Written by Roland Van Den Brink
Roland Van Den Brink
This week I spoke to a pension fund which just invested $60 mln in China. They gave me the following arguments: the renminbi lowers our euro risk, and according to our analyses bonds, high yield and equity are fairly priced. Actually, some categories and sectors seems attractive.
What struck me most was that their simplicity in approach and willingness to act. During my career I witness several times when pension funds themselves took the initiative to invest in a category which is now mainstream. Today the popular themes are LDI, global macro, simplicity and low fee mandates. All these three developments were not developed by the asset management industry or consultants. They were fast followers. A role which in itself is natural and sound as fund management and consulting is a service industry.
Let’s look at the facts. China is opening its financial markets in a fast pace. Foreign investors can now invest in Renminbi denominated cash funds, government bonds, high yield, equity and private equity. There are four routes to enter the market: via a Western asset manager, via a fund, via Hong Kong, Singapore or via a license. The pension fund mentioned to have chosen the last two options and in particular the license route to pay only one fee to a local manager. They think other funds will follow soon and that market inflow lowers their risk. The paper burden was far less than what common wisdom told them, and they are still enthusiastic about the warm welcome by the Chinese regulators. And language is no barrier at all.
The last six months roughly $3 bln has been allocated and given the fast track of licenses and quota’s assigned, $30 bln will be invested soon. Still only 1% of the market cap, but sizable enough to earn your attention. Just last week a large Sovereign announced informally that they will apply for a $5 bln quota.
We all passed the age to believe free lunches and fairy tells: there are risks. First of all the ordinary risks of investing. As always you have to do your homework. The Chicago Tribune mentioned the problems with exercising your shareholders rights, and the Dealbook website give some names which cooked the books. But if you operate without local presence and you did not check whether they the management well, you are asking for problems. This has nothing to do with China but with investing in general.
A more subtle risk is taxation. There is an ongoing debate amongst Chinese officials whether there should be a 10% capital gain tax. Well, I learned to ignore politics as the pension fund does I spoke. When it not applies, their return will be even higher…
What is the future? Where we will be five to ten years out? My first statement is that China is a normal emerging country which only goes faster than predecessors like Korea and Japan. Growth will probably slow to the single digit range, but still a firm plus. Secondly, the sound growth will push the currency up more than people can imagine. One year Renminbi trades at minus 2%, but that is the traders corner. Within the next five to ten years Asia will add roughly 500 mln to 1 bln new customers to the developed world, and with it goes always a currency appreciation. A factor 2 to 4 should not amaze us; it happened many times. Keep in mind that currencies are a relative game, and we all are aware of the euro crisis… The third statement is that the Chinese governance is fully aware of the implications that private persons and companies within China have a lot of cash but not an optimal choice to diversify their investments which rises the risk for bubbles. This in itself is a risk for the whole world. So they are strong supporters of long term investment solutions and aware that this requires healthy market conditions. As for instance that equity holders get rewarded for the risk they take. Finally, English will be the main business language. Actually, it is already the case, and when I travel I meet many young Westerns who are teaching English on the most unthinkable spots. This is to me a clear sign. Adding to it that the social media are for more developed in China than elsewhere, and the ICT world almost forces you to English completes my arguments.
Do we see new initiatives from China? Or are it only copycats? Can Western investment companies do business in China. Can they sell Chinese investments freely? Yes, yes, not yet, not yet.
With respect to the latter two questions, the golden gate is opening now and looking at the background of the people at the Regulator, I witness a will to be there within the next three years. Today the Chinese are just introducing Western solutions: bonds, stocks, high yield, ETF’s, simple benchmarks, limited currency floating, state companies to become public, an upcoming derivative market , and they even copied the Western bubble and bear market. Actually, the same pattern Amsterdam followed when early 1600 it became the financial centre of Europe for about the next two hundred years. New initiatives? Yes. I already showed one to Reuters in Beijing. China is on route to mix the social media and investing. This phenomena is mainly culturally driven, as people like to talk about investing and regard it as a good use of their (limited) free time. Actually, big stuff.
Conclusion. Anyone who is willing to invest in long term relationships and takes the time to do its homework, will find juicy niches with healthy business prospects.
Note: Last week the Citi Bank issued a report about the Chinese opportunities for all linked to the investment industry: institutional investors up to asset managers.
Roland van den Brink, Founder, TRIGNUM, & Principal, EUROPE CHINA INSTITUTE, NYENRODE BUSINESS UNIVERSITY, was speaking in the Emerging Markets summit at FundForum International 2012 on strategies for successful investment in China.
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