China syndrome: open and closed for business at the same time

A recent closed-door symposium held by the CSRC in Beijing aimed to show that China is open for business. But can it keep the door open and closed at the same time?

August 01, 2023

For US dollar private equity (PE) and venture capital (VC) funds, the appetite for China deals has dwindled to the equivalent of a meagre repast of plain rice.

From the heady days of 2017, when deals peaked at more than $300 billion, capital raised by Greater China-based PE and VC funds fell to $36.8 billion in 2022, according to figures from Preqin.

This was significantly lower than the average of $148.9 billion between 2019 and 2021.

At a recent symposium on July 21 held by Fang Xinghai, vice-chair of the China Securities Regulatory Commission (CSRC), was a testament to the complexity of the conundrum: how can China attract foreign direct investment (FDI) but at the same time maintain policies that restrict the ability of foreign firms to exit deals successfully.

Executives from PE and VC heavyweights such as KKR, Blackstone, Carlyle and Warburg Pincus, reportedly attended the symposium. Neil Shen, founder of Sequoia Capital’s China unit, which is being renamed HongShan, also attended the closed-door meeting.

The global investment groups were asked to share their prognosis for China’s economy and encouraged to suggest ways to make it easier to invest in the country. Authorities, meanwhile, did not offer any specific incentives, reports said.

US restrictions

Restrictions, are not just the preserve of China.

The Biden administration’s long-expected outbound screening mechanism for US investment in China is still a work in progress. It continues to be delayed, however, by domestic opposition in Congress and on Wall Street.

The screening mechanism – which would come through executive order from President Joe Biden – would focus on investments in dual-use technologies that could have military applications such as semi-conductors and artificial intelligence (AI).

Quantum computing and biotech are also expected to be included in the executive order, underscoring the geopolitical tensions that are throttling both inbound and outbound investment for both countries.

No exit

The problem for China, meanwhile, remains chiefly around exiting deals and repatriating profits.

“The regulators have introduced a lot of ambiguous steps that must be followed around winding down, and winding out, of foreign investments in China,” Professor Zhiwu Chen, chair of Finance at Hong Kong University, told FinanceAsia.

“It is only likely to get tighter and more one-directional, rather than bi-directional, going forward.”

Finding the right deals is also proving difficult with vendors of Chinese businesses who are unable, under current regulations, to keep the proceeds of any sale without currency issues.

“If a foreign investor or foreign business goes into China to buy a local business, then the sellers of this local business in China cannot really pocket that in US dollar or British pounds sterling because, it would be subject to conversion requirements right away.”

“Foreign currency would need to be converted into renminbi.”

Recovery hopes

With China’s economy growing less than 1% in the second quarter of this year compared with the previous three months – and regulations severely restricting overseas listings –
China’s Politburo meeting in July acknowledged that the post-reopening recovery had been slower than anticipated.

The focus now should be on expanding domestic demand and consumption by increasing consumer income. For Alec Jin, investment director of Asian Equities at abrdn, this concentration on bootstrapping the Chinese economy still offers plenty of opportunities for investors going forward.

“The policy environment remains accommodative, and support from the central government will continue to be targeted and calibrated for specific sectors,” Jin said in market commentary shared by email.

“For example, we have already seen this play out in June, when stimulus policies were announced to spur auto consumption and electric vehicle (EV) demand, including a proposal to extend a tax exemption scheme for purchasing new energy vehicles.”

“In terms of market sentiment around Chinese equities, we have seen some initial bounce on the back Politburo meeting. We think investors are still waiting to see some meaningful comeback in high frequency indicators,” he said.

Private investment hopes

Another encouraging note, he said, has been recent efforts to spur private investment to improve the private sector. Sectors he says are likely to be opened up include clean energy, transport, and new infrastructure.

“Valuations are also at extremely undemanding levels, which represent opportunities for long-term investors to find quality assets at attractive prices,” he explained.

“We are seeing cheap valuations in certain consumer-related companies too. This represents a ripe opportunity to get into the China market before the sustained recovery momentum takes off.”

He said that abrdn in particular is looking at high quality companies across five themes – aspiration, digitalisation, going green, health and wealth.

“This is where we are finding the most compelling opportunities.”

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