Qingshan Kang of JD Capital：Identifying investment opportunities in a transitioning China | Preqin Thought leaders
2023-08-02
Source: PREQIN
Original post: https://www.preqin.com/insights/research/blogs/identifying-investment-opportunities-in-a-transitioning-china
By Qingshan Kang
Chairman and CEO of JD Capital
Through 16 years of extensive market engagement, JD Capital examines the investment landscape in China
Following the easing of COVID-19 control measures in China this year, economic activities have rapidly recovered. Economic performance in the first quarter demonstrates the robustness and potential of the Chinese economy, with the country likely to achieve its target of a 5% annual GDP growth rate in 2023.
However, it is worth noting that the growth rate of the Chinese economy is slowing compared with the rapid growth of the past several years. This slowdown can be attributed to China’s deliberate transition from high-speed growth to focus on high-quality development, marked by increased emphasis on green initiatives, innovation, and equity.
In the past, China has grown rapidly in multiple industries through extensive development. However, the Chinese government’s focus has shifted to sustainable, high-quality development, actively promoting the upgrading of traditional industries and increasing efforts in nurturing strategic emerging industries. China established the 1+N policy framework for ‘dual carbon’ in 2021, which encompasses unified guiding policies and implementation plans in sectors such as energy, industry, transportation, and urban-rural construction. Additionally, the government has introduced a series of measures to support technological innovation, aligning with the strategy of driving development through innovation.
These trends are indicative of China's economic development reaching a more mature stage, when market participants must prioritize both economic benefits and the quality of social development. This shift underscores the growth potential for private equity investments aligned with sustainable development trends in China.
How to seize China’s current investment opportunities
China’s leading companies in select industries are capitalizing on unique growth opportunities. Those opportunities are coming from industry consolidation, import substitution, and innovation-driven growth, as well as digitalization and green development, which all align with sustainable development.
Our recommended investment strategy focuses primarily on growth opportunities in the advanced manufacturing, consumer, and healthcare sectors. We prioritize leading companies with competitive advantages in industries that exhibit faster growth. Our key investments are directed toward bridging gaps, supporting specialized enterprises that have innovative and self-controlled technology, and identifying opportunities in niche sectors where China has a competitive advantage, such as new energy. Throughout the investment process, we prioritize environmental protection, social responsibility, and corporate governance.
One example is our involvement in green agriculture. Our investment team conducts in-depth industry research to suggest a proposed investment list. Our research has revealed that Chinese agriculture is undergoing modernization, transitioning toward capital- and technology-intensive models. Companies with competitive costs and services are poised for rapid growth. Meanwhile, our deal-sourcing teams explore opportunities in regions including the Southeast, Western, and East regions of mainland China, supplementing industry research and identifying high-quality enterprises that complement the findings. This has led to us being strategically invested in leading enterprises in green agriculture, including Limin Group (an enterprise integrating the research and development, and production and sales of agricultural and veterinary drug raw materials and preparations) and Flagchem (a company focusing on new, efficient, green pesticide research and development, and production).
Furthermore, based on our understanding of China's national conditions and governance philosophy, we avoid sectors dominated by state-owned enterprises, or where state-owned enterprises hold advantages. We also avoid sectors involving wealth transfer rather than wealth creation, as well as those associated with monopolistic platforms and significant negative public sentiment related to people's livelihoods.
Understanding China's governance philosophy
For example, recent policy adjustments by the Chinese government in specific industries, including internet and edtech, have raised concerns about policy uncertainty. It is necessary to contextualize this aspect within China's current situation to gain a comprehensive understanding.
The rapid development of the internet in China has greatly enhanced social efficiency. However, as internet platforms grow, they tend to exhibit monopolistic characteristics. ‘Preventing and defusing major risks’ was a key objective outlined in the 19th National Congress of the Communist Party of China, therefore, it is necessary to prevent large internet platforms from forming monopolies in sectors that impact livelihoods and guard against the risk of platform-related issues translating into broader social and financial risks.
Policy adjustments in the education sector are driven by the long-standing issue of high pressure on students and parents within China's exam-oriented education system which has elicited strong public feedback. Guided by the governing principle of serving the people, the Chinese government takes proactive measures in areas that generate particularly significant negative public sentiment.
Looking back, many emerging industries in China have undergone a cycle of development, observation, rectification, and then further development. However, through this process, the Chinese government has prioritized risk prevention and promotion of sustainable development. The objective behind these policy adjustments is to continuously optimize social equity and enhance the quality of people’s livelihoods.
Drivers of China's sustainable economic growth
China’s sustainable economic growth is driven by a combination of internal and external factors. Internally, China has maintained long-term political stability, adapted a market-oriented economic system, and remained committed to openness. Furthermore, the inherent driving forces of China's economic development are still substantial. While the size of the economy is significant, the per capita basis is relatively low, with per capita GDP in 2022 at approximately $12,700, about one-sixth of the US. This indicates room for growth.
Looking at the external environment, we believe there is no need for any significant concerns about geopolitical risks or the risk of a China-US decoupling. China has already become a major trading partner for global economies. Unless major economies are willing to endure significant losses, it is unrealistic to replicate China's demand in other markets. In fact, trade data released by the US Department of Commerce shows that the total goods trade between China and the US reached $690.6bn in 2022, surpassing the previous high of $661.5bn in during the trade war in 2018.
There is no denying that China remains an indispensable market on the global stage. To discover sustainable investment opportunities, it is essential to comprehend the governing philosophy of the Chinese government and grasp the intrinsic driving forces behind China's economic growth.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and JD Capital providing the information in this content accepts no liability for any decisions taken in relation to the above.