The conflict between Saudi Arabia and the UAE is showing new signs of escalating. If current trends continue, this could raise question marks around the $3 trillion managed by the sovereign wealth funds of both countries — much of which flows to western markets.
In January 2026, a month before the war between the US and Iran broke out, we warned that the conflict between Saudi Arabia and the UAE was likely to escalate during this year. As soon as the war began, we warned that it was likely to threaten the safe haven status of the Gulf states, as a significant amount of capital was likely to leave the region permanently. A few weeks later, we reaffirmed that the risk of a financial crisis in the Gulf was growing, as the UAE requested a currency swap line with the Fed. Next, the UAE took the extraordinary step of leaving the OPEC oil cartel, as it can afford a much lower oil price than OPEC leader Saudi Arabia. In recent weeks, new signs of stress have emerged, as Saudi Arabia has reportedly blocked financial flows to the UAE.
Looking ahead, a relevant analogy is the conflict between Qatar and Saudi Arabia (backed by the UAE), which led to a blockade of Qatar in 2017. It severely depressed foreign direct investment into the country for years — and a similar, but far larger, financial shock could follow if the conflict between Saudi Arabia and the UAE continues to escalate.
In 2025, China recorded the largest merchandise trade surplus in history – roughly $1.1 trillion more in exports than imports – based on Chinese manufacturers' global competitiveness. The alarm this has provoked in the United States and Europe over the fate of their own industries has dominated the debate. Far less attention has gone to another question: where is all this Chinese capital going? A trade surplus does not simply disappear. Every dollar China earns abroad and does not spend on imports must be reinvested abroad – the question is through which channel.
For two decades from the early 2000s, much of China's surplus was recycled into US Treasuries. But that has changed: Chinese capital no longer flows automatically to the US. The largest destination for China's capital in recent years has been Hong Kong – though much of it flows through the territory rather than settling there, using Hong Kong as a conduit to other foreign markets.
In the years ahead, more countries are likely to compete for access to Chinese capital rather than resist it. At the European level, this almost happened in December 2020 when the EU and China concluded the Comprehensive Agreement on Investment, which would have opened a return channel for Chinese surplus capital into Europe – including partnerships that would have shored up Europe's industrial competitiveness through a new energy system with lower energy costs. The deal was shelved at the last moment, but the logic that produced it has not gone away: Spain and Hungary are already building long-term national strategies that position Chinese capital as a funding engine for European reindustrialization, and others are likely to follow.
In recent weeks, China announced several significant steps to address the barriers that hold back adoption of the renminbi by global investors.
1. Chinese government bonds can now be quickly converted into cash - making them far more attractive to hold. Through a new repo facility, foreign investors will be able to use their Chinese government bond holdings as collateral to borrow short-term renminbi cash. This mirrors the US Federal Reserve’s repo facility, which lets foreign central banks swap US government bonds for dollars. Previously, Chinese government bonds were difficult to liquidate quickly, making them relatively unattractive to hold for global investors who need to be able to move in and out of positions.
2. Global investors can now protect themselves against losses on Chinese bond holdings - removing a key barrier to owning them. A new Hong Kong-based futures market for Chinese government bonds will allow global investors to hedge interest rate risk in their Chinese bond holdings without needing mainland China market access. The absence of such a hedging mechanism was a key reason for underweighting Chinese bonds in global investment portfolios.
3. More support for two-way capital flows - a necessary step in making the renminbi a currency global investors can comfortably hold. China has increased the quotas under its Qualified Domestic Institutional Investor program, allowing more Chinese capital to flow into foreign markets. Enabling outward capital flows is a classic step in the internationalization of a domestic currency because it creates a two-way market and reduces the perception of a one-way trap.
4. More support for the offshore renminbi, which is freely traded outside China - making it easier for global investors to transact in the currency. Six major state-owned banks have been authorized to conduct transactions in offshore renminbi - a currency market distinct from the onshore renminbi, freely traded in financial centers such as Hong Kong and Singapore - directly from the mainland. Previously, such transactions had to be routed through these offshore hubs. This is likely to increase the pool of freely traded renminbi in global markets.
Analysis of the internationalization of the renminbi should go further than reflecting on “de-dollarization” - although foreign demand for US dollars could indeed decline as the renminbi becomes a more credible alternative. More importantly, the internationalization of the renminbi is likely to begin in Asia, where central banks and sovereign wealth funds have the most to gain from diversifying into renminbi assets, something Chinese government statements in recent years have made explicit. The infrastructure to support that vision is now being put in place, and global investors would be unwise to ignore it.
