Featured Topic: China

legoIn the process of building a new factory in China, Lego is committed to making “considerable investments in capacity and capabilities” in Asia.  Meanwhile, Global Head of Alternatives and Group Head of Solutions for Aberdeen Asset Management, Andrew McCaffery, said that his firm is also looking into the region.  Looking to expand into alternatives, they are committed to making investments in Asia as well.

CMBCI (CMBC International Holdings Ltd.) made investments in CARRET Private Investments (Asia) Limited, the private wealth management firm.  One of the firm’s founders and current Managing Partner, Kenneth Ho explained: “CARRET has more than 50 years of history in creating long-term value for its high net worth clients, and we believe, that together with CMBCI, we can form a partnership to develop high end wealth management for Chinese clientele.”

Vis-à-vis the region’s infrastructure, it is anticipated that in the decade from 2015 to 2025, approximately US$5.3 trillion ($7 trillion) will be invested into the industry in Asia.  Ten years thereafter, it will be worth around 60 percent of global expenditure on infrastructure.   According to the 2016 Infrastructure Australia Report, by 2031 Asia will account for around two-thirds of the middle-class population around the world.

ChinaAmerican companies investing into Asia has long been a subject.  But now, at least in China, US firms seem to be zooming in on the food market specifically.  KKR – a global, alternative investment firm – over the last few years has started putting its money into “everything from chicken producers to dairy farms.”  The company – which speaks of its “industrialist vision” is seeing China’s food industry as a great opportunity.  This is because – in the words of the firm’s global head of capital and asset management, Scott Nuttall, it is “seeing opportunities in private equity that really don’t show up in the public markets.”  The firm is also aware of the entire Asian region’s new focus on environmental safety.

But there is somewhat of a challenge with making investments in the food industry in Asia, specifically China since the Chinese have so many people to feed. In a recent article in Business Insider by Rachel Butt, it was noted that: “the food industry there has to feed more than 1.4 billion people. The air pollution problem is so intense that officials have had to put caps on energy use.” So perhaps the food industry isn’t the best bet for US firms to make their investments.

China is considered a good, steady investment hub since it is believed that its economy is crucial to the overall emerging-market performance.  In other words, given its $11 trillion GDP it is approximately the same size “to the next 1- largest emerging markets combined.”  According to global CIO at UBS Wealth Management, Mark Haefele what this means is that even though its “growth trajectory has slowed over the past year, the deceleration has not been abrupt. The 6.7 percent GDP expansion in the second quarter provided additional evidence that government stimulus is stabilizing activity. And rising consumer spending is partly offsetting weakness in the ‘old economy’ industrial sector.”

Overall since China’s economy encountered a year-on-year growth of 6.7 percent in the second quarter (which was slightly higher than market expectations), this is indicative of an attractive investment location.

pharmaceuticalChina is about to get a biotech center.  With an investment of $350 million from Pfizer Inc., this facility – that will be located in eastern Hangzhou and will be ready by 2018 – is in line with other similar ones engineered by large pharmaceutical corporations to develop a presence in the second largest drugs market in the world.

According to IMS Health, the healthcare market in China is estimated to be valued at $185 billion by 2018. For FDIs to get the edge in the market, getting a head start on government and domestic regulations is very advisable.  And with this new facility it will help China’s goal of adding to the value of its manufacturing sector.

There has been a significant plummet since 2012 in drug market growth from 20+ percent.  This is due to the lack of demand for branded generics as well as Beijing’s attempt to push prices down to stop costs getting out of control.  Despite this, the projected spending for overall healthcare in the region by 2020 is $1.3 trillion.

In Singapore, ASLAN Pharmaceuticals is in the process of developing the pan-HER inhibitor varlitinib.  The US Food and Drug Administration Office of Orphan Products Development for gastric cancer just gave it orphan drug designation.  Given that gastric cancer is the third leading cause of cancer deaths around the world and the third most common cancer in Asia, this is an important step in disease control in the region.

ChinaPotential Asia investors might want to look into China right now. The first reason is because of the proposal put forward by the Commerce Ministry that would consolidate foreign investment in China while reducing restrictions and start adjusting the variable interest entitles often used to sidestep foreign-ownership limits.

