China sovereign wealth funds provide safe route to investment success

With the mainland playing field far from level and an anti-graft drive under way, investors should keep eye on key state asset managers

PUBLISHED : Monday, 26 May, 2014, 5:06am
UPDATED : Monday, 26 May, 2014, 6:35am

Sometimes, investing in the mainland is a bit like stumbling into the Twilight Zone - especially if you are thinking about being a strategic investor in a major initial public offering.

The idea of taking a strategic stake appeals because you get access to business sectors that a foreign firm might find hard to enter, given the notorious barriers in many mainland markets.

But then you have to understand that even domestically, the playing field is far from level. The plum, fat deals go to the state-owned enterprises. Private companies and foreign business get the scraps that are left.

That helps explain why a decision by the National Development and Reform Commission, the country's top economic planner, to let private investors participate in 80 infrastructure projects previously closed to them has yielded almost no significant interest.

The reality is that under a centrally planned economic system, the best way to do business is probably to partner with government officials who have the power and flexibility to implement and adjust policies from Beijing.

Why be a private sector investor with all of the responsibility to deliver a project, but none of the certainty of the legal and regulatory framework required to earn a profit from it?

But that calculation is changing fast as Beijing's anti-corruption campaign gathers pace.

Foreign investors who learned long ago that forging close personal relationships were the best way to get business done are now having to rapidly reassess the relationships, how they were built and what risks may be attached.

A number of foreign companies have been accused of potential wrongdoings in business dealings in China, relating to concerns over bribery and corruption in order to boost sales or gain new business.

So how should a prospective strategic investor traverse this shifting landscape?

Follow the sovereign wealth funds is arguably the best advice - at least, according to some Western pension fund managers mapping the new terrain.

When China's powerful US$575 billion sovereign wealth manager, China Investment Corp, has a stake in a deal, other sovereign wealth funds tend to follow. As, by implication, they represent governments Beijing is friendly towards, it is reasonable to assume those deals are going to have good prospects for success.