Asia and the Gulf: Strengthened financial links in cross-lender lending and investment could freeze if the war does not end soon

No one has a crystal ball for where the war in Iran goes. While there is hope that the conflict can end in certain form, it is hard for investors not to prepare for and price in some of the worst-case scenarios in mind. For Asia, the connection may not be limited to the widely discussed shocks in energy and supply chains. As more countries in the Middle East, especially the Gulf Cooperation Council (GCC) , have been pushing for economic diversification and the green transition, Asia is playing a bigger role as investor and lender. In this report, we analyze the financial links between Asia and the GCC, focusing on lending and investment.Cross-border lending: Stronger connection between Asia and the GCCBased on the cross-border lending data from the Bank for International Settlements (BIS), the UK has been the largest lender, accounting for 27% of GCC borrowings. What is new is Hong Kong, which has emerged as the second largest lender, with its share of total lending to GCC moving from 5% in 2019 to 10% in Q3 2025 with is equivalent to $58 billion additional lending. While Hong Kong appears to be the most exposed, this is also because a large share of its assets goes overseas, part of which goes to the Gulf. And yet, if we were to focus on the share of cross-border loans going to the GCC, South Korea is the most exposed as the GCC constituted as much as 5.4% of its total cross-border claims in Q3 2025. And yet Korea’s exposure to the GCC has decreased since 2019 while that of Hong Kong, Macao, and Taiwan has risen in recent years. And yet, due to their small cross-border lending overall, Korea and Taiwan are shielded with only 0.5% and 0.6% of their lending into the GCC, respectively. Therefore, the biggest exposure, overall, is clearly Hong Kong, accounting for 2.3% of its total bank assets.Still, one missing part here is China, especially with its growing ties with the GCC countries through closer trade relations. The GCC also forms 35% of China’s overseas construction projects in 2024-25. Given the limitation of BIS data without a country breakdown by China, we use syndicated loan data as a proxy. China has become the biggest foreign lender with loans rising almost 5 times since 2019 to $21 billion. They account for 15% of GCC syndicated loans in 2025, up from 6% in 2019. Against such a backdrop, Hong Kong has gained ground as a platform for China’s offshore lending, making it the biggest foreign source of funding for the GCC.All in all, the exposure of APAC banks looks manageable given the small exposure to banks’ asset size. China’s relevance has climbed massively for the GCC, but the size of lending remains contained. The upside is that most lending is related to government and financial sectors, which can involve state backing. Equity investment is decelerating rapidly but without net outflows so farLastly, beyond credit and lending, equities are another important source of capital flow. We compiled capital flows for four markets (Saudi Arabia, Dubai, Qatar, and Oman) using available data to track the movement of foreign investors. Since the war broke out on Feb 28, foreign investors have sold $1.2 billion of GCC shares between Feb 28 and March 22. Still, compared to historical episodes, the current scale is not notably different from other crisis periods. But of course, if the war continues at an intense level and with significant blockages, it can fuel risk-averse sentiment and capital outflows, as the impact may start to emerge in corporate profits and exports.Conclusion: Watch out for Asian investors’ behavior if the war in Iran continuesAll in all, Asia has become a more important lender and investor to the GCC, especially with the greater involvement of China through Hong Kong. Further development is still dependent on the war's outcome, a key focus in our weekly tracker. If the war continues in the worst-case scenario, foreign banks may wait-and-see and be more cautious in reducing exposure or demanding a higher risk premium when extending loans to the GCC. Currently, there is limited sign of panic withdrawal given the rather state-related sector exposure. Foreigners’ reaction to GCC equity markets has been moderate, but it could worsen with relevant spillover effects.