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Chinese Companies Park Record $110bn in Wealth Products

Cash-rich Chinese corporations are running out of places to invest.


As economic growth cooled and investment opportunities ebbed in China last year, listed companies moved a record $110bn of idle cash into financial products, mainly at banks, according to data from Wind Financial Information.

The flood of company funds into wealth management products — up some 40 per cent on the previous year — was a sign that many groups in the country shunned risky corporate expansion amid the economic slowdown, instead preferring short-duration investments.

Almost half of the products bought by companies had a maturity of one to three months.

“They believe that these products offer attractive returns relative to risks compared with other investment opportunities, particularly as the economy is still under downside pressure,” said Chua Han Teng, a senior analyst at BMI Research in Singapore.

China’s gross domestic product grew 6.7 per cent in 2016, hitting the high end of a government target but still the slowest pace of growth since 1990.

In early 2016, policymakers signaled that they would again unleash stimulus spending targeted at state-owned groups, while also promoting consolidation through mergers and acquisitions.

Those efforts came up short last year. The value of domestic M&A in 2016 fell 19 per cent from the previous year following two years of rapid growth. Fixed asset investment in China grew 8.1 per cent year on year — the slowest rate since 1999.

About $64bn of the cash companies invested in wealth products had been raised from investors through initial public offerings and private placements, indicating that despite the low appetite for corporate investment, Chinese groups still sought to hold on to cash.

“It does suggest inefficiency in China’s capital and credit markets that Chinese companies have to deal with by precautionary cash hoarding,” said Liao Qiang, S&P Global Ratings senior director of financial institutions.

Capital expenditure for corporations in China declined starting in 2012, prompting companies to remove or reduce spending plans from their annual business strategies, said Catherine Yeung, investment director at Fidelity International.

In 2016, many groups saw an unexpected increase in profits that left more cash at hand than expected, she said. Company managers could deploy some of those resources in the second half of 2017 if economic conditions hold up.

“Free cash flows were picking up [in 2016] but you didn’t see the capex cycle turn,” Ms. Yeung said. “Especially in the second half [of this year], it will be interesting to see if capex picks up.”

Over the past four years, Chinese regulators have leaned on listed groups to pay out regular dividends in the hope of bringing mainland bourses more in line with international standards.

The wealth management investments show that many state-held groups still refuse to return cash to shareholders.

“The state still has strong holdings in many of these companies, often more than 50 per cent. So institutional investors cannot put pressure on companies to pay out dividends,” said Wong Chi-man, executive director at China Galaxy International Securities.

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Chinese Overseas Real Estate Investment Hit New Record of US$33 Billion in 2016

China has hit a record of US$33 billion in overseas commercial and residential property investment in 2016, an increase of nearly 53 percent year-on-year, according to the latest data from JLL’s Global Capital Flows.

While investment in land, offices and hotels account for 90 percent of all Chinese outbound capital in the last three years, the hotel and industrial sectors showed the largest increase in 2016 due to significant transactions in the U.S. in the form of portfolio sales and Chinese appetite for industrial parks.

“Hotel activity last year was boosted by the purchase of Strategic Hotels and Resorts by Anbang Insurance for over US$6 billion,” says David Green-Morgan, JLL’s Global Capital Markets Research Director. “China Life Insurance has secured assets across the hotel and office sectors with portfolio purchases from the Starwood Capital Group and an office tower in Manhattan; sovereign wealth fund Chinese Investment Corporation has been active in the office sector in New York as well.”

Land acquisitions by Chinese investors made a comeback last year, with a rise of 44 percent following significant transactions in Hong Kong, Australia and Malaysia.

“We do believe that Chinese investors will continue to be major movers of capital into global real estate for many years to come,” says Green-Morgan. “But a similar increase in 2017 may be challenging given the recent discussion about China monitoring its capital outflows.”

Overseas investment aside, Chinese investors further deepened their investment domestically. They accounted for more than 86 percent of transactions in China in 2016, up from about 75 percent in the past few years.

The tier 1 cities were most attractive to these investors, according to Johnny Shao, Head of Capital Markets for Shanghai and East China, JLL.

“Total transaction volumes in Shanghai reached US$14 billion, accounting for 48 percent of China’s total investment volume. Beijing was the runner-up, accounting for 16 percent of all the transaction volume in 2016, while Shenzhen came in third, reaching 10 percent of the total,” says Mr. Shao.