China: why investors can't afford to 'wait and see'

With so much discussion in the world’s media about China’s slowdown and the challenges associated with its shift to a consumption model, there is a popular belief that the days of impressive growth in the world’s second largest economy may be over.

There was a spirited and robust challenge to this assumption at the first of FundForum Asia 2016’s debates on China.

Chris Powers, Manager, Consulting, Z-Ben Advisors, opened the session with an assertion that China’s fragmentation and multi-layered regulatory framework has hidden the growth and opportunities in recent years.

In fact, Chris said, extremely robust growth can still be found if you know where to look, especially in onshore funds. “This is where the future lies. The big focus of all asset managers going forward should be on the 90%-plus of mainland portfolios that are going to be invested in Chinese stocks and funds. By the end of 2015 we had a $3.2 trillion mutual fund market. That’s 81% CAGR growth over the last 3 years. With all the news stories, ‘China’s crashing’, ‘China’s rising’ – you’re still seeing substantial growth.”

Jelle Vervroon, Chief Executive Officer, HFT Investment Management, said there were apparently contradictory dynamics at play in the Chinese market. “On the one hand China is opening up. If you want to invest in China there is a way, there is access in abundance.  On the other hand, you see a choppy market for equities in 2015, RMB depreciation and onshore yields going down. The risk in China is changing. So there is the access but the market is perceived to be riskier.”

Jelle told the conference that while the ‘how’ question of investment in China has been largely answered, the ‘when’ question remains for many people. Global investors want to get into China but are unsure about how to mitigate the risk. With the onshore dynamics changing, someone may understand the situation one year but find that it has significantly changed 12 months later.

Lieven Debruyne, CEO, Hong Kong/China at Schroders agreed, and suggested that this is simply part of operating in the market. “To do business in China you have to get comfortable with being uncomfortable. You can’t figure everything out in advance. You have to decide whether you want to be part of leading in the development of what’s happening in China.”

“Overall we see tremendous activity in our business – particularly the insurance sector. It is not going to change the bottom line fundamentally in 2016 but it will if you look a bit further out. The trick is to look well beyond the short term.”

Dr Alfred Shang, Partner at Bain & Company, agreed that China offered excellent opportunities but urged some caution for investors new to the market, “The first step we advise our clients is to really step back and understand what will suit your relative competitive strength. Then, get your foot in the door, be part of the game so you have a springboard to put your name into the market and understand the market better. Also, recruit – talent is an important part of the market.”

Dr Shang said that while the biggest opportunities were with high net worth individuals who invest actively onshore in China as well as in overseas markers, there is also a growing upper mass affluent market which is getting more sophisticated and really values professional service advice and favours global allocation.

Ben Zhang, Managing Director, Haitong Asset Management (HK), said foreign investors who get into China now will do better than those that delay. “Do it as early as you can. Get a WFOE before the policy changes because the Chinese onshore market is such a big market. Grab the opportunity if you can.”

The audience were asked to take part in a poll on which Chinese market they thought would be most important to global managers over the next five years: inbound, outbound or mainland. The results were decisive: 5% thought inbound, 19% thought outbound while 76% believed the mainland market would be the most important.

Lieven Debruyne said the poll results were not quite what he has expected, “I think if you look long term I think this is right but in the short term this is quite a surprise.”

Overall though he said the prospects were very good indeed, “The Chinese market has had a rough ride since August last year but I think that is short term phenomenon.  There will be short term challenges but investing in china will continue to be great.”