One of China’s largest private equity firms, Hony Capital, has bucked fears voiced at a forum over China’s near-term prospects, pointing to “historical investment opportunities” as the nation develops a stable market economy.
At a general meeting hosted by Hony Capital in Shenzhen yesterday, Zhou Qiren, a professor at Beijing University, described over-capacity in the consumer sector combined with declining exports as a very serious problem.
He noted that this over-capacity had been built up to support global demand, and will be almost impossible for Chinese consumers to fully absorb. While rising urbanisation will likely boost domestic consumption, this will not happen in the near-term, Zhou added.
Many commentators have questioned whether China has the ability to transform itself from an export-focused to consumer-driven economy without experiencing a hard landing.
One research house recently argued that Chinese corporates will need to cut their debt levels eventually, which will inevitably lead to a recession. Economist Paul Krugman went as far as to describe the mainland as a giant ponzi scheme, again premised on the notion that it was building capacity without a corresponding increase in consumption.
But John Zhao, CEO of $7 billion Hony Capital, struck a different note. While conceding that continued uncertainty over China’s political and economic makeup, along with a stagnant IPO market, will likely keep many PE investors on the sidelines, he maintained that opportunities under president Xi Jinping would be “tremendous”.
“The central government has [made it] clear that it [will] adapt to a market economy, allowing the market to allocate resources,” Zhao said at the meeting. “This is very important to us.”
When asked whether Hony Capital would reduce its China exposure if the economy slowed further, Zhao said only that the firm remained “cautious on these issues”.
But he added that Hony Capital was very comfortable investing in the mainland and would continue to be so for the next 10 years.
He pointed to opportunities in consumer-driven sectors. “We have to consider how to grab these,” Zhao stated.
Hony Capital forecasts that China’s consumer market will increase by Rmb45 trillion ($7.4 trillion) within the next few decades, the same size as Japan and Germany combined.
Other sectors he sees as set to benefit from increasing urbanisation in China include health care, renewable energy, environmental protection and financials. Zhao is also keen on the photovoltaic industry, where he believes M&A opportunities will present themselves in coming years.
Hony Capital launched in 2003 and manages five US domiciled funds and two RMB funds. As well as providing PE capital, Hony helps Chinese entrepreneurs to meet potential investors abroad and introduces foreign investors to mainland companies.