Transition time

While there was never any doubt that the National People's Congress, frequently described in Western media as China's Potemkin parliament, would endorse Xi, his resounding confirmation was greeted by investors as a sign of continued stability. While private equity investments have been slow, it is likely they will pick up.

Although unrelated, foreign direct investment into China rose the first time in nine months - up 6.3% year-on-year to $8.21 billion - as investor confidence in the world's second-biggest economy begins to improve.Chinese companies' appetite for outbound M&A also continues, with outbound direct investment jumping 147% to $18.4 billion. While a majority of these deals are done by state-owned enterprises (SOEs), private equity professionals expect to be a more active participants in this trend.

Newly installed Premier Li, a PhD graduate from Peking University, announced a number of policies that looks positive for the PE industry. In his inaugural briefing, Li promised to crack down on corruption and clean up pollution. While the impact of the former will be hard to gauge in the short term, the latter could open up more opportunities not only for cleantech-focused investors but also for larger private equity firms looking to take advantage of the depressed market for "green" companies, many of which are overseas-listed.

Just in the last few days, Suntech Power, China's largest solar panel producer, defaulted on $541 million worth of bonds.

The new government has also promised to take a lesser role in the economy as it recognizes the need for mutual cooperation between public and private sectors if the country is to achieve 7.5% annual growth through 2020. It has long been accepted that to keep the Chinese economy in its current drive, the nation will need to rely more on domestic demand for expansion.

Private equity has always played a role in promoting the Chinese economy with its investments in consumer- and services-related industries and, according to AVCJ Research, its influence has spread beyond the metropolises of Beijing, Shanghai and Guangzhou/Shenzhen. Investment in Zhejiang province, for example, came to $2.5 billion in 2012, up 342% from 2010. Shanghai is the only one of the big three hubs to see a rise in investment over the period and the statistics are skewed by a number of larger deals such as the take private of Focus Media and sovereign wealth fund investments into Bank of Communications and China Pacific Insurance.

While the future may seem a bit clearer, Chinese private equity still has a litany of issues that must be resolved if the industry is to convince investors of its long-term sustainability. Top of my list? The lack of exits, particularly via IPOs, and the strong preference by Chinese business owners for renminbi funds.

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• Topics
• Greater China
• Investments
• China
• M&A