Founded in 2011, Keys fund focuses on investing in early and expansion stage companies in the healthcare, new material, advanced equipment, TMT (technology, media, telecommunications) and green energy sectors.

"We'll receive new deal flows and clients from the Americas, while Lombard will grow its base in the largest emerging market," says David Zhou, CEO of Keys Fund. "This collaboration will bring a high level of added value to our current portfolio and future clients."

"We believe the optimal time to invest in technology innovation and growth in China is now, not after the economy restructures," says William Billeaud, president of Lombard Global. "This partnership will increase our commitment to the long-term growth in China.”

Keys Fund is headed by David Zhou and Gao Zhenzhu.

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Standard Chartered Private Equity is the private equity arm of Standard Chartered Bank. It has made over $3.9 billion investments in mid- to late-stage companies in Asia, Africa and the Middle East.

The investment will be made through a convertible exchangeable bond. Standard Chartered Private Equity will hold a $75 million five-year convertible exchangeable bond with a 2.5% cash coupon.

With gas and power operations in Indonesia, Philippines and Australia, Energy World Corporation is focused on significantly expanding its liquefied natural gas operations to take advantage of the growth opportunities in Asia Pacific.

Electric power consumption per capita is very still very low in Asian countries compared to Western countries. Kilowatt-hour consumption per capita is 1,585 in China, 478 in Indonesia, and 597 in Philippines. The measure is 13,351 in the U.S., 11,193 in Australia and 8,170 in Singapore, according to NationMaster Energy Statistics.

Standard Chartered Private Equity's investment will be used to help expand Energy World Corporation's liquefied natural gas operations, including a liquefied natural gas receiving and regasification terminal currently under construction and a planned gas-fired power plant, both on Pagbilao Island in the Philippines.

Standard Chartered will also bring its industry and financial expertise to Energy World Corporation to improve the company's management.

"Over the past seven years, Standard Chartered has been tremendously supportive of our efforts to develop clean and green energy projects throughout Asia," says Stewart Elliott, CEO and chairman of Energy World Corporation. "This direct investment…is a strong statement of support for our strategy to develop modular solutions for liquefaction and receiving terminals."

Energy World Corporation is listed on the Australian Stock Exchange and on the OTCQX, a premier tier of the Over-the-Counter market in the U.S.

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IDG Capital Partners, Tiantu Capital, Shenzhen Cowin Capital and Tianjixing Capital have jointly invested RMB150 million in the company.

The four venture capital and private equity investors will obtain a stake of less than 15%, says Wang Wenli, chairman of Bama Tea.

The specific terms of the investment are not known.

Bama Tea says the company will use the funding to develop and promote new products, as well as upgrade production lines and processes.

Bama Tea has previously indicated that the company plans to IPO on the Shenzhen Small and Medium Enterprise Board this year.

As of April, Bama Tea has close to 1,000 chain stores throughout China, the second largest in the country.

In the past few years, Chinese venture capital and private equity firms have been increasingly active in the agricultural and food industry. By the end of last year, as high as 30% of the 52 agricultural companies that went public in China had VC or PE backing, according to data from Zero2IPO.

Backed by International Data Group and ACCEL Partners, IDG Capital entered China in 1992. With $2.5 billion under management, IDG Capital focuses on making venture and private equity investments in the consumer, Internet, new media, education and healthcare sectors.

Shenzhen Cowin Venture Capital manages over RMB7.5 billion across 7 funds.

Tiantu Capital manages RMB2.4 billion across 5 funds.

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The two partners are Chippenham, U.K.-based Vectura Group and Tianjin KingYork Group Company, a Chinese pharmaceutical company.

Zendex Bio Strategy was founded in 2003 with registered capital of $50 million. The private equity firm specializes in investing in advanced bio-technologies suitable for the Chinese market.

Tianjin KingYork holds 50% of the joint venture, with Vectura holding 35% and Zendex 15%.

The joint-venture, Kinnovata Pharmaceutical will develop and manufacture respiratory products for the rapidly growing domestic Chinese and other Asian regional markets.

It will first market Vectura’s dry powder inhalers to meet the increasing needs in the Asian asthma and chronic obstructive pulmonary disease (COPD) markets. COPD is a type of chronic breathing disease.

