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October 19, 2021

What's next in China?

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October 19, 2021

What's next in China?

MSIM Institute

What's next in China?

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October 19, 2021


This Q&A comprises edited highlights of the above-named session with panelists H. Chin Chou, CEO of Morgan Stanley Private Equity Asia, and Leon Sun, Lead Portfolio Manager for the China Strategies, Global Emerging Markets Team. The panel was moderated by Samantha Schoen, Global Head of Consultant Relations at Morgan Stanley Investment Management (MSIM) and Head of MSIM’s North America institutional business.


Samantha Schoen (moderator): We've recently seen a significant regulatory reset, as China’s government shifts its priorities from growth to balancing growth and seeks to tackle issues such as social inequality and data security. How do you see the impact of this new policy plan playing out and can you share any observations of how previous five-year policy plans have played out?

Chin Chou: If you look back over the last two to three decades, you can do nothing other than marvel at the tremendous progress that China's government, along with the private sector, has made in terms of economic growth, social development and a number of other factors that now position China as the second-largest economy in the world. So, with respect to these new announcements, I'm going to keep an open mind. The government is trying to tackle many important issues that are vexing countries around the world. And when I look at any new changes or challenges in China, the first thing I think about is the impact on the private sector; the impact on the entrepreneurial class. This is because over the last 25 years, what has driven China's economy is the most entrepreneurial environment in the world. In our discussions with entrepreneurs today in China, we don't see them changing their plans or becoming more cautious in their outlooks for the country. I expect entrepreneurialism and new business creation will be very strong in the years to come.

Leon Sun: I agree with Chin. China's GDP basically doubled from 2010 to 2020, and GDP per capita is now above US$10,000. At the same time, China has built up a social welfare and health care system and has been able to reduce poverty. I think the Central Communist Party does care about economic growth. For the next five years, I see the government seeking to achieve so-called high-quality growth instead of just high growth of the economy. We’ll likely continue to see further urbanization, growth in the middle-income class and a shift from an investment-driven kind of economic model to a more consumption-driven economic model.

Samantha Schoen: Chin, what observations would you have for global investors who are interested in the long-term growth opportunities in China but who are perhaps wary of the influence and role of the Chinese government as it relates to private investments?

Chin: I tend to take the counternarrative that China is unfriendly to foreign investors. I just don't think the facts back up that claim, both in public and private markets. For private market investors like ourselves, so many of us have made US$20 million, US$30 million, US$40 million growth investments in China over these past many years, and the rates of return from investments of this size could span from US$4 billion and US$5 billion right up to US$100 billion. I think China will continue to be an attractive destination for foreign investors.

Samantha: Chin, what challenges and opportunities do you see for private market sectors looking forward?

Chin: This might sound counterintuitive, but the vintages for private equity in China that have historically performed best have typically tended to align with times when international markets have either dismissed or ignored China. In other words, when folks don't like China, private markets, private vintages tend to perform better. The near-term challenge now for any portfolio manager like ourselves is reasonably straightforward. If you have companies in your portfolio that you expect to go public this year or early next year, you'll have to wait until investors look to buy growth again, given the recent regulatory uncertainties.

Samantha: Leon, what are your views on the MSCI China Index valuation given the recent pullback? And do you see the MSCI China sector composition shifting to a more balanced makeup over time as a result the regulatory changes?

Leon: I think the MSCI China Index looks attractive and that the multiple will rebound. The recent index derating was more of a multiple degrade; it wasn’t driven by earnings. China was the first to emerge from the pandemic and has been in a tightening policy cycle. Looking ahead, the Chinese government is going to provide more monetary and fiscal support to the economy. After a few quarters when the regulatory dust has settled, I think people will see that companies in many of the sectors hit by the regulatory campaign can continue to operate, have a decent, valid business model, and have more visibility in terms of earnings.

Digital and internet companies, I think, will continue to feature prominently in the aforementioned index. The penetration of online retail in China is still only around 22% and recently, the Chinese government has encouraged the buildout of e-commerce to the rural areas.

Given China’s focus on so-called quality growth, interesting sectors likely to see very good growth include the consumption sectors, which are benefiting from income growth and, in some instances, an aging population. One example here is biotech companies, which are really gaining in competitiveness. In the past, they were just licensing drugs from the Western countries, but now some of them are licensing drugs to the U.S. market. Other quality growth areas include some globally competitive industrial names. Some of these companies have increased investment in R&D and have the potential to gain market share internationally.

Chin: Just picking up on what Leon has said, I think the really big investment opportunity relates to domestic income growth. We expect China will mimic – over the next, say, five to 10 years – the dramatic transformation America experienced; from being a big manufacturing exporter to more of a domestic consumer services economy.

Samantha: China is the world's second-largest private equity market. How do you see the growth of the private equity market in China and can you comment on the interest you see in China private equity from both domestic and also foreign investors?

Chin: Certainly. Private equity globally has been a secular growth asset class where the investor base has scaled dramatically over the past 20 years. I expect interest in China private equity (PE) will continue to increase over time and for China to become a larger percentage of investors’ PE allocation over time.

In terms of the big private equity opportunities in China, this is all about identifying best-in-class entrepreneurs who are targeting one key area – domestic income growth. Over the two decades to come, what you'll see is the creation of an entrepreneurial class that mimics that of the Gates’ and Bezos’ and Rockefellers’ and JP Morgans, all within one period of time.

What’s interesting is that PE has been the “go-to” asset class to help fund these entrepreneurs. Almost every company that now goes public in the private sector has had private equity or venture capital in its shareholding base at some point in time during its lifecycle.

Of course, as the economy matures, that opportunity set is now broadening. Over the last 10 to 12 years, we’ve been spending more time with entrepreneurs in terms of restructuring their businesses, be it via M&A or other corporate finance tools. And then more recently, we've seen the development of a buyout control market.



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Chief Executive Officer of Private Equity Asia
Morgan Stanley Private Equity Asia
Managing Director
Emerging Markets Equity Team
Managing Director


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