtually all its functions from business development to strategy and operations before becoming CEO ­— has seen him apply those lessons in the context of financial markets.
There is a lot more to do, Al-Hussan insisted. “Our plans never end. I’m more excited about what’s to come as we continue to enhance the market’s future” he said, before outlining the strategy to launch a full national clearing system that would enable Tadawul to launch derivatives trading platforms by the end of 2020 in a staged process.
There is also the plan to enhance the market-making function, so that traders can operate to international best practice standards by the end of this year. “There is already a model in place, but it will be perfected to global standards by the end of the year,” he said, rejecting suggestions that the innovations at the Tadawul might encourage the inflow of speculative “hot money” into the Kingdom.
All this reform and improvement is desirable in itself, of course, and for the good of the Kingdom’s financial markets. But there is a big goal in sight that Al-Hussan and Tadawul are aware they must keep in focus: the historic initial public offering of Saudi Aramco, as well as the other multibillion-dollar privatizations that are planned under the Vision 2030 plan.
“Of course, there is Aramco,” he said as he contemplated the list of tasks ahead. The IPO of the biggest oil company in the world is the centerpiece of the Kingdom’s plans to transform its economy away from oil dependency, and Tadawul has been designated the “home market” for the IPO.
The biggest stock exchanges in the world — New York, London, Hong Kong — have all been mentioned as possible venues for Aramco, but it is certain that Tadawul will also play a big part in the sell-off.
Al-Hussan caused quite a stir at last year’s Future Investment Initiative in Riyadh when he declared his “aspiration” to stage the IPO exclusively on Tadawul. He has since repeated his confidence that the Saudi exchange could handle the whole issue, which could be worth as much as $100 billion.
“Of course, I would like to have all of it, but that is a decision for Aramco and for its shareholder, the government. We will support whatever decision they reach,” he said. He also confirmed that Aramco would not have to wait until the MSCI upgrade — coming into force in two stages from May of next of year — is fully implemented. “We will be ready for it as soon as the decision on the IPO is made,” he said.
If the government did decide to put the whole of the Aramco IPO on Tadawul, it would change the character of the exchange completely, and alter MSCI’s calculations significantly.
MSCI awarded Tadawul a weighting of 2.6 percent of its global EM market, but that would increase enormously if Aramco were included. Al-Hussan agreed it could double the amount of funds flowing into the Saudi Arabian market.
It could also tie the fortunes of the Tadawul to the global oil industry in a way it is not now, by making it dominated by the biggest energy company in the world. Part of his philosophy has been to make the Tadawul — where banks and heavy industrial companies play a dominant role — more attractive to other sectors and more reflective of the changing national economy.
“We still aspire to do it. It would be a challenge, of course, but I think over the past three years, and with the upgrades, we’ve shown that we meet challenges,” he said.

To dodge trade war, Chinese exporters shift production to low-cost nations

Updated 37 min 59 sec ago

To dodge trade war, Chinese exporters shift production to low-cost nations

  • Chinese exporters long battled with rising domestic labor costs
  • China-US trade war was the final straw

GUANGZHOU, China/YANGON, Myanmar: Pressured by a labor crunch and rising wages in China, Shu Ke’an, whose company supplies bulletproof vests, rifle bags and other tactical gear to the United States, first considered shifting some production to Southeast Asia a few years ago, but nothing came of it.
When trade tensions flared into a tariff war last year, however, it was the final straw.
A day after US President Donald imposed additional tariffs on $200 billion of Chinese goods in September, Shu, 49, decided to start making vests for his US clients in Myanmar instead.
Since then, the Trump administration has further hiked tariffs on Chinese imports, raising the US taxes on Shu’s Guangzhou-made bulletproof vests to 42.6%.
With more than half of his company’s income reliant on orders from the United States, Shu was happy with his Myanmar decision.
“The trade war was actually a blessing in disguise,” he said.
With Trump poised to slap 25% tariffs on another $300 billion-plus of Chinese goods, no exporter in China will be unscathed.
In recent years, some Chinese manufacturers had already started to relocate some of their capacity to countries such as Vietnam and Cambodia, due to high operating costs at home. The trade war is now pushing more to follow suit, especially makers of low-tech and low-value goods.
A few Chinese exporters have also tried to dodge the trade war bullet by quietly transhipping via third countries.