It is estimated that the overall asthma population in China is more than 25 million people. In addition, approximately 42 million people suffer from COPD in China. That population is estimated to grow to 56 million by 2021.

The growing patient population is driven by population growth, increasing urbanization and aging. China also has one of the highest smoking rates in the world, with 75% of adult male either current or former smokers.

Tianjin KingYork and Zendex Bio Strategy are expected to contribute assets of RMB260 million of cash, technology assets, intellectual property and land to Kinnovata, which will establish its factories at KingYork's pharmaceutical business park in Tianjin.

Chris Chan, previously an advisor to Zendex, is appointed CEO of Kinnovata.

Vectura will receive royalties through to 2030 on certain products sold by Kinnovata, and is expecting an exceptional non-cash gain of approximately $20.55 million in relation to the acquisition of the 35% stake in Kinnovata.

Kinnovata is expected to be loss-making for at least 24 months following its establishment.

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With $5 billion under management, Adveq has offices in Zurich, Frankfurt, New York, Beijing, Shanghai and Hong Kong.

Ron Li joined Adveq as a managing director in January 2013 and is based in the firm’s Beijing office. In his role as head of China, Ron is responsible to further develop Adveq’s position in China as a world leader in private equity and real assets.

Prior to joining Adveq, Ron worked for Legend Holdings in China where he established Raycom Real Estate Asset Management. Before joining Raycom he worked for Legend’s private equity subsidiary, Hony Capital. Earlier in his career Ron also worked for Whirlpool Corp. both in the United States and in China. He started his career as an entrepreneur.

Ron holds an MBA from the University of Michigan, an MA in Economics from the State University of New York at Stony Brook, and as a Bachelor’s Degree in Finance from Renmin University of China.

"Adveq’s investment activities in Asia date back to 1998 and our presence in Beijing and Shanghai underscores the strategic importance we place on China," says Sven Lidén, CEO of Adveq. "Ron Li combines an extensive track record in local investing with his exposure to international governance standards and an entrepreneurial mindset."

Founded in 1997, Adveq is a fund of funds manager focused on private equity and real asset funds globally. Adveq has invested in more than 400 funds on behalf of its clients.

Adveq incorporates environmental, social and governance principles into its investments, both at the fund manager and at the underlying portfolio company level.

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Hank Greenberg answered questions from former Morgan Stanley chief economist Stephen Roach at a luncheon event organized by the China Institute.

Listen to the audio podcast, or read an excerpt below.

Q: Is China's new leadership up to the job managing China's reforms and economic model transitioning?

A: I think they are. The process they go through in China to decide who becomes the next new leaders is generally very balanced.

The U.S.-China relationship is the most important in the world, but it's also the most troubled in the world. Until the two countries learn to trust each other, we have a problem.

The U.S. is a Pacific power and an Asian power. So is China. Both countries have to learn to live in that part of the world together, and not say, I dominate or you dominate it. We have to learn to manage that area jointly.

I'm sorry that Xi Jinping made his first foreign visit to Moscow, but not to the U.S. (or to meet U.S. leaders somewhere midway).

Q: It seems to me that Washington continues to look at the old China as a threat, instead of looking at the new China as an opportunity. Is that the heart of the trust issue that you alluded to?

A: It is part of it, but the problem goes beyond that. The excursion of China to the South China Sea has heightened that tension a bit.

Every nation has a right to build a military force for self-defense. Put yourself in China's position – it's surrounded not by the friendliest countries. Vietnam is not China's friend. Japan is not. China has border problems with India. South Korea is now an issue because of North Korea.

I think the issue of the South China Sea is not who owns the reefs, but who owns the oil and gas beneath the reefs. There must be a better way to give that up than muscling your way into it. It doesn't create the right atmosphere for building relationships.

Q: How does China transition to a consumer-driven economy?

A: China has to build a consumer market. But change in China won't happen abruptly. It's a 5,000-year-old society.

But China will become a consumer economy. They will take people off the farms and build many new cities. The question is how do you finance building these cities? How do you create jobs?

It seems to me not that complicated. We issue 30-year bonds here in the U.S. I think one day, China will issue 30-year bonds (or 20-year, 50-year, doesn't matter). Those bonds will be attractive worldwide, not just in China.

