In November, Chinese president Xi Jinping delivered the keynote speech at the opening ceremony of the very first China International Import Expo in Shanghai.
Preparations were extensive: city schools closed, construction projects were suspended and even police officers posted in hotel rooms with sensitive sightlines to monitor guests who had not voluntarily vacated for the day.
Such measures signalled not just Xi’s singular status, but the importance of his message. “Economic globalisation faces headwinds, and multilateralism and the system of free trade are under threat,” he said. Diplomatically, he chose not to illustrate this point by referencing American threats of 25 percent tariffs, or 2018’s 90 percent drop in the value of Chinese outbound M&A transactions into the US.
Xi’s key theme – previewed in Davos in 2017 – was China as the defender of international economic order, leading by example. He emphasised that this was a continuation of a long-established liberalisation process – neither a knee-jerk reaction to external pressures nor a search for stimulus in the face of domestic deceleration.
Global investors can confidently expect China to pursue “a new round of high-level opening up” and to engage in a “major initiative to still widen market access to the rest of the world”. This means “stimulating the potential for increased imports” and reduced restrictions for foreign investors.
PE implications: sectors are key
What do such positive ambitions mean for private equity, if anything? Broad swathes of China’s economy were highlighted for greater openness: financial, services, agricultural, mining and manufacturing. Each sector has its own dynamic, and investors should be on alert to understand what tangible measures are planned; the speech itself provided notably limited specifics.
Private equity will be interested in accelerated access in such areas as telecommunications, education and medical services. Foreign equity caps are to be raised in two recent hotspots of financial investor interest – education and medical services – both of which are more insulated from tariff impacts and a domestic economic slowdown. More private equity activity is likely, especially in the healthcare space, as China features in regional consolidation and funds participate to get ahead of the wave in 2019.
Big funds are certainly getting stuck in. Carlyle Group, along with Meinian Onehealth Healthcare, a listed China-based company engaged in the provision of physical examination and medical services, acquired a 66 percent stake in ADICON Clinical Laboratories, a Chinese clinical laboratory. Meanwhile, KKR, through its newly-formed holding company SinoCare Group, a Chinese hospital management platform, acquired an undisclosed stake in HeTian Hospital Management, which operates two hospitals in the eastern province of Anhui. SinoCare intends to drive HeTian’s expansion and growth through acquisitions, with a focus in third- and fourth-tier cities where medical resources are scarce and quality healthcare services are lacking. This chimes with the Chinese government’s encouragement of more medical resources being extended to lower-tier cities, where there is urgent need but currently limited supply and high costs for medical treatments.
The finance sector has already provided evidence of widened market access. American Express’s long-awaited license to process RMB payments in China was issued days after Xi’s speech and duly celebrated as a breakthrough. Yet UnionPay has enjoyed a long-held effective monopoly on domestic card payment systems, and Alipay and Tencent have transformed the Chinese consumer experience so that using cash feels antiquated and cards cumbersome. Amex will enter a hyper-competitive environment, facing up against dominant and sophisticated incumbents who are themselves already expanding overseas.
Insurance is more promising, being one area where private equity has shown it likes to deploy decent chunks of capital efficiently. Off the back of some serious Asia-oriented fundraising over the past couple of years, investments of scale are of particular interest. Many global PE players have both the appetite and the firepower to enter China’s insurance sector. Carlyle has multiple small stakes in Chinese financial services companies such as Du Xiaoman Financial and JIC Leasing. In August 2018, it acquired US-based DSA Reinsurance for $476 million and Blackstone acquired Acrisure for $2 billion at the end of the year. Apollo and Warburg Pincus are also active, and could well be exploring larger stakes and larger deals that have previously been off-limits.
The other side
However welcome it may be, any ongoing economic liberalisation will struggle to fully offset either the slowdown of the domestic economy or the related disruption from continued American pressure. US-China trade relations are liable to be problematic into the medium-term at best. The modest foreign direct investment statistics show that China has already lost ground here, being overtaken by India for the first time in 20 years.
Many businesses are looking to adjust to be less China-dependent. In particular, export-oriented manufacturing will rebalance towards South-East Asia, with Vietnam and Malaysia being two favoured destinations. M&A will be key to that process, involving acquisitions of companies with facilities and skills that can be quickly dedicated to take on activities displaced from China. Regional private equity may have an arbitrage role to play if sufficiently nimble.
Sponsors are thus entering a turbulent 2019, China’s efforts notwithstanding. Trade tensions merely steepen the hill for an economy that was already slowing under debt deleveraging. This year will struggle to be a vintage one for either RMB fundraising or IPO exits.
Yet, in a market of China’s size and secular momentum, bright spots will remain. An aging but wealthier population hungry for better health, education and life experiences will generate opportunities even in the face of a wider slowdown – and the majority of these will have made good investment sense regardless of regulatory easing directed from on high. Sophisticated and patient investors with dry powder in hand will seek out, find and profit from them.
Mark Webster is a managing director based in Shanghai. He joined BDA Partners in 2005 and has experience at Standard Chartered Bank and JPMorgan. He speaks Mandarin, Chinese and French.