On Tuesday 24 November, ACFS hosted a roundtable with Ping An Asset Management Co. Ltd. (PAAMC) and a range of Australian fund managers, asset consultants and industry executives. PAAMC’s visit to Australia was facilitated by the Australian Trade Commission (Austrade). Jacqueline Zhang, Managing Director, led the PAAMC delegation, which also included Suzie Xie, Song Peng and Jiang Yongming. Below is a summary of the discussion.
Ping An Group, PAAMC’s parent company, is a Fortune 500 company and China’s largest non-state owned enterprise. The group is dual-listed in Hong Kong and the Chinese mainland. It has three core business units: insurance, banking, and investment (asset management). The asset management unit, PAAMC, was originally responsible for the assets of the insurance unit, but today manages a wide variety of assets (including equities, fixed income, property, infrastructure, alternatives etc.) for many third parties.
In mid-2015, PAAMC had assets under management of approximately RMB 1.9 trillion (AUD 413 billion), making it the third-largest asset manager in China – behind two state-owned enterprises, China Investment Corporation (CIC) and China Life. Approximately 60 per cent of PAAMC’s assets under management are invested in fixed income, perhaps reflecting its historical role as a backer of long-term insurance liabilities. There is room to grow in its exposure to equities and other classes. Unlike other asset managers in China, PAAMC has no retail business; it caters only to institutional investors. PAAMC provides what it describes as an ‘international standard’ service to a number of foreign institutional investors, including Middle Eastern sovereign wealth funds.
Ms Zhang noted that the company is interested in increasing its overseas exposures and is currently testing the Australian market. Low interest rates in China have made overseas investment more attractive. At the same time, the weaker yuan (in recent months) has led to greater interest in the Chinese market on the part of foreign investors. PAAMC has made individual property acquisitions in the United Kingdom and United States, but its foreign investments are still less than 1 per cent of overall assets under management.
PAAMC noted that its objective in investing overseas is to achieve greater diversification and a sustainable return. Its preference is to invest in major assets/projects, given the perceived high cost of assessing smaller investment opportunities. Among its current domestic investments, PAAMC has recently invested in a number of private equity projects. Technology and healthcare are sectors of particular interest.
One participant asked about recent corporate governance reforms for state-owned enterprises in China. PAAMC noted that the reforms apply to all companies, but that the focus has been on state-owned enterprises. The reforms are intended to result in greater transparency and information disclosure. Another question concerned the Qualified Domestic Institutional Investors (QDII) program. PAAMC noted that the program has expanded in recent years so that eligible Chinese investors can now invest in most asset classes.
One participant asked about the insurance market in China. PAAMC noted that the market is still relatively undeveloped, and that insurance and investment products are often conflated. It will take some time to educate clients about the kind of guarantee that insurance products provide vis-à-vis investment products.
Credit risk in China was a major concern for some roundtable participants. PAAMC’s position is that it expects to see some defaults in the near future, which will help to ‘improve the market’, but that the situation is ‘not that serious’. PAAMC noted that international credit rating agencies (Standard & Poor’s, Moody’s etc.) do not operate in China because of restrictive licensing. For this reason, PAAMC has a proprietary in-house credit rating system. Default risk is not just property-related; there are also issues with overcapacity in the steel and coal industries.
One participant asked about local government debt levels in China. PAAMC noted that the Chinese government has commenced a RMB 3.8 trillion (AUD 818 billion) debt swap program, which will help to take pressure off local governments. Another participant remarked that the market appears to have been slow to participate in this debt restructuring.
PAAMC was asked about its outlook for the future. It noted that fixed income in China was still seen as a ‘good’ investment (although bond yield spreads over developed markets will tighten as the United States raises interest rates). The Chinese equities market is still offering ‘good’ returns for those who invest through a knowledgeable fund manager. Foreign investors remain interested in property, infrastructure and alternative assets.
One participant asked about PAAMC’s approach to foreign currency exposure. PAAMC noted that it has an internal currency research team – but that hedging is very expensive for long-duration assets and the right hedging tools do not always exist. As such, every one of its foreign investments could have a net currency exposure.
A question was asked about the possibility of PAAMC conducting a capital raising onshore in Australia. Raising funds locally would mean QDII restrictions would not apply to those funds. PAAMC noted that it was open to the suggestion, but had little idea of the costs and benefits.
PAAMC noted that China’s bond market is growing in size, but is still small relative to GDP. The annualised return on bonds has been around 4 to 5 per cent over the past decade. Foreign holdings of RMB-denominated bonds have increased rapidly off a very low base. Low central government debt levels mean the Chinese government may employ proactive fiscal policy to tackle the economy’s ‘slowdown’. PAAMC noted that the value of the Chinese yuan is expected to decline, but it is not anticipating a large devaluation.