Saturday, August 25, 2012

China Slow Down a Game Played by US and Europe.


Private equity position in India market is quite well known to everyone. In simple words they are struggling to get deals where they could find the horse of profitability doubles in every game. In an recent study in my research I find that the second largest economy in the world is too struggling with Private Equity. In India it is quite hard to find out the number of Private Equity players since every passing few takes birth and few dies. Prime reason is data bases management in which India ranks one of the lowest. China had more than 10,000 venture capital and private equity firms at the end of 2011, according National Development and Reform Commission (NDRC).Moreover those companies managed nearly 2 trillion yuan ($313.9 billion) in assets. The number of VC are on the increasing mode despite of the much acclaimed that Chinese economy is slowing down. Well when an economy slowdown how numbers of VC jumps by 34% in 2011 compared to 2010 leaves many of us to doubt about the real meaning of lows down.

If an economy slows down, then it is reflected in the investment numbers and also on the assets being managed by the VC segment. But unfortunately according to the NDRC reports that the value of assets managed by these 882 firms had increased by 41.5 percent to 220.7 billion yuan ($34.6 billion) at the end of last year(2011).
Local firms in china are actively scouting for good deals. Further in china most preference is being given to local based VC than foreign based VC. This is just the opposite in case of India. According to the Asian Venture Capital Journal, investment by Chinese firms rose to $7.8 billion in 2011, exceeding for the first time the $7.4 billion invested by U.S. and other foreign funds. Drilling further I found that according to Centre for Asia Private Equity Research Ltd From September to December of 2011, US$4.9 billion worth of deals were recorded, while in the same period of 2010 there were US$3.9 billion
Moreover, yuan-denominated private-equity funds have raised $41 billion in the past two years, which is more than double the U.S. dollar amount in China. This clearly shows the depth of local based VC funds preference. At the same time the shift of investors using Chinese currency has resulted in a 45 percent drop in investments by foreign funds in 2011, even though the value of private-equity deals has doubled since 2009.To put it in simple words Foreign capital hardly finds way into Chinese market since China itself is sufficient enough to open shops for VC.

The ongoing slow down in Europe and US has left few options for the global Private Equity to find profitable investments keeping in mind the exit option through IPO. Since exit through IPO in US and Europe is less profitable as compared to China, many foreign shops are opening their shops in JV with Local Chinese VC firms. In my research I found that A Capital a Beijing-based European private equity firm which did predominantly investments in Europe is now scouting for investments opportunities in China andtrying to rise up to 500 million euros ($613.6 million) from Chinese investors such as ChinaInvestment Corp, the country's sovereign wealth fund for doing investments.

Well apart from VC Chinese stock market is well attracting inflow of capital. Qualified Foreign Institutional Investors in china are buying China’s stocks at record low prices, increasing their portfolio with net capital inflow of 8.77 billion yuan (US$ 1.4 billion) within the past two months. In my research I found that QFIIs raised 8.77 billion yuan investment in China since June to July 27, equivalent 84 percent of accumulated net capital inflow QFII had in the first six months this year. RQFII, at the same time, enhanced 4 billion yuan (US$ 0.63 billion) in China’s A-share market. I still doubt about the slowdown of the Chinese economy.
I find the slow down story to be cooked in order to keep equal parlance with the US and European slow down. Moreover even if China slows down to 7% GDP it is still way above the US and Euro zone GDP growth. This simple revels that slowdown is buzz is more cooked by the Foreign countries of China just to attract the flow of capital into their own bond buying proposals declared by Euro and US. Well this is further proved by the Statistics from China’s stock regulator reveals that in the first half QFII only saw 225 million yuan capital outflow in January, while remaining five months QFII enjoyed a net capital inflow respectively and sustainably, with accumulated net capital inflow of 10.4 billion yuan. QFII’s net capital inflow, nevertheless, soared to close 8.77 billion yuan in June and July, or 84.18 percent of accumulated capital inflow QFII enjoyed in the first six months. Slow down is just a game for China and an strategy to degrade China by US and Euro zone. Both parts of world are well proven expert player of the global financial system.

In coming months Chinese markets will find further stupendous inflow of capital since there are 147 QFIIs to gain the approval from State Administration of Foreign Exchange (SAFE) along with the QFII investment quota grew by US$ 1.17 billion in June. One will argue that according to the recent data FDI inflow in china has dropped. If an economy is well sufficient for funding and where local players are big enough and preferred most for investments does FDI drop in china really affect? I doubt and I hope you doubt too.

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