Investment houses must ride political tremors

The concept of campaigns of intensive political repression and persecution, known as the ‘Great Purges’, originated in Joseph Stalin’s Soviet Union in the 1930s and spread to Xinjiang province in Western China, where pro-Soviet leader Sheng Shicai led his own purge in 1937. This led to much local difficulty.

All eyes are on China once again. A nervous finance industry is looking to assert itself in the wake of bigger problems which optimists hope will not overshadow slow but solid regulatory progress and product innovation with a pan-Asian perspective.

Many thought the very idea of ‘purging’ individuals had faded together with the darkest days of the mid 20th century. Yet the discrediting of Chongqing leader Bo Xilai – since his whistle-blowing former police chief, Wang Lijun took refuge in the US consulate in Chengdu in an apparent defection bid – has led to unprecedented coverage of the machinations of China’s elites. A prominent British businessman has been found dead and Mr Bo’s wife is under arrest on suspicion of murder.

This latest development follows Premier Wen Jibao’s statement at his annual press conference, including a call for political reform by new leaders. If this was not forthcoming, China could slip back into the chaos of the Cultural Revolution, claimed Mr Wen, in an implied criticism of Mr Bo.

The latter has been sacked as his region’s party secretary, his apparently bright future as a key political leader of the world’s fastest-rising power now over. Commentators are fast to conclude that Maoist tendencies of Chinese society are still very much in the nation’s DNA.

This factional in-fighting, with Mr Bo’s opponents quick to accuse him of abusing state funds, is nothing new.

It is reminiscent of 1995 when a similar scandal surfaced involving the Beijing vice mayor, says Kristina Sandklef, Asia economist at East Capital. In fact, as she points out, this triggered a major sea-change in Chinese politics, when the Shanghai faction ousted the Beijing group within the Communist party.

Such regional rivalries exist across Europe and elsewhere in Asia too, but are intensified by China’s geographical area and size of population. Top management in regional banks in Shenzen in the south or Beijing in the north is seldom infiltrated by intruders from rival regions, who are treated with suspicion.

On a recent trip to Shanghai, a discussion was taking place among local officials and their advisers about the future of the city as a global finance centre and the educational resources needed to boost skills in capital markets and wealth management.

When asked which other centres, particularly Singapore and Hong Kong – both battling to receive an increased share of mainland-sourced private banking funds – may be considered regional rivals in Asia, the answer came back with a smile: “There is only one regional rival for us and that is Beijing.”

While not exactly signalling a new era of political turmoil, these dramatic rumblings of unrest and low-level clan warfare are further frightening investors in an economy already thought to be fragile by some commentators.

One prominent professor of finance talks about the “very real spectre of Mao”, which haunts Chinese progress. Local finance houses, he says, are very positive about their country’s prospects in asset management and private banking in group sessions, but tell a very different story privately, with many doubts about asset bubbles and the “shadow banking system” in particular.

A major concern for them is the millions of immigrants from villages to cities, who can be deployed on industrial production lines in a matter of hours when needed. Yet if these apparently highly flexible workers are deemed surplus to requirements, can they be asked to go back to the countryside, when they have laid down roots as city dwellers?

LIMITATIONS FOR FUND HOUSES

Both Chinese and foreign asset managers are slowly coming to terms with their country’s limitations. While Shanghai’s Industrial Bank is keen to highlight the increasing spending power of the wealthy Chinese luxury consumer, institutional investors can be more concerned about audit problems relating to Chinese companies listed overseas and practical difficulties with over-hyped investment schemes.

With the fast-paced internationalisation of the renminbi leading to much interest across the globe, including a scuffle for Chinese influence between London and continental European centres (see page 26), strategists expected huge foreign product demand for renminbi-denominated investments, as opposed to the limited deposit accounts available so far.

Yet the long-awaited RQFII reforms, allowing foreign investors to buy into RMB-denominated products have proved a damp squib. According to Shanghai-based consultancy Z-Ben Advisors, fund managers have found buyers for just half of their RMB20bn ($3.17bn) worth of quota. Distribution difficulties have thwarted sales, while target restrictions have resulted in a bland menu of near-clone products.

It is always tempting to blame “local difficulties” associated with politics, regulation and cultural tendencies. But consultants, educational establishments and regional banks can point to well-planned Asian success stories which defy the problems and get the formula right, while rivals flounder.

The success of the RQFII programme, believe consultants at Z-Ben, could ultimately depend on increasingly engaging foreign distributors and investment product manufacturers into a greater level of involvement in Chinese asset management. So far, many have shied away from these levels of commitment.

New provisions from the China Securities Regulatory Commission will allow foreign managers to invest a combined total of $80bn in Chinese stocks, up from the previous $30bn limit.

Global distributors such as HSBC and Citibank are also likely to play an important role accross the region.

As many global groups have known for a decade at least, while the political and economic background is a key criteria for consideration, it is the depth of relationship between manufacturer and distributor which ultimately determines the success of a business, particularly in new markets.