Having benefitted from huge capital inflows in the last 30 years, Chinese outbound investment (OI) is now expanding rapidly in both volume and scope and is likely overtake inbound investment within the next decade. Along with well-documented increases in non-financial OI, which rose 36% yoy to $59bn in 2010, the opening up of China’s financial sector and the retreat of Western investors in global markets have created the conditions for growing Chinese expansion into international financial markets.
Hong Kong’s offshore RMB market has grown rapidly and the government has substantially enhanced the currency’s convertibility. Local and foreign asset managers have also been able to steadily expand OI options for Chinese clients. Moreover, the country’s burgeoning private equity sector, which doubled in size year-on-year to $27.62bn in 2010 and is expected to repeat the same feat in 2011, has increasing international ambitions. Products such as the recently-launched Pramerica-Fosun China Opportunity Fund herald an era of rapidly expanding Chinese overseas investment.
Political appetite for further expansion of the financial sector seems healthy. For example, as part of ongoing attempts to diversify its forex holdings and strengthen the PE sector, Beijing will this year allocate an extra $200bn to its sovereign wealth fund, the China Investment Corp, which currently holds about 30% of its $320 aum overseas.
However, despite strong demand for the acceleration of China’s financial developments, Chinese asset managers remain “ultra-cautious” and not entirely ready to embrace global finance, according to David Mahon, Managing Director of Mahon China, a long-established Beijing based China advisory and asset management house.
“Chinese asset managers are extremely cautious of purely financial transactions and conventional PE deals,” Mahon told IPA. “While we expect sovereign investment to remain strong, the Chinese preference for investing in industrial companies whose future performance may be easier to predict rather than less-tangible financial products is likely to continue for some time yet,” he continued.
Commenting on bullish predictions about China’s burgeoning financial sector, Mahon urged caution. “The barriers Chinese firms face in developed economies often means they cannot easily invest in their first-choice asset classes and have to be more opportunistic in their approach. For example, China would probably like to invest in American agricultural land, or financial houses which can improve their branding and help gain market share abroad, but political resistance to that is relatively high.”
“It is important to bear in mind that China’s overseas acquisitions and investments are not part of a “grand plan” but decisions are made as and when they see value. We should be careful not to ascribe strategic motives to overseas deals which are in fact ad hoc,” he continued.
However, with memories of heavy losses still fresh in the mind, Mahon also emphasized the strong risk-aversion of many Chinese investors.
“The global financial crisis thrust China into a global role ten years before they were ready for it. The Chinese are still troubled by their lack of familiarity with international deals, and are unlikely to extend themselves too much until it becomes easier to determine value in the market.”
“Like most Western governments, China failed to see recent events in the Middle East and North Africa coming despite their extensive interests in the region. This failure has reminded ultra-cautious Chinese of the high political risks associated with foreign expansion.” As such, while the economic fundamentals of China’s financial markets are exceptional, potential political and cultural obstacles have not yet been totally surmounted.