According to Hong Kong-based Partner at Davis Polk & Wardwell, Anthony Dapiran, if this becomes law it will “push China so much closer to being a ‘normal’ place to do business.” This is partly because the region will no longer have conflicting layers of regulations and bureaucracy will be facilitated as local and central government approvals for most investments will be eliminated.

This could be part of the reason that foreign companies are investing in the region. For example, L Capital Asia just announced its second substantial investment in China. This marks its first investment in an outlet mall throughout the world. The company will be putting in $100m+ in Sasseur Cayman Holding Ltd. – the company that began as a coffee shop but has now developed into four outlet malls, featuring brands that sell excess stock at bargain prices.

So if the trend continues, then China will be becoming an increasingly more attractive region for foreign investors.

Dariuz KowalczykChina’s FOREX reserves have been escalating substantially over the past five years. In 2009, the figure exceeded $2 trillion and by the end of last month, that number nearly doubled! China’s FOREX makes up a a third of all FOREX reserves worldwide. According to Li Keqiang, this figure has become somewhat burdensome for China, forcing its Central Bank to issue home currency for the purchase of FOREX, which can increase inflation.

Given this situation, experts have advised officials to encourage business people to keep hold of foreign currency and put their monies into foreign markets. One possible explanation for such FOREX reserve escalation is the export increase and foreign investments that are coming to China. Since the region has a trade surplus, further FOREX arrives. And, given that China is becoming an increasingly attractive place for FDI, this further stokes the issue.

In a response to these and other related issues, officials widened the freedom of its banks to set foreign-currency deposit rates in Shanghai. With this, interest-rate controls would be facilitated countrywide. According to senior economist at Credit Agricole SA, Dariuz Kowalczyk, “this is a small step in deposit-rate liberalization because forex deposits are a tiny fraction of the total. However, the removal of Forex deposit caps does represent a step towards liberalization of interest rates and will increase hopes for raising the cap on yuan deposits in coming months. This in turn would lead to higher rates throughout the economy.”

In addition, the People’s Bank of China recently began a trial period on removing the ceiling on foreign currency deposit rates for small accounts at first. Later on, should this go well, it will be extended to other accounts, contingent on the current market conditions.

To a certain degree, China needs its FOREX reserves. But for global transactions and to cope with potential risks they are necessary. However, in excess, they result in an “unendurable burden.”

Although America and Europe are still caught in a recession that has seen a decrease in high-end luxury purchasing, China has seen an increase.  In 2010, the sale of luxury goods in China hit the 212 billion yuan mark, with a growth of approximately 25% on that figure in 2011.  Even more interestingly, new customers accounted for over 60% of the purchases.

Luxury companies from Cartier and Van Cleef to Hermes and Christian Dior all reported significant increases in their sales last year – and the Year of the Dragon should account for even higher sales.

With this information in hand, many luxury buyers are turning their attention to China.  At the moment, they represent 10% of the world’s luxury sales market. And, Chinese buyers aren’t just boosting sales at home; they are also accounting for more of the luxury sale purchases outside of China.

Just during the holiday season this past year, Chinese buyers accounted for $7.2 billion in sales in the US and Europe.  According to a report by the World Luxury Association, this is an increase of over 28% year-on-year.

Prime Minister John Key revealed yesterday that New Zealand is becoming a major investment hub for Asian businesses and financiers, and the nation’s currency is expecting a boost. Some of the targets include government debt securities as well as farms and natural resources.

In fact, Shanghai Pengxin Group, a Chinese company, recently received permission to acquire sixteen dairy farms in New Zealand in one of the largest transactions ever sealed by the two countries.

When interviewed by the Wall Street Journal during a visit in Australia, Key said: “We are starting to see quite an increase in interest from Asia, particularly as they look at New Zealand and see the potential in the mining and exploration centers, we’ve seen significant interest there, and obviously in the agriculture sector where we have a pre-eminent position.”

Key added that it is the New Zealnd-based assets that so attract China at this time. Some dealings have caused minor tension in the region, however.

“They like the New Zealand story. They are a country that is significantly worried about food security. Not only do they want to buy food, but they are increasingly starting to buy products on the basis of health benefits.” Key continued, stating that “Where we see more sensitivity is around the purchase of real assets in New Zealand.”