Once you build these cities and move people in, declare a tax holiday for 5 to 10 years to attract businesses and industries to these cities. These cities will then have competitive advantage not only for exports, but also domestically as they enjoy the tax benefits.

Q: China Development is trying to make a sizable real estate investment in San Francisco, but it seems to be falling apart?

A: I think it was politics on both sides. There were all sorts of issues, some are technical and some related to safety.

But China Development Bank is loaning a lot of money in Africa, a continent where the U.S. is not doing much. But that continent is going through dramatic changes now (and the U.S. shouldn't be absent).

About Hank Greenberg:
Hank Greenberg is currently chairman and CEO of C.V. Starr & Co., a diversified financial services firm that is named after the founder of AIG, Cornelius Vander Starr. Greenberg is formerly chairman and CEO of American International Group (AIG) from 1967 to 2005.

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Beijing-headquartered AsiaInfo-Linkage is a software and IT services provider to the telecommunications industry.

The buyer consortium is led by $2.6 billion-under-management CITIC Capital Partners and Edward Tian, co-founder and a significant shareholder of AsiaInfo-Linkage.

The consortium also includes their respective affiliates, CITIC PE and China Broadband Capital Partners, a Chinese private equity fund focused on the telecommunications, media and telecom sectors founded by Edward Tian.

The terms of the deal remain the same when CITIC and Tian initially made the privatization proposal on January 11, 2012. The consortium will pay $12 in cash, a 52% premium over the closing price of the last trading day before the announcement.

Bank of Taiwan, Cathay United Bank, ICBC International Capital, Maybank Investment Bank Berhad, and Nomura International (Hong Kong) will arrange a $330 million debt financing for the deal.

AsiaInfo-Linkage shares closed trading at $11.60 today on the NASDAQ.

Investors and management are pushing forward on numerous take-private deals of overseas listed Chinese companies.

Last month, 3SBio Inc., a Chinese biotechnology company, says a consortium has raised its offer to take the Shenyang-based company private for about $370 million.

NASDAQ-traded Focus Media also got shareholders approval for a deal to privatize the company last month.

AsiaInfo-Linkage's board has approved and recommends shareholders to vote for the deal.

CITIC Capital Partners is the private equity arm of CITIC Capital Holdings, a China-focused alternative investment management and advisory company that manages over $4 billion.

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While the pace of growth has slowed, April's number is still robust and indicates an easy liquidity environment in China. The numbers also beat market expectations by 17%.

Total social financing is a measure of the aggregate amount of capital support to the real economy given by financial institutions, covering all intermediate markets such as loans, bonds, and equities.

As to new loan growth, it also normalized during April at RMB793 billion, lower than March's RMB1.06 trillion. But it beat market expectations by 5%.

The healthy credit condition is coupled with tepid inflation. Consumer price index rose 2.4% year-over-year, well below the government's target of 3.5% for the year.

Producer price index declined 2.6% year-on-year because of sluggish domestic demand.

The April economic and monetary numbers make ANZ (The Australia and New Zealand Banking Group) to forecast an increasing likelihood for the Chinese central bank to cut policy rate by 25 basis points (or 0.25 percentage point) this year.

While other central banks in Asia cut interest rates to ease the pressures of currency appreciation, China doing the same will reduce hot money inflows to its delicate economy.

Sanford Bernstein echoes ANZ's projections. Its research team is also forecasting that the People's Bank of China may take further monetary easing policies in the next two to three months if growth continues to decelerate.

But Goldman Sachs Gaohua sees China's central bank staying put in the near term, at least until the second half of the year. It sees growth potentially accelerating during the latter half of 2013. In that case, the PBOC will have no need to ease monetary policy.

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New Hope Agriculture and Food Fund is a private equity fund focused on making equity investments in private companies within the agriculture and food sector in China.

The Fund will be managed by Hosen Capital, which has 23 staff and is led by Alex Zhang and Chris Wang, previously of New Hope Capital, the financial business arm of Chengdu-headquartered New Hope Group.

With annual sales of around $8.8 billion, New Hope Group is one of the largest agribusiness enterprises in China.

New Hope Agriculture and Food Fund is targeting to raise up to $180 million. IFC has proposed to make an equity investment of up to $20 million in the fund, but not exceeding 20% of the total final commitment. IFC says it will not be the single largest investor in the fund.

