Investors worldwide are seduced by the China growth story. But while there is plenty of interest, there are also plenty of reasons – cultural, political and economic – for western institutional investors to be hesitant. A group of Australian investors, participating in the 3rd AIST Global Dialogue, recently explored the opportunities in the region, including how, and whether, to turn that growth into investment return. AMANDA WHITE took the trip to Hong Kong and China with them.
China is the world’s third largest economy, boasts one fifth of the world’s population, and its average annual GDP growth in the 20 years to 2009 was 9.6 per cent. It’s a force that is hard to ignore. But, the country faces one particular structural characteristic which is both problematic, and opportunistic – it could get old before it gets rich. Managing director of State Street Global Advisors in China, Ting Li, says there is huge pressure to reform the pension market, which presents an opportunity as it lacks the participation rate of other mature markets. “China is not moving as fast as people thought but it is moving in the right direction,” she says, pointing out the relative youth of the financial and funds management industry of China. Its entire financial industry has only come into being within the past 20 years.
There are now two stock markets, in Shenzhen and Beijing, launched in 1991 with a total of about US$3.6 trillion in ‘A’ shares, with about half of that free floating. Li says it is “relatively complicated how you can invest”, with the ‘A’ sharemarket of domestic companies, a ‘B’ sharemarket of $US denominated listed companies (this is small and illiquid with only US$6.8 billion capitalisation), and the ‘H’ market in Hong Kong. Some investors also access Chinese companies through their listings on the Nasdaq, New York or London Stock Exchanges. China Merchants Fund Management, a joint venture one-third owned by ING, points out there are more than 200 companies listed offshore and they are often cheaper and more transparent.
Head of investment consulting China for Towers Watson, Yvonne Sin, says the Hong Kong stock market is a conduit for accessing China. Investors in Chinese-listed companies that also list on the Hong Kong exchange are provided with a more familiar legal structure, and a more transparent, relatively corruption-free environment. “It gives investors confidence in investing in China,” she says. But listed equities are only one type of investment opportunity, with many investors looking to the private markets. “In the private markets there have been a lot of foreign direct investments, from investors that want to take advantage of the economic boom. But it is not capital that China wants or needs. “China has the largest foreign reserves in the world, they don’t want money, they want knowledge and technical assistance,” Sin says. While Westerners have knowledge, there are many challenges to overcome in the exchange of that information, Sin continues.