Chinese investment companies (ICs) have come to the fore internationally, with rapid expansion over the last five years due to loose monetary policy and government support for overseas expansion of local companies. But that rapid growth may not have been matched with corresponding risk management, according to a recent report from Fitch Ratings.
Overseas expansion has become important in the strategies of ICs, which have acquired an advantage in making foreign acquisitions, with targeted businesses tempted by access to the Chinese market and other opportunities afforded by IC portfolios. From 30% to 40% of the total assets of ICs are bound up in overseas investments, Fitch estimates. Foreign acquisitions have even become necessary for portfolio diversification, but such expansion is also in accord with the government’s “going out” policy that encourages companies to invest and operate abroad.
The government has recently sought to curb capital outflows and check foreign direct investment, but ICs keep foreign currency offshore and have expanded access to offshore capital markets, which can help in foreign acquisitions without increasing capital outflows, the ratings agency said.
Concern lies in the fact that the ICs’ strategies and risk controls have not been tested by market volatility or an economic downturn. These companies also have less-sophisticated tools for reporting risk compared to more developed countries. The fact that ICs have been able to meet performance targets is attributed by Fitch to favorable market conditions. A reliance on divestment proceeds and bank loans to meet cash outflows creates the risk that ICs could be pushed into a “fire sale” environment if there is stress in liquidity, Fitch said.
Chinese IC assets enjoyed a compound annual growth rate of 67% in five years to the end of 2016, reaching a value of $1.5 trillion. Fitch expects assets to rise by more than 25% each year over the next five years.
– Adam Fusco, associate editor