Not much happens in the Chinese investment world without the central government’s say. Right now, Beijing is in the middle of an international row over the value of its currency, which dominates all other local financial discussions, at least in public. But there are more important things happening in China which institutional investors around the world need to watch. GREG BRIGHT* reports after a visit to Beijing for an investment conference. The Chinese funds management industry is just over 10 years old and already it’s starting to flex its muscles. To the frustration of the Government, the Chinese love to save and the locally grown funds managers, some of whom have foreign partners, have grown their combined businesses from zero to about US$ 370 billion since 1999.
The Government licensed 10 firms in 1999(there are 60 firms in total now) to carry on domestic and international asset management and most have enjoyed strong growth, particularly from domestic clients. One of the largest, which has a mix of shareholders from state owned company to foreign funds manager Deutsche Asset Management, Harvest Fund Management, held a conference for about 150 invitees in Beijing last month, with various managers from around the world as well as a strong contingent of Chinese institutional investors and advisers in attendance.
The big surprise, from an outsider’s point of view, was how willing the conference participants, from speakers to delegates, were to talk about China’s challenges and perhaps, therefore, the world’s. Li Yang, one of the most senior economic advisers to the Government, reiterated Prime Minister Wen’s recent comment, as other Chinese speakers did too, that this year would be “the most complicated of the century so far”. Li, the vice president of the Chinese Academy of Social Sciences, said: “The big priority is to change the structure of our economy. The financial crisis was not really a big hit but it serves as a warning for our economic growth model. Our priority, therefore, is to change the economic model.” He said that the model needed to be changed so the traditional growth drivers of investment and exports were supplemented by a greater contribution from domestic consumption.
This would take some time, and in the short term economic growth required continued strong investment. Foreign trade, however, which was recovering slowly from the “US recession”, would likely contribute less to Chinese GDP growth in the future. Li also spoke of the importance of tackling softer domestic issues such as challenges of employment, imbalances in growth between the regions, the problems with real estate development leading to a potential price bubble, and the need to invest in social infrastructure. He said China needed to encourage equity financing, rather than bank financing. “In a crisis, cash is king. In the future, equity will be king … We need to encourage the development of private capital. This will lower the overall leverage. That includes foreign capital too. While some people criticise this, it becomes equity investment which will help optimise the total investment in China.” In the recent past, China’s industrialisation had gone ahead in parallel with urbanisation. But in the future, urbanisation would play a more prominent role.