SHANGHAI/HONG KONG - Large sovereign funds in the Middle East are buying up Chinese stocks, and investors say their appetite is growing as trade and diplomatic relations between the two regions improve.

Abu Dhabi Investment Authority (ADIA), one of the world's biggest sovereign wealth funds, became a major shareholder in coal and power companies China Shenhua Energy and Zijin Mining in the fourth quarter of 2022, and has increased other Chinese equity investments.

Kuwait Investment Authority (KIA) added to positions in Shenzhen Airport Co and yeast and other food processor Angel Yeast Co in the fourth quarter.

Neither responded to requests for comment, and such investments don't necessarily illustrate a wider trend. But they do coincide with stepped up efforts in China to court Middle East money and with China's push to settle oil contracts in yuan, which creates demand from oil sellers for yuan assets.

It also comes as money managers discern a positive shift in China sentiment in the Gulf, while many other foreign funds remain sceptical or on the sidelines about Chinese investment.

"The interest to invest in China, in forming a stronger trade relationship with China, including adopting the petroyuan, is driven by the desire to reduce dependence on the U.S.," said Jason Hsu, founder of Hong Kong's Rayliant Global Advisors, referring to Chinese-currency cash received for oil sales.

Hsu said he recently visited Saudi Arabia, Abu Dhabi, Dubai, Oman and Kuwait to meet sovereign and pension funds which are "actively looking to invest in China."

Nasdaq data business eVestment noted in its March institutional intelligence report that China equity strategies were among the most viewed by Saudi investors in the fourth quarter of last year.

ADIA appeared for the first time in the top-10 shareholder list of China Shenhua and Zijin, which has been surging this year, in their latest annual reports.

It also increased stakes in financial services firm East Money Information Co, electronics-maker Universal Scientific Industrial Shanghai Co and textile firm Bros Eastern Ltd, according to their annual reports.

The rising interest comes as China's influence in the Gulf is growing.

Beijing brokered a milestone rapprochement deal between Iran and Saudi Arabia last month. Chinese President Xi Jinping told Gulf Arab leaders in December that China would work to buy oil and gas in yuan, which could prompt further investment.

"The appetite for Chinese assets is extremely strong - extremely, extremely strong - partly for political reasons," said Louis-Vincent Gave, founding partner and CEO at asset manager Gavekal Capital.

"The guys at the very top, whether in Abu Dhabi or in Saudi Arabia, et cetera, want to make friends with China."

In contrast, some western money remains cautious investing in China amid geopolitical tensions around Taiwan and concern at regulatory risks in owning Chinese assets.

"Politically speaking, There's no such a problem for Middle East investors," said Jie Lu, Head of Investments China at Dutch asset manager Robeco.

"They feel China's political system is okay, and they can relate to China."

(Reporting by Jason Xue and Samuel Shen in Shanghai, Summer Zhen in Hong Kong; Editing by Kim Coghill)