China is currently New Zealand’s second-largest market, following close behind the neighboring Australia.

Western companies have become increasingly more attracted to China’s consumer market, despite the major commitment needed in order to become truly involved. According to one observer,  entering the Chinese market is no longer a simple feat.

Once, China would jump at an opportunity with a Western brand. Today, however, the country’s coastal cities are bursting with investment and equity firms, as well as numerous other western businesses. Major competition and the increase of prices in the sector are likely to discourage newcomers.

There are a few suggestions. First, he recommends selling a product that is actually needed by the Chinese. Jokingly, he said a toaster would not make great business, as the Chinese “don’t like to eat hard things.”

Second, he said, is checking that the product is acceptable to the Chinese market. If not, be sure to modify it to fit the requirements.

Lastly, it has been suggested studying the domestic products that have already entered the market. He added that there may be “established players” in the market already, and Western businesses will need a strategy to compete with them.

Last year, some predicted an increase of small Western businesses in China. When asked by the BusinessNewsDaily, he said: “There is significant intrinsic demand built up in the 1.3 billion population of China, which will allow creative entrepreneurs plenty of opportunities to expand overseas in 2011 and beyond. Small businesses have the advantage of being nimble and able to seize even the slightest niche markets by introducing foreign products of unique distinction. The same goods that are well received by Americans are often welcomed by the Chinese, which means there will be many repeats of historically successful product lines. After all, both sides have more similarities than differences, and we can expect further convergence in the coming years.”

While much of the world is still feeling the economic downturn, China stands strong with its confidence in its economic future. Last week, Chinese Premier Wen Jiabao said that he is confident in China’s economy.  He has openly welcomed foreign companies like ARC Investment Partners to share in the country’s growth.

As Wen said during his keynote speech at the opening of the World Economic Forum’s annual meeting in the northeastern city of Dalian, “We sincerely welcome foreign companies to actively involve themselves in China’s reform and opening up process and share the opportunities and benefits of China’s prosperity and progress.”

China is becoming more desirable for outside investors of all sorts. Recently, HSBC Holdings Plc. found that wealthy people in China are the youngest in Asia, outside of Japan.  In a recent HSBC report that covered Australia, China, India, Indonesia, Hong Kong, Malaysia, Singapore and Taiwan, they found that the average age of people in China who have liquid assets of at least 500,000 yuan was 36. This was in comparison to 48 in Hong Kong and 38 in Indonesia.

According to the report, more than 25% of wealthy Asians will be investing in greater China and Southeast Asian funds and equities in the next six months. Certainly, fund companies outside of China similarly have their eyes set on this region, and on the ever-increasing economic expansions happening in China.

The expansion into the Asian market is being seen in many sectors.  In the technology sector, companies are trying to get into the market and to target products to this new rising wealthy class.  Investment managers like Adam Roseman of ARC Investment Partners have also made China their main focus on interest.  Global banks like HSBC, Citigroup Inc. and Standard Chartered Plc are expanding into this area as well.

Though the Global Financial Crisis has not been resolved, the increase in Asian trade has encouraged many investors and companies to resume business in Chinese operations.

APM Terminals, for example, the port operations division of AP-Moller Maersk Group, has recently announced it will be continuing its investments in the region following a short pause as a result of the crisis.

Martin Christiansen, the division’s chief operating officer and head of its Asian-Pacific operations said “We are actively looking for investment opportunities in emerging Asian markets such as China, Vietnam and Indonesia.”

He added that a slight reduction of exports from China was to be expected. “The growth rate of China’s container volumes in the future is expected to be lower than the past, particularly China’s export volumes to mature markets such as the United States and Europe.”

Other companies and regions have also taken interest in China’s potential. China’s ambassador to Canada, Zhang Junsai, has stated that the relations between the two countries have improved dramatically over recent months. He continued, saying he expected trade to continue to increase, as well as foreign investment.

“China is playing an increasingly peaceful and constructive role in the world. China has performed very well during the financial crisis and I think all this is seen by the Canadian people that China is making contributions to the world economy,” Mr. Zhang said. “More importantly, China has a huge market. There is a great potential for both countries to develop friendly relations.”