LPs may have to lower China expectations
By Paul Mackintosh - 05/03/12
For the world economy’s brightest star, China seems to be attracting its fair share of negative commentary these days. Hard on the heels of the February 2012 International Monetary Fund China Economic Outlook warning that a slowdown in Europe could knock as much as four percentage points off China’s growth rate comes a World Bank report predicting China’s growth rate to halve or worse by 2016, and calling for extensive institutional and even political reform if even the upper end of that lower limit is to be reached.
“As China’s leaders know, the country’s current growth model is unsustainable,” Robert Zoellick, the World Bank president said at the release of a highly cautionary report which, he emphasised, was prepared in conjunction with the PRC’s State Council Development Research Centre, supported by Vice Premier Li Keqiang, China’s premier-in-waiting. And this January, Nicholas R Lardy, veteran China-watcher and Senior Fellow at the Peterson Institute for International Economics, released a book entitled ‘Sustaining China’s Economic Growth After the Global Financial Crisis’, which noted that “the global crisis raises the question of whether the previous growth model of low consumption, high-saving countries such as China is obsolete.”
With arguments stacking up in favour of change and reform in China’s economic base, private equity could logically have a place in the process as a change agent: one of the roles in which its style of long-term transformative investing is always supposed to excel. “China can transition to a new economic model that will allow it to sustain rapid growth,” affirms Mr. Lardy in his book. “This transition is strongly in China’s own economic and political interests because the export- and investment-driven growth strategy of the past decade is no longer viable.” And the need for change and a reprioritisation of capabilities in Chinese business could give foreign private equity firms the differentiation they badly need to remain competitive versus the upsurge of new domestic RMB vehicles.
Yet the predictions and recommendations also point to a fraught and uncertain reform path whose implementation requires considerable political will in the face of strong vested interests favouring the status quo. The alternative, though, is for China to be sidetracked into the middle-income trap, as an emerging market that never quite emerges. And consensus is that whatever the outcome, China will not deliver the same levels of growth that it has in the past. LPs who have been jockeying for a piece of the China action may need to lower their expectations – and trim their allocations.