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Opportunities and challenges in China’s private capital market

25 August 2023

Derek Tsoi

Commercial Director, Fund Services, Hong Kong

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Derek Tsoi

Commercial Director, Fund Services, Hong Kong

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How the Chinese funds market has recovered since the country’s borders reopened.

Fund activity in China is growing again after a pause in expansion marked by pandemic-related lockdowns and economic uncertainty. It’s doing so, however, against a backdrop of high global inflation and a slowdown in M&A.

These factors gave the participants much to discuss at the recent China Private Equity Summit, organised by the Hong Kong Venture Capital and Private Equity Association (HKVCA).

Throughout the summit’s panel discussions, breakout sessions, and informal coffee break conversations, the focus was on the opportunities and challenges of cross-border investments—in and out of the world’s second-largest economy.

Here are four key takeaways from the event.

Fund activity in China is ramping up—and not just in the biggest cities

The Chinese fund industry is moving up a gear. There’s plenty of activity in financial centers such as Beijing and Shanghai, as you’d expect. But the sense of optimism is also being felt in less obvious places.

General partners (GPs) are taking a close interest in second-tier cities such as Chengdu, which has earmarked significant funds for sponsoring start-up businesses and funds. In addition, some of the top-branded fund managers in China were recently present at an event at Wenzhou in the Zhejiang province. Hefei, the capital of Anhui province, is also attracting attention.

None of these cities are traditional centres of finance, but the interest being shown in them as potential destinations in China for funds and capital is evidence of the increase in investment activity across the country.

Chinese GPs are pursuing new outbound opportunities

The Middle East has been a destination for Chinese capital for some time. It’s now being joined by the likes of Germany, South Africa, Japan, Indonesia, and India.

After years of increased proximity to foreign markets, more sophisticated Chinese investors are looking for diversification through growing overseas activities and a wider portfolio of asset classes.

China looks to Asia for more inbound investment

During much of the first half of this year, the denominator effect – which arose during the turmoil in public markets in 2022 – limited new LP allocations to private capital across APAC, particularly in China. This has been the drag on new fundraising activity in the short term.

There is still, however, a healthy appetite for China in Asia-Pacific, and capital is flowing into the country from the Middle East and elsewhere. Chinese domestic capital is also being deployed in ever-increasing amounts.

We have seen this trend in our own business. While 2022 was quiet, the first quarter of 2023 saw a rebound in new fund launches. With activity returning, we are quietly confident for the rest of 2023.

Chinese authorities continue to encourage foreign investment

Despite a challenging macroeconomic environment, the Asset Management Association of China continues to encourage and support the Chinese funds industry across the country.

As we’ve seen, activity is no longer limited to two or three top-tier cities, and the Chinese government is keen to attract more foreign managers to the country, to manage investments closer to the assets themselves.

In addition, the Qualified Foreign Limited Partnership (QFLP) and the Qualified Domestic Limited Partnership (QDLP) pilot programmes have proved a strong draw for global attention.

The QFLP allows foreign investors to invest in China’s financial markets (that is, to raise USD and deploy in RMB). Meanwhile, the QDLP allows foreign fund managers to market offshore investment products to Chinese institutional investors and high-net-worth individuals (to raise RMB and deploy in USD).

One potential challenge for foreign managers is the relative immaturity of the local fund ecosystem. Corporate outsourcers in China compete heavily on price, and fund accountants are inexperienced to deal with the complex world of alternative funds (especially private equity and venture capital funds).

For those reasons, many private capital GPs choose the services of an experienced global provider, which can bring comprehensive global experience and local knowledge, and provide end-to-end services in fund administration and accounting.

Why Intertrust Group?

CSC completed its acquisition of Intertrust Group in November 2022. Together we offer a global solution for subsidiary governance, fund strategies, and capital markets transactions, and navigate the ever-changing compliance and regulatory environment that our clients face. With capabilities in more than 140 jurisdictions, we are able to do business wherever our clients are—and we accomplish that by employing experts in every business we serve.