Robert Horrocks, CIO and portfolio manager, Matthews Asia
Recently, some have asked whether the "smart money" is leaving China. For example, high-profile, Hong Kong businessman Li Kashing has been reorganizing and lightening his load of Chinese property assets.
But in this case, it's hard to declare that the smart money is leaving as it can be difficult to separate personal issues from hard-nosed investment decisions or shifts in allocations. Regardless, mainland property assets are still a significant part of Li's wealth; and in some cases, associated companies of sold properties still retain an interest in the management of them.
More recently, other Chinese businesses with at least as strong a pedigree have been making significant acquisitions in their core businesses there, particularly in consumer sectors. So, not all the "smart money" is necessarily moving in the same direction. There have definitely been some recent retrenchments from China by multinationals.
Sales by some Hong Kong banks of banking assets held in China may be more telling. Is this a way of taking some of the risk out of Hong Kong bank balance sheets? There's been some concern over corporate sector loan growths, and potentially in exposure to rising nonperforming loans on the mainland.
Since 2014, the Hong Kong Monetary Authority (HKMA) has been far more public about lending details of Hong Kong bank loans to Chinese corporates. Mainland assets at the end of 2013 had grown to 17% of Hong Kong bank assets.
Hong Kong remains eager to grow its role as a financial center for China over the long term. But it seems apparent that the HKMA is at least somewhat concerned over the mainland market's pace of growth, and its ability to regulate such activity. In addition, some regional banks with mainland loans have been reassessing the risk of these assets, particularly among state-owned enterprises.
But even here, though the near-term concern is over rising non-performing loans, this reassessment may be in part a symptom of the belief that these companies will become gradually slightly more commercial and lose some of the implicit backing of the state. Apart from the implications for bank risk, would that be such a bad thing?
Then there is the long term-who are the buyers of China's assets? I would argue, the U.S. U.S. investment in Chinese securities is at low levels-less than 3% of foreign equities are reportedly in China and Hong Kong combined. Although the absolute level has grown throughout the 2000s, it is now little changed since 2010. And it makes sense from a diversification standpoint for the U.S. to be buying more Chinese assets and vice versa.
Let's not forget that every sell is a buy-greater foreign ownership of China is likely to go hand in hand with greater China ownership of foreign assets-witness China's investment abroad climbing from 2% of the world's total (as of 2006) to nearly 6% as estimated at the end of 2013.
Indeed, we have seen some Chinese insurance companies starting to buy real estate and other assets since China's regulators made this easier in 2012. (New York's Waldorf Astoria is now Chinese-owned.)
Programs such as the development of the corporate bond market in China, the development of an over-the-counter market, the mutual fund industry, better regulation of and capital allocation by the Chinese banking industry and capital markets all hold dual purposes: to raise the efficiency and attractiveness of investing for domestic investors, and to reassure and attract foreign investors.
For it is only by achieving long-term demand for Chinese assets (alongside the significant demand for Chinese goods) that China is likely able to achieve international status for its currency.
So, is China for sale? Most assuredly yes. This partly reflects the decisions of some high profile businessmen, which grab headlines but which are an imperfect guide to the real trends. It partly reflects an attempt by regulators and banks to get a handle on growing mainland risk exposure.
But it also reflects a natural trend of greater cross-border holdings of assets between China and the rest of the world. Over the long term, China will likely continue to be "for sale," in my opinion, as demand for Chinese assets from foreign investors and central banks continues to grow. What really matters is what price you pay.
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The views and information discussed represent opinion and an assessment of market conditions at a specific point in time that are subject to change, and may not reflect the writer's current views. It should not be relied upon as a recommendation to buy and sell particular securities or markets in general. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews International Capital Management, LLC does not accept any liability for losses either direct or consequential caused by the use of this information.
