Chinese growth ‘seductive’ warns Towers Watson

The China growth story is seducing many institutional investors, in theory. But in practice many investors still don’t know the best strategy for investment in the region. Yvonne Sin, head of investment consulting China for Towers Watson, spoke to Amanda White about some of the options.

Most investors are accessing the growth opportunities of China through their emerging markets exposure. Like other emerging markets China has some country-specific challenges and risks which make due diligence, and manager selection, all the more important.

There are a number of ways to access the Chinese share market – the domestic equity market or “A” shares has about $3.6 trillion, of which about half is free-float.

But institutional investors can also access some of these companies through their dual listing on the Hong Kong exchange, the “H” market.

There is also the “B” market which is small and illiquid.

Head of investment consulting China for Towers Watson, Yvonne Sin, says the Hong Kong stock market is a conduit for accessing China. For those Chinese-listed companies that also list on the Hong Kong exchange it provides investors with a more familiar legal structure, more transparent and relatively-corruption free environment.

“It gives investors confidence in investing in China,” she said.

But listed equities are one type only of investment opportunity and many investors are 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 reserve in the world, they don’t want money, they want knowledge and technical assistance,” Sin said.

While westerners have knowledge, there are many challenges to overcome in the exchange of that information. If you speak to anyone with a knowledge of investment in the region, they say westerners cannot come to China and expect to do business as they are used to it.

“It is usually a condition of collaboration that you share, and westerners are worried about that,” she says. “And I guess you have to consider how much you want it as to whether you accept that.”

If investors are not large, or dedicated enough, to have people on the ground themselves, Sin recommends that a gatekeeper – or screen – for manager selection, someone based on the ground, with local knowledge, as an essential ingredient.

Transparency, also, remains an issue.

There is a lot of private money in China and disclosure and transparency for those investors is not at the same requirements for public pension funds.

Sin, who was previously the World Bank advisor to the Ministry of Finance and Social Security for China, believes if China is serious about becoming a world power it will have to get to OECD standards in transparency, disclosure and regulatory requirements.

However, she also says, the West needs to be patient. Is it only 30 years since China has opened , and it has achieved a lot in that relatively short time.

“You have to switch sides and think of it from the Chinese government point of view. Money is flowing in. Is there any rush to be more transparent? They need time to do it.”

At the moment, Sin concedes that very few public pension funds around the globe single out China as a specific percentage allocation in their investment strategy, but perhaps that will change.

“Perhaps for now that is right, but having a first entry is fairly important. In the next 10 years it might make sense to have a dedicated China exposure. It makes sense to be capturing the third-largest economy in the world.”