The fund aims to help grow agricultural and food companies in the rural areas of China. Its other objectives are to increase food safety and supply by increasing efficiency and improve supply chain. The key focus areas are biotech, agricultural equipment, distribution and cold chain.

IFC will share its global agriculture and food sector experience with the fund, as well as improve the environmental and social standards in Chinese agribusiness.

The fund has already one existing investment: a fishing company operating in the Pacific Ocean.

This is the second time IFC and the New Hope Group are working together. Back in 2000, IFC committed to invest $3.2 million in equity and a $16 million loan into a joint venture called Chengdu Huarong Chemical Company Ltd. (CHCCL), a special chemical business. The New Hope Group was the main shareholder of CHCCL.

Hosen Capital is headquartered in Beijing, and has offices in Chengdu, Shanghai and Shenzhen.

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Founded by Mark Lasry and Sonia Gardner, Avenue Capital is a private equity and hedge fund investment firm managing $11.5 billion. Its Asian operations are headed by Mark Harris, a former consultant at PricewaterhouseCoopers.

Avenue Capital may have suffered losses of millions or more by investing in Beijing-headquartered Ambow Education, whose stock stopped trading and last closed at $0.95.

This is another case of Wall Street's smartest investors suffering great losses from questionable accounting practices of U.S.-listed Chinese companies.

John Paulson, founder of the giant $18 billion-under-management hedge fund, Paulson & Co., reportedly lost from $100 million to over $700 million in its investment in Sino-Forest Corp., whose stock imploded because of alleged accounting misconduct.

Avenue Capital initially invested in Ambow in September 2007. It joined its peers Macquarie Bank Group, CID Capital, and Cisco Systems to inject $54 million to Ambow in a private placement. The specific terms of Avenue Capital's investment are not clear.

On August 5, 2010, Ambow Education IPOed on the New York Stock Exchange at $10 per American Depository Share (ADS). Avenue Capital, then with a 17% stake of Ambow, didn't sell.

On May 2, 2013, Ambow Education's stock halted trading, pending news. Its last trading price was $0.95.

In a regulatory filling from last month, Avenue Capital disclosed that it is now sitting on 21,599,914 Ambow shares, a 21.6% stake.

There are numerous early warnings signs of Ambow's accounting problems. Last May, Ambow delayed filling its 2011 annual report because it required additional time to complete the audit of its financial statements.

Two months later, the company's CFO, Gareth Kung, resigned. Kung was with the company for only seven months. At the same time, a former employee alleged Ambow of financial impropriety and wrongful conduct in connection with Ambow's acquisition of a training school in 2008, among other problems.

The final blow came with a series of dramatic twists of events. On March 18, Baring Private Equity Asia announced that it will take Ambow private in a $108 million buyout, paying $1.46 per ADS in cash.

On March 22, Ambow's accounting firm, PricewaterhouseCoopers, resigned as auditor. Fenwick & West LLP, counsel to its audit committee, also resigned. Four days later, Baring Private Equity Asia withdrew its take-private offer, citing unexpected events.

The central issue of Ambow's accounting problems is surrounding revenue recognition, according to a source who has inside knowledge of Ambow's operations.

"Ambow may be recognizing revenues before they delivered the services," says the source. "That practice is not GAAP compliant."

Revenue recognition is a common thread among accounting problems of Chinese companies (Listen to our interview of Paul Gillis, professor of accounting at Peking University, discuss Chinese accounting practices here).

"Ambow's CEO, Jin Huang, is a visionary self-made woman," says the source.
"It's such a pity."

Jin Huang founded Ambow in 2000. She was previously an engineer at Avant, where she was responsible for product design and engineering management.

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Founded in 2007, Mandarin has made 10 investments in Italy and China through its first fund, totaling €328 million.

Mandarin Capital offers its portfolio companies unique support in business development from China to Italy and from Italy to China. With teams based in Milan, Beijing and Shanghai, Mandarin helps its portfolio companies in opening up new business opportunities in China and Europe.

Mandarin is currently raising its second fund. In order to capture greater China-Europe cross-border opportunities, the new fund will expand its geographical scope to the German speaking part of Europe.

