China alluring to foreign investors

China remains one of a few decent options for investment managers in New York, London and other financial centers, thanks to its relatively secluded financial system and its ambitious economic stimulus program.

Half the fund managers surveyed in a recent Merrill Lynch report said they intend to "overweight" Chinese equities even though 80 percent of respondents predicted China's economic growth will slow further in 2009.

"China remains the most favored destination for foreign investors," said Zhu Yipu, an analyst at China Venture, a venture capital and private equities investment research institute.

China is not exactly an investor's dream at the moment. The stock and property markets took a savage beating in the past 12 months. The benchmark Shanghai Composite Index fell more than 70 percent to 1850. Property prices in major cities dropped an average 25 percent. In Shenzhen, real estate prices nosedived an average 40 percent from the beginning of 2008.

But despite horrific erosion of asset values, the country's financial system is shielded by restrictions on currency convertibility and foreign participation and is faring well compared to others around the globe.

The combined exposure of Chinese banks to toxic securities, which brought down some of the most venerable financial institutions in other markets, was insignificant relative to their total assets.

The downturn in loan demand from many corporations combined with a narrowing interest rate spread will eat into many banks' profits in the next few years. But loan defaults by corporate and individual borrowers remain manageable.

Many foreign fund managers are not in a position, or mood, to acquire new assets. Foreign acquisitions in Shanghai's real estate market dropped 26 percent year-on-year to 16 billion yuan in 2008, according to the latest figures from Jones Lang LaSalle, a global real estate service firm.

But a massive fire sale of fast-depreciating assets by jittery investors has not happened in China.

Instead foreign investors are waiting on the sideline, keeping a keen eye on available bargains. Fund managers and analysts say many foreign investors are beginning to revisit investment opportunities in China since the decline in asset values presents high return possibilities in a perceivably lower risk environment.

"Investors of venture capital and private equities are taking a more cautious approach, waiting for capital values to come down," said Zhu of China Venture, "But their longer term investment strategy in China will not change."

The government's economic stimulus package which includes measures to further open the Chinese investment markets helps boost foreign investors' confidence.

Several measures from the government in recent months will likely bolster their confidence even more.

The central government tripled the quota for qualified foreign institutional investors from $10 billion to $30 billion.

"Although foreign acquisitions in Shanghai slowed to a halt in the fourth quarter of 2008, a pick-up next year is expected," said Steven McCord, senior manager of the research department at Jones Lang LaSalle, China.

(China Daily 01/05/2009 page8)