China’s Third Plenum seen as plus for investors

The meeting that set the direction of China’s next ten years bodes well for private equity and the larger investment community, sources said.

Private equity and the larger investment community can take away a strong positive message from China’s Third Plenum, the meeting of top officials earlier this month that resulted in the boldest economic and social reforms in 30 years.

“It was about as positive a message as investors could receive,” said Paul Gillis, management professor at Peking University in China. 

“It cleared the underbrush with a lot of reforms that could make private equity more effective. The overall outline of reducing government interference in the markets and facilitating a greater role for the private sector portends a very positive longterm result.”

Gillis thinks the reforms will also facilitate the raising of capital internationally by Chinese companies. The variable interest entity (VIE) structure, which allows foreign investors to take stakes in Chinese companies in sensitive sectors such as internet and media, is on the way out.

“The VIE is an unsustainable form,” he said. “The details are not in yet. But China will likely allow sensitive sector companies to directly list abroad, possibly with some controls that could include two classes of stock. That could get rid of the need for the VIE form that investors dislike so much.”

All the reforms “point to the possibility of an environment that would be something quite effective for private equity”, he added.

Another decision from the meeting was the establishment of an intellectual property court in China. Gillis says China is now creating its own intellectual property, making IP theft a crucial issue. “It’s inevitable enforcement would be increased in that area. All reforms seem to be moving in the direction of protecting the rights of property owners.”

The European Union Chamber of Commerce in China also hailed the results of the Third Plenum as “impressive and bold”. However, the organisation noted that there were still questions about the dominant role of state-owned enterprises and the opening of sectors for foreign investment.