A Comprehensive Guide On How Singaporeans Can Make China Investments Successfully
This might be a cliché, but China is an economic miracle since the Open Door Policy of 1978. Interestingly, the world’s second-largest economy is still opening up with a new phase coming in 2020. This makes China’s investments more attractive today than ever before.
Debunking Myths About China Investments
China is an interesting proposition as an investment destination. First, most of the focus that the country gets from outside seems to dwell on things that do not go right. For instance, people all over the world are aware that the Chinese economy is in decline since 2011. However, what many people fail to realize is that China is changing its economic model from export-oriented to service-oriented. According to an analysis by BlackRock, the drivers of growth of the Chinese economy are shifting from exports to domestic demand. China’s homegrown brands like Huawei are giving serious competition to US-based tech companies.
Another issue that worries potential investors in China is the debt level. According to the Institute of International Finance (IIF), China’s total debt-to-GDP ratio topped 300% in July 2019. This implies that the debt makes up 15% of the global total. While the debt has remained high since the 2007/8 Great Recession, it is apparent that corporate debt is the largest. In 2017, for example, the share of corporate debt was 160% of the total. In contrast, government debt took up 47% of the total debt-to-GDP, while household accounted for 48%.
Nevertheless, many investors fail to acknowledge that majority of the corporate debt is yuan-denominated. This is to say that changes in the yuan-USD exchange rate do not have a significant dent on the corporate debt levels. In addition, this is evidence that China can service its dollar-denominated debt obligations without a hitch. Therefore, one cannot conclude that China is in a debt crisis, as some analysts do.
An opportunity you should not ignore
Unlike 25 years ago, China is a major player in the global economy today. The as of November 2018, the gross domestic product (GDP) for China was $13.6 trillion, just $6 trillion short of matching the US’. Interestingly, this rivalry is stocking up major developments like the ongoing US-China trade war. The incredible growth of the Chinese economy is evidence that there is huge investment potential.
After the US, China has the largest equity market capitalization. According to World Bank data, China closed 2018 with the equity market capitalization at $6.325 trillion. This is the value of all listed domestic companies. In comparison, the US closed the year with a capitalization of $30.436 trillion. Despite the huge chasm, China is the second best, beating markets like the United Kingdom and Japan.
Source: World Bank
Moreover, China is gearing up to lift restrictions on foreign ownership of domestic securities by investors. Notably, China’s foreign direct investment (FDI) inflow is quite low. In 2018, the total FDI inflow stood at 1.495% of China’s GDP, according to World Bank data. Interestingly, this is evidence that China is under-owned, especially by foreign investors. Overall, there is a strong case for China’s investments.
The process of investing in China
In 2018, China pledged to open itself up more to foreign investors. According to the People’s Bank of China (PBOC), foreign firms and individuals will be free to invest in the country without any restrictions. This is a huge opportunity, especially for Singaporeans. Interestingly, Singaporeans are already snapping up investing opportunities in China in huge numbers. What about new investors? We explain the process through which new Singaporean investors can snap up more investments in China below.
Like any other country, China takes foreign investors through a rigorous review process before allowing them to invest. In particular, the review ensures that the country does not become a conduit for a money-laundering scheme. Further, the country as an industrial and economic policy that needs protection.
Once cleared by the government, one is free to explore the market for investment opportunities. If, for instance, you would like to invest in the country’s massive stock market, you need to register with a local stockbroker. However, there are international brokers like UOB Kay Hian and OCBC Securities that offer access to China’s stock market. After opening a brokerage account, you can now access either China A shares or B shares. Oftentimes, the A shares (denominated in renminbi) are popular among local investors. The B shares (priced in Hong Kong Dollars and USD) are popular among foreigners.
However, the process is different if you prefer to invest in using investment vehicles like foreign-invested partnerships. In this case, investors will be subjected to different types of approvals. For instance, the Ministry of Commerce (MOFCOM) will conduct an anti-monopoly law review of concentrations. Other reviews include the national security review, registration of the foreign-invested partnership enterprise, and project approval, among others.
China is shifting its growth from export-oriented to reliance on the services sector and domestic demand. As such, there is a huge range of investment opportunities through a variety of vehicles. Nonetheless, the most popular investment vehicles are the stock market and the exchange-traded funds (ETFs). Usually, these vehicles are available to individual and institutional investors.
There are other investment opportunities in China that might need more complicated investment vehicles. For instance, investing in China’s property markets might require you to use an equity joint venture (EJV) or a wholly foreign-owned enterprise (WFOE). Usually, this depends on your investment interests and the size of the investment you intend to make.
Advantages of investing in China
China is a rising global power, both economically and politically. As such, it presents a great alternative for Singaporeans who want a safe place to put their money. This is because economic and political are all sources of safety for investments. Interestingly, China’s rising star should attract more investors from other parts of the world going forward. As such, the value of Chinese assets has a better chance of growing in value compared to Singapore.
Further, China offers better growth potential for your portfolio than Singapore, based on its economic growth. Notably, China’s economic growth for Q3 2019 was 6%. In contrast, Singapore’s economy grew by just 0.5% y-o-y during the same period. Evidently, China presents a better investment opportunity than Singapore.
Disadvantages of investing in China
The political structure of China makes the country less predictable in terms of policy. Notably, the Chinese Communist Party has tight control on the government apparatus, and hence, the subsequent lack of democracy is destabilizing. Further, this monopoly of power means that corruption is endemic due to a lack of proper checks and balances.
Additionally, China is an aging society. The one-child policy that the country maintained for decades is driving a worrying change in the demographic landscape. Initially, a predominantly young population meant that Chinese companies had access to cheap labor. However, an increasingly aging population implies that labor supply will be low as wages increase. Overall, this demographic change could contribute to further slowdown of the economy.