Howard Wang, JP Morgan Asset Management
China’s bond and credit card markets are underdeveloped, and mainland investors do not hold many equities, Wang told FSA.
“They hold too much cash and real estate,” he continued. “In Taiwan, which is farther along in liberalisation and development, you’ll see a higher proportion of equity ownership.”
Therefore, as China continues to develop, he sees financial services offered domestically as investment opportunities.
Wang’s fund, the JP Morgan China Pioneer A-share Fund, is up 44% over the last three years. It targets financial service providers with a clear retail strategy as opposed to companies accumulating a variety of offshore businesses.
As of the end of January, it held 33.6% of assets in the financial sector, according to FE. The fund has 50-55 holdings with an average stock held for 18-24 months. The insurer Ping An and China Merchant Bank were among the top five holdings.
Wang said the H-share listings of many mainland banks and insurers are significantly less expensive than the A-share counterparts and his fund holds roughly 10% of assets in Hong Kong-listed companies.
Insurance retail vs offshore
Insurance is another growth area. Wang said he believes that the fledging insurance market will increasingly sell high-margin products to households. “Too many Chinese families own savings-type products and don’t buy sufficient [insurance] protection,” he said.
Despite the positive outlook for insurance, Chinese regulators have watched them closely because of ambitious overseas acquisitions and expansion of debt.
Last month, Beijing-based insurer Anbang was taken under control by Chinese authorities for one year due to the excessive risk it presented. Officials said Anbang had a high debt level that resulted in a fragile corporate structure, according to local media. The takeover is aimed at preventing systemic financial system risk, something authorities have pledged to tightly control.
Anbang had been aggressively buying assets overseas such as prestige hotels in New York and a retirement home chain in Canada. It also bought Allianz Korea, which operates a life insurance and asset management business in South Korea.
Wang believes that in general the financial sector looks healthy in terms of the level of corporate credit. China’s authorities have made progress in reducing the scale of the shadow banking sector and high corporate debt, he said.
A report from Northern Trust supported his view, saying China’s financial reform is progressing. “Beginning last year, the Chinese central bank began tightening credit conditions. Interest rates were raised and new limits on leverage were enacted. Credit growth is moderating, and speculative investments have been curbed. Growth in credit is now much closer to growth in gross domestic product, and the [risky wealth management products] market has slowed to a crawl.”
One concern is that limiting credit will slow economic expansion, the bank said. Wang added that an increase in inflation is a near-term risk to his thesis.
China’s onshore stock markets have presented challenges for foreign institutional investors.
Greg Kuhnert, portfolio manager at Investec Asset Management, argued that mainland-listed companies still need to improve transparency, which remains an obstacle to institutional investment.
The development of investor relations in China is still in infancy compared to the Hong Kong market, which has a much higher percentage of institutional investor participation, Kuhnert told FSA in an earlier interview.
For Wang, however, company disclosure is not a major challenge.
Describing the market as “a level playing field”, he said that the A-share market does not appear as a place of asymmetric access of information. Making direct contact with the companies, their consultants and distributors could overcome disclosure challenges, he added.