The new German office will be based in Frankfurt. Markus Solibieda, a private equity professional with 18 years of experience in investing in mid-sized companies in Germany and Western Europe, will head the office.

"We are looking forward to working together with export-oriented German companies, which are champions in their industry and Chinese companies seeking a wider European presence," Alberto Forchielli, Founding Partner of Mandarin Capital says in a statement.

The new fund will invest in healthcare, environmental technologies, oil & gas, specialty chemicals and specialized industrial companies mainly focused on product safety and energy saving.

The fund will focus on taking controlling positions in its investments, with average deal size ranging from €30 million to €50 million.

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The better-than-expected performance was led by a suspicious 57.2 percent jump in shipments to Hong Kong. Numerous banks released reports, voicing skepticism of the trade data.

Over-reporting is a possible distorting factor, says Goldman Sachs Gaohua in its report. But it expects this distortion to fall as China's State Administration of Foreign Exchange (SAFE) tightens control over the issue.

Gaohua says that China's underlying export momentum is in fact weak, if considering other indicators such as export orders index of the official Purchasing Managers Index and Korean exports. The bank expects an export recovery during the second half of the year led by a recovery in the U.S.

Nomura echoes such skepticism. It estimates that if excluding those disguised trade flows, April export growth is as low as 6.6% and import growth is only 9.3%.

ANZ (The Australia and New Zealand Banking Group) says that trade growth arising from round-tripping of goods between Shenzhen and Hong Kong contributed 34% of China's export growth during the first quarter.

ANZ also notes that the growth in export values in Shenzhen beat that of the port throughput in volume by a large margin, suggesting over invoicing may have boosted China’s export data.

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Hohhot, Inner Mongolia-based Mengniu Dairy is forking out approximately $410 million to increases its shareholding in Modern Dairy from 1% to 28%, becoming the single largest shareholder of Anhui province-headquartered Modern Dairy.

The sellers are Advanced Dairy Company and Crystal Dairy Holdings, two companies controlled by private equity firms KKR and CDH, respectively. After the partial exit, KKR will hold roughly 3.6% in Modern Dairy. CDH will maintain another 1.5%.

KKR and CDH initially bought stakes in Modern Dairy in 2008. The specific terms of their investments are not clear, but KKR reportedly paid roughly $150 million for a 34.5 percent stake of Modern Dairy, then named Ma Anshan Modern Farming Co.

The valuations were favorable to the private equity firms as the Chinese dairy industry was rocked by scandals of milk containing melamine that killed infants.

In 2010, Modern Dairy completed an IPO in the Hong Kong Stock Exchange. KKR sold down its stake to 24 percent in the $448 million IPO.

With the latest partial exit, KKR and CDH are estimated to have generated a three times return on their original investments.

What is unique about the latest sale to Mengniu is its price. KKR and CDH are selling at HK$2.45 per share, a 12% discount to the closing price before the deal was announced. The norm is for the purchaser to pay a premium.

Analysts say that the two private equity firms accepted the discount to maintain good relationships with COFCO (China National Cereals, Oils and Foodstuffs Corporation), China's giant state-owned food processing conglomerate that is Mengniu's biggest shareholder.

"The increase of Mengniu’s stake in Modern Dairy is to secure both quality and quantity of raw milk sources, as well as to further capitalize on our competitive edge in high-end milk source," Sun Yiping, CEO of Mengniu, says in a statement.

Founded in 2005, Modern Dairy is currently the largest raw milk supplier to Mengniu, operating 22 large-scale dairy farms across China with a geographic footprint that coincides with Mengniu’s processing facilities. The company has total production capacity of over 700,000 tons of raw milk per year.

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Founded in 2004, Shanghai-based UniTrust could be valued at more than $800 million. TPG first acquired 50% of UniTrust in 2008 at the depth of the financial crisis. In a complicated deal, TPG spent $288 million to acquire over 40% of NIS Group, a Japanese financial services company focused on small and medium enterprises. The deal also gave TPG a 50% stake of UniTrust, then a subsidiary of NIS Group.

If TPG succeeds in completing a sale of UniTrust at its estimated valuation, it could mean a roughly four-times return during a five-year investment period.

It would also be an example of how private equity firms can still achieve outstanding returns even when the IPO market is still unwelcoming.

Potential buyers of UniTrust include international strategic and financial buyers.

