Mounting political tensions between Beijing and Washington are placing pressure on American funds to not invest in China, leaving the door open for some Asia-based private equity and real estate fund managers to fill the hole they leave.

If the antagonism between the two nations continues to mount, regional general partners (GPs) could become a more popular means for international asset owners – including those in the US – to make mainland investments.

The mounting tensions between the world’s two largest economies found its most recent outlet in Beijing’s plans to impose a national security law in Hong Kong last week. Meanwhile, US politicians are increasingly leaning on local investors to pull back from putting money into Chinese assets.

Institutional investors in Asia are closely monitoring these developments, but they generally face less domestic opprobrium for putting money to work in China than their US peers. That is leading many to continue to do so via regional GPs, even in the face of the Covid-19 pandemic.

Preqin data showed that China-focused foreign private equity and real estate funds raised $13 billion in the fourth-quarter of 2019, compared to $7.4 billion in the previous quarter. While that volume fell to $3 billion in the first quarter of this year, that was not a bad result given that Covid-19 emerged in late January. 

According to Preqin, no US based fund managers have launched any China-focused private equity or real estate products so far this year. However, there are 26 such funds in the market currently, including six open-ended real estate funds. In comparison, there were 34 such funds this time last year.

The most recent Asian-based GP to release a new investment vehicle was China Merchants Capital, in which Singapore's GLP has a 50% stake. It launched a $225 million fund to invest in start-ups in China in early May. 

Mark Fogle,
Baring Private Equity Asia

Earlier, Hong Kong-based PAG closed its SCREP VII fund on April 9, after gaining $2.75 billion in investor commitments, primarily from pensions and sovereign wealth funds from North America, Europe, the Middle East and Asia. The new fund aims to buy into distressed debt and property in Japan, but can make opportunistic real estate assets in China, Australia, Korea, among others. 

Elsewhere, Baring Private Equity Asia (BPEA) closed $480 million in commitments in March for a mainland China logistics joint venture.

Asia funds that include US investors have so far been unaffected by the increasingly tense politics. None have reported any withdrawals from investments in the mainland so far, nor any change to their investment strategies.

“Most limited partners' interest in China is driven by its fundamental economic growth story,” said a Singapore-based real estate fund manager, whose limited partners (LPs) include North American and Asian pension funds. "While some US investors are facing political pressure, there are no indications that they are pulling out," he said.

"The US-China trade dispute, the Covid-19 pandemic, and China's proposed national security law for Hong Kong are all fluid situations that could change the owners' view of market fundamentals,” said a director and founder of a Hong Kong-based real estate investment firm. “Having a strong balance sheet would help, but so far asset owners are still generally positive about the regional fundamentals.”

POSITIVE PROSPECTS

The appeal of Chinese investments is no great mystery. Mark Fogle, the managing director and head of real estate for BPEA, argues that while the country is facing short-term challenges, its long-term prospects continue to look pretty good.

“A lot of people believe that eventually, there will be some stability,” he told AsianInvestor.

Beijing has some big short and medium-term problems to manage. It began to reopen China's economy in April from a lockdown that it originally imposed on January 23 to contain the spread of Covid-19. China's central province of Hubei, where the novel coronavirus causing the pandemic was first detected, was the last to open its borders on May 2.

The country is now grappling with ways to improve economic growth, particularly at a time when appetite for its exports remain at very low levels as the rest of the world grapples with the virus. Its economy contracted 6.8% in the first quarter, and it has said it won’t set an economic growth target for this year due to uncertainties in trade.

Chinese companies also face US export sanctions, due to the ongoing spat between the countries over intellectual property theft, technology, security and human rights.

President Xi Jinping told his top economic advisers in Beijing last weekend that China was pursuing a new development plan in which domestic consumption is a crucial driver of future growth. The country had been seeking to bolster local consumption for some years, but Xi’s comments signal a redoubling of such efforts to make the country more self-reliant for growth. 

BPEA's most recent $480 million China logistics commitment was primarily driven by China's booming e-commerce trade, which has broadly benefited from the pandemic as consumers bought their essentials online, Fogle said. The fund’s focus on mainland logistics has helped insulate it from disruptions in global supply chains.

“For us, it is about where the domestic capital is investing. From a long-term standpoint, liquidity for real estate in China, we think, will remain very high,” said Fogle, noting that a residential asset was sold at a record price in Shenzhen earlier this month.

REMOTE INVESTING

Logan Property Holdings, the record holder for the most expensive land bought in Shenzhen, surpassed itself when it paid Rmb11.6 billion ($1.63 billion) for a plot in the city’s Qianhan financial district on May 15. The parcel of land can yield 183,000 square metres (1.97 million square feet) in gross floor area.

The deals come as China unveiled a sweeping plan to spur financial services and investments in the Greater Bay Area, which includes Hong Kong, Macau and nine Guangdong provincial cities. The plan, announced in May, is to develop the region into one of the world's largest economic areas.

Amid lockdowns, BPEA's venture was finalised with some investors unable to travel to China, said Fogle. To get around travel restrictions, multiple video cameras were installed on-site at all its projects to allow the fund's investors to monitor construction progress. The firm, which has over $20 billion worth of capital commitments, has invested in seven logistics projects in China from its logistics unit.

“Investors are more concerned with how we are managing risks on the ground; they want updates on operational issues as China begins to return to normal,” said the Singapore-based real estate fund manager.

As China eases its lockdowns, institutional investors in Asia are looking to kickstart projects that had been suspended for months. Many are considering how best to conduct their business in light of quarantine rules. “One of our senior management will stay for months rather than weeks,” he said. The company's main China office is in Shanghai.