HONG KONG, Oct 10 Reuters Chinese funds are seeking new capital sources in the Middle East and other markets, managers say, in a shift that could reshape investment flows as diplomatic tensions and other risks drive many U.S. investors out of the country.

Seven China equity funds, including hedge funds and mutual funds, running more than 500 billion in combined assets, told Reuters they visited the Middle East this year to raise money, three of them for the first time.

Mideast investors are also keen to allocate more resources to China as they can benefit from lower valuations and the effects of government stimulus to support the recovery.

The retreat by U.S. investors and businesses out of China due to a host of risks has in turn prompted Chinese funds to look elsewhere to lessen their reliance on U.S. investment.

The search for new capital could affect Asia39;s hedge fund scene, where China firms account for more than half the market. Brokers and ancillary firms could change their focus to provide for Middle Eastrelated services.

In the past perhaps the holy grail of capital raising was the U.S., said Effie Vasilopoulos, coLeader of law firm Sidley Austin39;s AsiaPacific investment funds group.

But if the U.S. investor leaves, there is a real focus on replacing that with other capital that is derisked to this U.S.Sino tension. So that dynamic is leading many of our clients to the Middle East.

Managers of four of the seven funds visiting the Middle East spoke on…