If successful, this will also be TPG's big exit after a long drought. TPG last exited a Chinese portfolio company in 2010 when it sold its stake in Ping An Insurance (Group) Co.

UniTrust provides equipment financing for small and medium enterprises across construction, printing, textiles, IT and technology, medical, and production, in partnership with equipment vendors.

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The report also forecasts that China's private wealth market is on pace to increase an additional 20% this year.

Average individual investable assets per HNWI were RMB29 million at the end of 2008, and are estimated to grow to RMB31.8 million by the end of this year, an increase of nearly 10% annually.

There are now 20 provinces in China with HNWI populations exceeding 10,000. Five new provinces and municipals, Heilongjiang, Chongqing, Shanxi, Shaanxi, and Inner Mongolia, are added to the list.

As the wealthy in China become more sophisticated, they are increasingly looking outside of China for investment opportunities. The percent of HNWIs and ultra-HNWIs with overseas investments have roughly doubled since 2011, with half of ultra-HNWIs now invested overseas.

And 60% of those interviewed who have overseas investment now say they expect to increase their overseas holdings.

As they age, the wealthy are also looking at wealth management differently. Wealth preservation, quality of life, and children's education are the top three objectives. Wealth creation, which topped the list in the 2009 survey, dropped to fourth place.

Wealth inheritance planning is also becoming a central issue for the group. One-third of HNWIs and one-half of ultra-HNWIs, defined as individuals with at least RMB100 million in investable assets, are thinking hard about inheritance planning.

"As wealthy Chinese age, they now face a dilemma in how to preserve wealth and leave it to their families," says Jennifer Zeng, co-author of the report and a partner at Bain & Company.

More than half of ultra-HNWIs have expressed interest in establishing family trusts, while 15 percent have already done or started to do so. Most ultra-HNWIs have gained their familiarity with family trusts through their exposure to private banks located in Hong Kong.

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In this episode of China Money Podcast, co-founder of Amalfi Capital, Tristen Langley, talks with our host, Nina Xiang, on Alibaba Group's $586 million acquisition of an 18% stake of Sina's Weibo, her investment firm's winning and losing bets, and the future challenges facing China's e-commerce industry.

Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt below.

Q: Alibaba Group just bought 18% of Sina's Weibo for $586 million, valuing the Chinese twitter-like site at $3 billion. Do you think it's a fair valuation?

A: Weibo has almost 500 million users, and is still growing. Compared to Twitter and other U.S. comparable, the valuation is probably modest. But this is a very strategic alliance. So a lot of the valuation is driven by Alibaba's motivation to leverage Weibo's audience. It's estimated that 14% of Weibo's traffic is being pushed onto Alibaba's Taobao site. That sort of potential synergy makes the valuation very reasonable for Alibaba.

Q: Sina expects that the new strategic alliance will generate $380 million in extra revenue over the next 3 years. Do you think users' habits will be changed?

A: Any group who communicates on a free platform and doesn't expect to be marketed to can be disengaged (when there is an effort to sell products to them). But by this alliance, Taobao has an opportunity to innovate around product discovery (among Chinese consumers). I think the ways consumers become aware of products still haven't been fully explored in China.

Another thing is, Alibaba has a lot of cash. I did a quick tally of Tencent, Netease, Baidu, Focus Media, Qihu, Sina and Alibaba, there are all together $13 billion of cash sitting on their balance sheet.

Q: Where do you see as some good new venues for these companies to invest the cash?

A: We've seen (misjudgment) over time. Netease, for example, was putting their cash towards pig farms in 2010. Thank goodness that Netease is now looking to develop their own content and games.

So I think the cash should go into their own innovations. It's estimated that about 18% of the options from 2010 to 2012 were given to Weibo's management team as an incentive to create value in essentially a start-up within a big public company. Tencent has proven that this kind of investment (into start-ups within a big company) can have a clear internal rate of return (IRR) and be extremely advantageous.

Q: Alibaba is facing competition on all fronts. How do you see China's e-commerce industry's competitive landscape evolving in the next few years?

A: The offline and online worlds are going to meet in ways that present unprecedented challenges. For example, Suning Appliance bought Redbaby, an online e-commerce site for baby goods and now expanded to other products. Redbaby started from catalog services, developed into online e-commerce, to telephone ordering. This merger with Suning will present extreme challenges just integrating the back-end systems.

