January Insight-Squeezed on Both Sides

The US China Index which tracks US-listed companies that derive most of their revenue from China fell 27% in 2011 in a stark sign of how fraud allegations and slowing growth have made foreign investors bearish on Chinese groups.  There has been a knock on effect from this on China’s bourses as well which has resulted in steep fourth quarter falls.  By the end of the year just passed – in which the local markets slumped 22% in value - we had the impression that the confidence of retail investors in China was shattered in much the same way as that of foreign investors in foreign markets has been after the various disasters of the past few years.  If this is right, then 2012 will likely see –as did 2011 over 2010 - declining new IPO action on the Shanghai and Shenzhen bourses which, in the Chinese context, will most impact private businesses wanting to go public.

Meanwhile, the risk averse policy settings on display in these months leading up to this year’s handover to a new generation of political leaders has largely left the formerly vibrant private sector without access to working and development capital loans needed to fund operations.  Many of these businesses - articles appearing in the Chinese press have estimated up to 70% - are now running on razor thin margins or no margins at all with those dependent on falling export orders most at risk.

Without re-instated access to debt funding and with asset managers troubled to make a case for equities, the current outlook for private businesses in China is clouded.  Intercedent believes that this is leading the managers and owners of such firms to be more cautious in business and more open to strategic deals involving change of ownership with the result that a new wave of foreign investment in China in the form of strategic M&A activity may well result in the year ahead.

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