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China’s new leadership is set to breathe life into its bureaucratic and highly leveraged state-owned enterprises (SOEs).

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And that’s good news because restructuring will benefit China’s state-run companies, says Kenrick Leung, director of investments at Amundi Asset Management in Hong Kong. He manages the Renaissance China Plus Fund.

“Over the last 10 years, a lot of the investment opportunities were in private enterprise,” he adds. “Over the next decade, they will be in the SOEs.”

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But, before the country liberalizes different sectors and opens them up to foreign investment, Leung says it’s trying to make state-owned sectors as competitive as possible.

“We’re talking about a lot of government companies that haven’t historically focused on return on equity or cash flow.” Now, those companies are spinning off non-profitable assets, conducting more risk management, and focusing on cash flow and earnings.

Take China’s telecom sector, for example, where government-owned telcos are sharing capex costs. “[That’s] very positive because the burden won’t fall on [any] one company. They will [all] be more efficient,” Leung says.

State-run banks will also win. Instead of being government conduits to channel funds, these banks will, over time, become profit-seeking and make loans to commercial enterprises, he adds.

“When you talk about the liberalization of interest rates and deregulation of the [financial] sector, initially most people think it’s negative — [that] as you liberalize the funding side of things, the deposit rates will go up.

“But, if you liberalize lending rates and go toward risk-based pricing,” explains Leung, “bigger banks, which have a large deposit franchise, can actually start making loans based on risk management.”

Still, certain firms won’t benefit from reforms. As China tries to clean up the environment, coal, oil and heavy industrials will be disadvantaged. Manufacturers will also suffer as their environmental and labour costs rise commensurately.

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But as wages rise, consumption-based companies will gain an edge. And other companies could see their fortunes turn in the next five years. Sports apparel companies, Leung says, are prime examples.

“They’ve been through a lot in terms of cutting out a lot of fat. Before 2009, all they did was grow their store network. But now, they’ve come to the realization it’s not just about growth; it’s about profitable growth.”

E-commerce, he adds, will be another theme. “Companies like Alibaba.com and JP.com have very bright futures. They won’t just benefit from China’s domestic growth, but also from global growth.”

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Originally published on Advisor.ca

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