But Alibaba and Taobao are still well ahead of the game. It's up for others to catch up, form alliances to take on the gorilla in the room.

Q: Tell us some background on Amalfi Capital that you co-founded?

A: Amalfi Capital is a global technology investment fund with a long-short equity strategy. Co-founder, Paul Waide, and myself founded the firm in 2010.

We interview around 500 entrepreneurs, engineers and CEOs from around the world every year. We build this thematic approach to profile about 50 companies from that group. Then we choose about 20 to 30 companies that we invest in. Our portfolio has a 60% to 80% exposure in China.

Q: When you were working at venture capital firm, DFJ (Draper Fisher Jurvetson), you led its investment in Skype. What was the most difficult judgment you had to make at that time?

A: Back in 2003 when Skype was launched, Voice-over-IP was nothing new. When I saw the deal, it was 12 engineers who had already received $5 million in series A funding and have already acquired 1.7 million users. At that time, the big question was always the business model. Also, would the users stay with Skype or would a competing technology take away users?

We invested $20 million alongside Index Ventures in February 2004. We knew it was a race to capture the world quickly. After we invested, Skype ended up adding one million users a week from 100,000 users a week.

What I learned is the importance of market entry and user acquisition. Skype had very low cost structure and low customer acquisition costs. Now at Amalfi Capital, we think about these two aspects all the time when we make our investment decisions.

Q: What kind of performance you have been able to achieve so far?

A: From August 2010, our accumulative return is 18% net of fees. The biggest contributor to our performance is Netease, a tremendously undervalued company sitting on a pile of cash. It also has strong assets between its online games, World of Warcraft and Fantasy Westward Journey. The other one is Alibaba, which we own indirectly through Yahoo. Tencent is another stock we like. We also shorted Millennial Media and Verifone.

We own some of these stocks indirectly because we couldn't get exposure any other way. For example, we also invest in Australia-listed SEEK Australia. It now owns 74% — moving to 79% — of Zhaopin.com, the number two jobs searching website in China. You can't own Zhaopin because it's still privately held.

Q: Can you share some investments that didn't work out as planned?

A: One company is JiaYuan, an online dating website that IPOed at around $10 per share. The stock is now around $5. This company faces competitive pressures in mobile from MoMo and other free services. It has been misunderstood by the market and has suffered since its IPO.

About Tristen Langley:
Tristen Langley is co-founder of Amalfi Capital, a long-short equity investment fund focused on technology and China. Previously, Langley was a business development and marketing manager at Skype Technologies for North America. From 2002 to 2005, she was an analyst at venture firm, Draper Fisher Jurvetson (DFJ) where she initiated the firm’s investment in Skype Technologies.

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The Eco-Valley project is a semi-governmental project with participation from Infinity, COFCO, and the City of Beijing. The Israeli government is also providing support.

Infinity and its partner, the LR Group, an Israeli infrastructure consulting company, will invest over RMB1 billion in Eco-Valley and its agricultural projects, which measure 11.2 square kilometers in total.

Eco-Valley, or the smart agricultural city, plans to build high-end agricultural production, high-tech demonstrations, ecological landscape, agriculture tourism, resort hotels, commercial and residential properties.

Infinity will provide Israeli agricultural technologies to COFCO to improve food quality. Infinity and LR will also provide a professional team for on-the-ground operational support.

“We intend to be responsible for the people, the environment and the earth by developing safer and healthier food," says Ning Gaoning, chairman of COFCO.

The collaboration was announced at a signing ceremony in Beijing, two days before the arrival by Israeli Prime Minister, Benjamin Netenyahu, to China this week. This will be the first visit to China by an Israeli prime minister since 2007.

“A 20% ownership in the Eco-Valley project is an attractive investment," says Amir Gal-Or, founder of Infinity.

Infinity is founded in 1993 and backed by the China Development Bank and Clal Industries. The firm currently manages RMB10 billion through 17 local RMB funds, with 100 portfolio companies.

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Last June, China Investment Corp (CIC) and the Russian Direct Investment Fund (RDIF) each committed $1 billion to jointly establish the $2 billion joint fund, the Russia-China Investment Fund (RCIF).

