Policymakers and commentators such as George Yeo, former Minister of Foreign Affairs and visiting fellow at the Lee Kuan Yew School of Public Policy, may be bullish about China’s long-term prospects, but fund managers, private equity and investors, in general, are scratching their heads about the funds flows out of China.
The Chinese stock market — as represented by the Shanghai Composite Index and the Hang Seng Index, where around 70% of the stocks are China-based or owned by mainlanders — has underperformed global markets. Nonetheless, inflows of foreign direct investment (FDI) into China fell to US$72 billion in 2022, down from US$180 billion in 2013, based on IMF and World Bank data. On the other hand, outflows of FDI rose to US$149 billion in 2022, up from US$72 billion in 2013.
Still, foreign institution funds have flowed into China this year, as evidenced by the rebound in the Hang Seng Index, which gained 1,729 points from its January low, but has eased subsequently.
Increasingly, with the bifurcation between the US and China, a “China for China, RMB funds for RMB assets” strategy is being developed by private funds, IPOs and the like.
While companies like CapitaLand Investment (CLI) are lowering their direct exposure to China, they continue to create private funds for capital within China.
During a results briefing by CLI’s management team, Lee Chee Koon, group CEO of CLI, said: “When I first took over as CEO of CapitaLand in 2018, our exposure to China was 51% [of AUM]. Today, it’s down to 34%. The commitment to diversify into different markets was dedicated and focused and we executed successfully. For a company with such a big asset base, it’s not easy to move, because, unlike publicly traded securities, you cannot move in and out [swiftly]. And to be able to recycle and be disciplined about it, in building a diversified business, focusing on building the fee income was something that we were really so focused on, we will continue to execute.”
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Wtih the split of CapitaLand’s business into the unlisted CapitaLand Development and the listed CLI, the latter was able to shed the asset-heavy residential business in China and large assets such as Raffles City Chongqing. From some 51% of AUM, CLI’s exposure in China is down to around 34% for its real estate AUM which includes items on the balance sheet and 31% of just funds under management (FUM).
Paul Tham, group CFO at CLI, said China is still challenging. “But obviously, [navigating China] is one of our strengths. It is one of the markets we know. The focus for us will be on RMB for RMB, really focusing local RMB funds for capital raising and optimising our portfolio. We need to lighten our balance sheet to become a little bit more capital-efficient in how we approach and grow in China. China at 31% of FUM is down slightly from the year before. That is still obviously a significant portion. We believe we can grow this through RMB funds.”
Lee concurs with the “China for China” theme. “In China, the team on the ground is well established. Collectively we have raised more than RMB50 billion [$9.3 billion] [with capital partners] in the last few years. I think that trend will continue to grow. There is a lot of insurance money and pension funds trying to find a home.”
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Separately, Michelle Ling, Mapletree’s chief executive of private capital management, as reported by PERE, said during a PERE Network Asia Summit in February that investors will relook at China. “At the end of the day, I do believe people will start to be active in China again when the global risk-return dynamics are more stabilised. But currently, it is more of a North American play in terms of higher returning opportunities.”
Despite the lack of foreign participation and patient money giving China a wide berth at the moment, the “RMB for RMB, China for China” strategy continues apace for Asian real estate investment managers. In December 2023, ESR Group announced it had submitted the “application materials” to the China Securities Regulatory Commission (CSRC) and the Shanghai Stock Exchange for the registration and listing of a C-REIT on the Shanghai Stock Exchange.
The initial properties are three high-standard logistics projects located in Kunshan, Jiangsu Province, “pursuant” to a pilot programme launched by the National Development and Reform Commission and the CSRC.
The main problem in China is its residential property sector and defaults by its large developers on offshore bonds. On March 6, Bloomberg reported that the National People’s Congress (NPC) will refine real estate policies to provide stronger support for the sector as “the property crisis” drags into a fourth year.
Interestingly, the mantra “housing is for living in, not speculation” did not appear at the NPC for the first time since 2019, media reports say. In the meantime, the Chinese government is reportedly studying some ideas to trial to find a floor for the property market. Suggestions include the government buying up unsold, uncompleted units as part of a social housing project.