Choice destination
Nine months on, Shu’s firm, Yakeda Tactical Gear Co, is relying on his new Myanmar factory, which started operations in December, to produce new orders for its US clients.
The 220 workers at his original Guangzhou plant, in China’s Pearl River Delta manufacturing powerhouse, now mostly supply clients in the Middle East, Africa and Europe.
In Yangon, meanwhile, Shu’s Myanmar factory turns raw materials imported from China into backpacks, kit bags and pouches for rifles and pistols — all labelled “Made in Myanmar” — almost all of which are exported to the United States.
“Our factory is receiving many orders. The products are being exported to the US and Europe. So, I believe our future will be improved from working in this factory,” said Marlar Cho, 36, a supervisor at the factory.
The factory manager, 40-year-old Jiang Aoxiong from eastern China, said they were constantly rushing to keep up with orders, despite its 600-strong workforce.
Though international criticism of Myanmar’s handling of the Rohingya crisis has crimped Western investment, the Southeast Asian nation has become the choice destination for some Chinese firms, drawn to its cheap and abundant labor.
The former British colony, located on China’s southwestern border, exports some 5,000 products to the United States duty-free under a US trade program for developing nations — another big plus.
In the 12 months through April, approved Chinese projects increased by $585 million, the latest data from Myanmar’s Directorate of Investment and Company Administration shows.
The infusion of Chinese capital has helped fuel expansion in Myanmar’s fledging industrial sector.
In May, firms saw the fastest rise in workforce numbers since 2015, while production scaled a 13-month high, the latest Nikkei Myanmar Manufacturing Purchasing Managers’ Index survey showed.

Stay or go?
ACMEX Group, a tire maker based in China’s coastal Shandong province, already had some experience with offshoring when the trade war began.
About two years ago, it started manufacturing some tires in Vietnam, Thailand and Malaysia to take advantage of lower labor and raw material costs and avoid US anti-dumping duties.
With fresh tariffs in the trade war, the company plans to boost the proportion of tires made abroad to 50% from 20%, and build its own factories instead of outsourcing to existing factories, Chairman Guan Zheng said.
“The time is ripe now,” he said, adding that supply chain infrastructure had improved.


• Guangdong bulletproof vest maker moved production to Myanmar

• Shandong tire maker moved capacity to Thailand

The experience of companies like ACMEX and Shu’s Yakeda Tactical Gear underlines how the trade war has put Chinese exporters on the back foot, needing to either diversify their client base, increase domestic sales or move production to a third country.
But all those options require time and money, which are not necessarily available to China’s legion of small exporters grappling with thinning profit margins.
Even locations such as Vietnam and the Philippines have grown too dear for some.
While China has encouraged the relocation of some heavy industry overseas to ease overcapacity and support its ambitious Belt and Road infrastructure plan, Beijing is less supportive of a broader move to shift manufacturing offshore.
Liang Ming, director of the Institute of International Trade at the Ministry of Commerce’s Chinese Academy of International Trade and Economic Cooperation, rejected the idea that Chinese firms were leaving China in droves.
“Few companies are actually moving. If they move, they risk losses if there is a China-US deal,” Liang told reporters earlier this month, adding that any relocation back to China would be expensive.
As trade pressures intensify, analysts say China will loosen policy further in months ahead to shore up economic growth.
Investors are also watching to see how much Beijing allows the yuan to weaken to offset higher US tariffs. The tightly-managed currency has depreciated about 2% against the dollar since trade tensions worsened in early May.
Trump and Chinese President Xi Jinping are due to meet in Osaka at a G20 summit at the end of this week in a bid to reset ties poisoned by the trade war.
And though costs and labor may be cheaper, some Chinese firms with experience of offshoring say there are downsides too.
Factory manager Jiang complained about lower worker productivity in Myanmar compared with China, flooded roads during the rainy season, and power cuts of eight to nine hours every day.
“If there is no trade war between China and the US, we definitely would not have come to Myanmar to open our factory,” he said.