The Chinese stock market volatility has been at the center of attention in the financial world lately. Is the turbulence a sign of a Chinese downturn or is it temporary inefficiencies that may open new opportunities? Martin Mok, Partner and Managing Director at Investment Advisor EQT Partners in China shares his view on the development in the region.
Please give us the “big picture” – what is the background to the turmoil?
During the global financial crisis, China responded to the slowdown in external demand with significant increase in domestic production capacity. The belief was that this would generate jobs and sustained income growth while exports would climb back to the pre-crisis levels. Indeed, in the first three years, this contributed to strong GDP growth in Asia, but the export growth has not returned to the pre-crisis levels. Furthermore, the real estate sector slowed down in 2013, following the Chinese government measures to keep property prices in check. This struck hard on many suppliers in the construction sector. In all, this resulted in excess capacities and deflation in producer prices.
What is China doing to stabilize the situation?
The government is somewhat caught between the goal of implementing far-reaching reforms and the urge to fix problems as they emerge – even though short-term fixes could go against long-term goals. For example, the IPO reform has taken a few years and is still in progress. It remains a very policy driven market. China is learning, and this process can bring ups and downs in the short term, but I am confident that China will get there.
Many investors consider the Chinese market as somewhat of an enigma. In your opinion, what is key to succeed in the region?
China is huge. Doing business in Shanghai is very different from doing business in Chongqing or in Changsha. I believe the key to success is to understand the local markets and know how to support local business with global resources. China today is a lot different from 2006 when the EQT Greater China II fund was raised, but EQT’s industrial acceleration approach, ‘locals with locals’ advantage, and strong track record in the region have created credibility in the market. This secures trust from entrepreneurs, which can be more important than upfront valuation.
How does the volatile stock market affect private equity investors?
While the recent volatility may help ease the expectations entrepreneurs have on valuations, the abundance of both foreign and local private equity money results in a competitive deal-doing environment, much like everywhere else in the past few years. Players who focus on pre-IPO redemption protection (hanging the exit on the rising stock market) are highly susceptible to market volatility. As entrepreneurs are opening up to buyout or co-control deals, and with founding management staying on in most of these deals, a GP’s capacity to work hand-in-hand with them have become increasingly important. So, market inefficiency also means opportunities.
Looking ahead, what kind of investment opportunities do you find most interesting in the Asian region?
High-quality businesses where EQT’s industrially oriented approach can be applied. There are opportunities opening with a growing middle class who can be provided with better products and services. EQT has historically done good investments in sectors such as consumer, retail, healthcare, business services and industry. Going forward, more emphasis would be put on business services, consumer services and healthcare.