China reshapes the world?

Given a little reflection, it seems obvious enough. If China is already the world's Number Two economy, and predicted to overtake the US by 2027 as the world's largest economy by total nominal GDP value, then its private equity sector should rise commensurately. And since Asia in 2009 already level-pegged Europe as a destination for funds raised, the region, if not China, is now equaling what was previously the second most significant venue for funds in the world behind the US. This also deserves reflection: Asia, with all its volatility, risks both economic and political, fragmentation and uneven development, is now on a par with the EU, with all its developed economies and time-honored institutions, in private equity LPs' eyes.

The reshaping has already begun. For instance, many of the world's leading private equity firms – the Blackstone Group, the Carlyle Group, TPG Capital – have come out with RMB vehicles, all of them for now in the RMB5 billion/$730-736 million range, adapting themselves and their offerings to the Chinese market situation. But as regulatory changes and financial markets development releases more Chinese LP capital into the market, more and more players seeking to participate are likely both to float similar entities, and to look to other ways to tailor what they do to China's needs.

What are those needs likely to be? Well, for one thing, developmental. Despite China's headline-making nominal GPD figures and growth rates, it still has a strikingly low level of private income, and much of the vast country with its 1.3 billion population still lags far behind even its own coastal regions. World Bank figures put per capita income in China at $3,620, just ahead of Angola but below Tunisia, versus $47,240 for the US. Furthermore, according to Credit Suisse, China's top 10% income bracket earns some 26x the bottom 10%.

So development-related investment platforms are likely to continue to enjoy added support from Chinese authorities and regulators. TPG's move into Chongqing with its second RMB vehicle is just one sign of this. Investments and funds designed to support the growth of the consumer sector are also likely to benefit, as the PRC tries to lead its economy towards greater reliance on the domestic market, in the process lifting domestic spending and income levels. The stimulus money poured into infrastructure and provincial development over the past few years has already helped to facilitate this, as Credit Suisse economist Dong Tao observed previously. China's hinterland, and Tier Two, Three and even lower tiers of its cities, facilitated by new infrastructure and sometimes personal purchase grants, are increasingly the venues for the most buoyant growth, and some of the most promising opportunities for investors.

With their eyes on social stability and sharing the growth, as well as putting Chinese citizens' incomes higher up the priority list, Chinese authorities may well make decisions that somewhat depress immediate profits to investors in favor of accomplishing developmental goals. But if this is the price of doing business in the world's future dominant economy, then it is one that international private equity already seems willing to pay. And it may be no bad thing to endow the asset class with a broader, more obvious social and developmental significance.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Greater China
• Performance
• Funds
• Renminbi fund
• The Blackstone Group
• TPG Capital
• The Carlyle Group