Chinese Investors: Where They Put Their Money

Chinese investors are increasingly putting their money into a variety of alternative assets, such as real estate, private equity, and venture capital. The country's high-net-worth investors show a preference for private funds over stocks, and China's asset management market is predicted to become the second largest in the world. The composition of investing in China is quite different from that of the US, with Chinese investors favouring real estate over the volatile domestic stock market.

China's rapid economic growth and urbanisation have made it a significant recipient of foreign direct investment (FDI), which has helped to spur development and sustain its competitiveness in the global marketplace. China's large population and growing economy also make it an attractive nation for investors to commit capital to higher-end industries like healthcare, information technology, engineering, and luxury goods.

Fixed income products

Fixed-income products are a popular investment choice for those looking to capitalise on China's economic growth. These financial instruments offer investors stable returns and are often seen as a safe haven in turbulent economic times. China's fixed-income market has been steadily growing, presenting attractive investment opportunities.

One of the key players in this market is China Everbright Limited, which offers fixed-income funds with a focus on offshore debt of Chinese issuers. Their funds also include Asian and global securities to improve diversification. With the decrease in China's onshore interest rates and the opening of onshore financing to offshore issuers, the supply of quality offshore Chinese bonds has become constrained, making them very attractive investment options.

China Everbright Limited's flagship product in this category is the Everbright Dynamic Bond Fund, established in 2012. This fund offers USD- and RMB-denominated share classes, primarily investing in offshore Chinese bonds. The company also manages other funds, such as the Convertible Opportunities Fund, Special Situation Fund, and managed accounts for institutional and high-net-worth clients. Their total assets under management are around HK$ 13 billion.

Another important aspect of fixed-income investments in China is the use of Chinese Accounting Standards (CAS) or Chinese Generally Accepted Accounting Principles. These differ from the US's Generally Accepted Accounting Principles (GAAP), creating a layer of complexity for investors accustomed to GAAP.

When investing in fixed-income products in China, it is essential to consider the risks and regulatory differences. While China has adopted free-market principles, its communist structure and unique accounting standards can create challenges for investors. Nonetheless, the country's economic growth and massive population present a compelling opportunity for those seeking stable and diverse investment options.

Real estate

Domestic Real Estate

Despite a vast array of properties available in China, some investors turn to overseas markets due to strict laws and regulations, limited property types, and stiff pricing in the domestic market. From 2005 to 2009, property prices in Mainland China tripled, making it unaffordable for middle-class earners in major cities like Beijing and Shanghai. This surge in prices eventually led to a housing bubble that burst in 2011, resulting in a surplus of empty properties. In recent years, the Chinese real estate market has shown signs of saturation, with decreasing interest from local investors.

Overseas Real Estate

Chinese buyers have been actively investing in overseas real estate, particularly in the United States, Australia, and Southeast Asian countries like the Philippines, Thailand, and Indonesia. Several factors attract Chinese investors to international property markets:

• Price Differences: The surge in domestic property prices and the subsequent crash have made international markets more attractive in terms of value and price stability.
• Government Constraints: In China, most land is owned by the state, and citizens only have the right to use the land for a limited period, which is typically 70 years for residential and 40-50 years for commercial and industrial use. The inability to own land perpetually has driven Chinese investors to countries with more lenient property laws, such as France, Italy, and Australia.
• Variety of Choices: Investing in overseas real estate provides Chinese buyers with a wider range of options and allows them to diversify their investment portfolios.
• A Change of Environment: Environmental concerns, such as air pollution, and the desire for better living standards, have prompted some Chinese citizens to invest in properties abroad, especially in countries with better environmental conditions and educational opportunities.
• Social Standing: In Chinese culture, owning multiple properties is seen as a symbol of social status and achievement.

US Real Estate

Chinese buyers have been the top foreign buyers in the US residential housing market for six consecutive years, according to the National Association of Realtors. Initially, wealthy Chinese buyers purchased million-dollar properties in cash, but now, more middle-class buyers are entering the market, utilizing mortgages to purchase lower-priced homes. California has been a favourite among Chinese investors, but they are increasingly expanding into other states like Texas, Georgia, and Florida. Chinese buyers view the US as a "safe harbour" for their assets and a desirable location for their children's future.

Private funds

The involvement of the state in private equity has its benefits and drawbacks. Some investors and advisers say that taking government cash can help align private and public interests, and that state fund managers often understand local policy objectives. However, there are concerns that government funds are "squeezing out other [limited partners]". There is also a risk of a mismatch in interests, as government-guided funds are not chasing returns in the same way that private investors are.

The Chinese government has been seeking to channel more household savings into the capital markets to fund innovation and aid its economic recovery, while reducing the economy's reliance on bank lending.

Some notable private equity firms in China include Shenzhen Southern Equity Investment Fund Management, Nanjing Chunchao Fund, and Strait Capital Investment Group.

Foreign direct investment (FDI)

A significant portion of China's FDI outflows is directed towards Asia, particularly Hong Kong, which received over 60% of the total FDI volume in 2022. Additionally, around 10% of China's FDI flows went to the Cayman Islands and the British Virgin Islands. The sectors that received the most direct investment from China include leasing and business services, manufacturing, wholesale and retail trade, and financial services.

However, China also faces challenges in attracting FDI inflows due to geopolitical tensions, regulatory differences, and concerns about national security. In 2023, China recorded its first-ever quarterly deficit in FDI, indicating capital outflow pressure and difficulties in attracting overseas companies. The decline in FDI inflows may be attributed to factors such as US-China tensions, Beijing's closure of foreign consultancy and due diligence firms, and a stringent regulatory environment.

Despite these challenges, China's economic growth and urbanization continue to make it an attractive investment destination for many. The country's massive economy, large population, and low correlation with other major world markets make it a compelling opportunity for investors seeking diversification.

Local Chinese market

The local Chinese market is an attractive prospect for investors due to the sheer size of the country's population. This large consumer base makes China an ideal place for investors to commit capital to higher-end industries like healthcare, information technology, engineering, and luxury goods.

China's impressive economic growth, largely driven by urbanization, has been sustained over the years. From 1978 onwards, China's gross domestic product (GDP) growth has averaged almost 10% per year. This growth is expected to continue, with the World Bank predicting a 4.5% increase in 2024.

The development of infrastructure, including roads, highways, and bridges, has been a key driver of China's economic growth. This has lowered transaction costs and increased profits for businesses, making the country an even more appealing investment destination.

China's strong workforce, in terms of both numbers and aptitudes, is another factor that makes the local market attractive to investors. The country's workforce is essential to its manufacturing and service capabilities, which cater to both native consumers and world markets.

However, it's important to note that investing in China also comes with certain risks and challenges. The country's communist structure, regulatory differences, and issues with insider trading can deter potential investors. Additionally, government regulatory policies that favor state-owned entities over private firms have historically made China a less favorable investment destination, with high start-up costs and heavy legal exposure.

Despite these challenges, the local Chinese market remains a significant player in the global economy, and its growth shows no signs of slowing down.

Frequently asked questions