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Fitch: Rapid Growth of Chinese Investment Cos is Building Risks
May 18, 2017 / 3:27 AM / 4 months ago

Fitch: Rapid Growth of Chinese Investment Cos is Building Risks

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Investment Companies in China here HONG KONG/SINGAPORE, May 17 (Fitch) Chinese investment companies (ICs) have grown rapidly over the last five years due to loose monetary policy and government support for investment that diversifies the economy and helps local companies to expand overseas. Strong growth is likely to be maintained over the long term, notwithstanding constraints that recent restrictions on capital outflows may have created. However, rapid growth and increasing operational complexity might not have been matched by investment in risk management, and the solid performance of most ICs is yet to be tested through a full economic cycle. The assets of Chinese ICs grew by a compound annual growth rate (CAGR) of 67% in the five years to end-2016, which was fast even by the standards of China's rapidly growing 'shadow banking' sector. IC assets had reached an estimated CNY10.6 trillion (USD1.5 trillion) at end-2016, which was equivalent to 7% of Chinese bank assets or around 13% of GDP. We expect assets to rise by more than 25% per year over the next five years. Chinese ICs have become increasingly visible on the international stage, reflecting the importance of overseas expansion in their overall strategy. We estimate that overseas investments account for around 30%-40% of their total assets. Many ICs have reached a scale where foreign acquisitions have become necessary for portfolio diversification, but the strategy has also been in line with the government's long-term "going out" policy, which has pushed companies to invest and operate abroad. IC strategies are often aligned with the government's economic policies, supporting, for example, the One Belt, One Road initiative and economic rebalancing toward tertiary industries. Some state-owned ICs prioritise government policies over profit. The government's recent efforts to contain capital outflows, which include greater scrutiny of outward FDI, could act as a short-term headwind to the overseas expansion. However, ICs generally keep much of their foreign-currency liquidity offshore and have expanded access to offshore capital markets, which should support foreign acquisitions without adding to capital outflows. Moreover, their outward direct investments tend to be of a long-term strategic nature that the government is likely to favour over investments in real estate or prestige assets, such as sports clubs, for example. Chinese ICs have gained a competitive edge in making overseas acquisitions, with shareholders of targeted businesses often attracted to the opportunities offered by Chinese ICs' strategic portfolios and access to the Chinese market. For example, Fosun's focus on the Chinese middle class meant it was able to offer potential synergies and cross-selling opportunities to existing shareholders when it made investments in Club Med and Cirque du Soleil. Most ICs have so far been able to meet performance targets, but we believe that is mainly a reflection of favourable market conditions. Their strategies and risk controls have not been tested by significant market volatility or an economic downturn. Moreover, risk-reporting tools and frameworks are less sophisticated than those of developed market peers, and are not institutionalised, with founders able to influence risk decisions. One vulnerability is a reliance on divestment proceeds and bank loans to meet cash outflows, which creates a risk that ICs could be pushed into fire-sales in the event of liquidity stress. The state-owned ICs are in a stronger position than individually owned ICs in this respect, as they have better banking relationships and lower leverage. For details, see "Investment Companies in China" at wwww.fitchratings.com or by clicking the link. Contact: Leo Wah, CFA Director Financial Institutions +852 2263 9951 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Jonathan Lee Senior Director Financial Institutions +886 2 8175 760 Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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