More than 70 percent of the fund’s capital will be invested in businesses and projects across Russia and other Commonwealth of Independent States, and up to 30 percent will focus on Chinese businesses and projects with Russian involvement.

At the time, the two parties said the RCIF would seek to raise $1 billion to $2 billion of additional capital from third-party investors. It is not clear from where the additional $2 billion will be raised.

The RCIF made its first investment of $200 million for a minority stake in Russia Forest Products, the country's second-largest forestry company, last September.

Dmitriev says the RCIF is currently looking for investment opportunities in agriculture, logistics and machinery in both China and Russia.

Founded in September 2007, Beijing-headquartered CIC manages $482 billion.

RDIF is a private equity fund established in June 2011 by the Russian government with $10 billion under management.

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Consumption and private investment will be supported by favorable labor market conditions in Asia. Unemployment is at multi-year lows in several economies. In addition, financial conditions remain relatively easy, notes the report.

Asia should also benefit from intra-regional demand spillovers mainly reflecting growing Chinese demand and policy stimulus in Japan. In the Association of Southeast Asian Nations, growing integration in final consumer goods will also benefit the region's economies.

But internal risks in the region are coming into clearer focus as a severe economic fallout from a worsening euro crisis diminishes.

Most importantly, strong credit growth and easy financing have fueled financial imbalances and rising asset prices. There could also be trade disruptions from a natural disaster, geopolitical tensions, a loss of confidence in Japan’s efforts to restore economic health, or a more severe slowdown in China.

Therefore, policymakers in the region face a delicate balancing act in the near term: guarding against the potential buildup of financial imbalances while delivering appropriate support for growth.

With inflation remaining low and stable, the current accommodative stance has generally served the region well. But financial imbalances are often persistent and cannot be easily unwound, the report points out.

Monetary policymakers should stand ready to respond early and decisively to shifting risks.

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Bluford Putnam talked with China Money Podcast on the sidelines of the Global AgInvesting Conference 2013 in New York City.

Listen to the full-interview in the audio podcast, or read an excerpt below.

Q: This past weekend, China's newly released March industrial profits showed slower growth of 5.3% year-on-year, compared to 17.2% during the first two months of the year. But this doesn't seem to concern you?

A: No. The amazing thing about China's industry company profits is that they were so good last year. China had to deal with the European crisis and less exports to Europe. But profits at Chinese industrial companies held up rather well, and they are just slowing down now. But it's not a big concern.

China's economic growth is on a "glide path" to a slower GDP growth of a more mature economy. So it's natural that its growth rate will slow down. I see that China's growth transitioning from an average of 10% a year for the past 30 years to an average of 6.75% for 2010s and down to 3.9% for 2020s.

Q: Do you think investors are prepared for a slower-growing China?

A: No. But I think the new leadership in China is very well aware of the need to focus on the quality, not the quantity of economic growth. They will move faster to deal with pollution, healthcare, and RMB normalization issues.

Q: You talked about the difficulties facing emerging markets' central banks in a global zero interest rate environment. What's your expectation of the People's Bank of China's (PBOC) policy this year?

A: I don't think any major countries will hike interest rates as long as the U.S., Europe and Japan have close to zero rates. For China, its growth rate is slowing down and inflation isn't a big problem, I don't see the PBOC raising interest rates (this year).

Q: The global monetary conditions have a great impact on China. When do you see the U.S. Federal Reserve raising interest rates and stopping asset-buying programs?

A: The Fed has adopted a massive government asset-buying program, purchasing $80 to $85 billion every month. We see that ending in early 2014 because the U.S. economy doesn't need it any more. With a 2% annual growth rate, the U.S. economy really isn't bad considering taxes have gone up and fiscal spending has been cut.

The decision by the Fed to raise interest rates will probably be delayed to 2015 or 2016 when inflation becomes a concern. Inflation is not a worry now.

Q: What will happen to the Fed's balance sheet when it raises interest rates?

A: The Fed has accumulated over $2 trillion of treasury securities. If interest rates rise, the prices of treasuries will fall. Therefore, that $2 trillion will be worth less.

Q: China has 36% of its $3.4 trillion foreign reserves in U.S. treasuries, which also face the risk of losses?

A: Only when the U.S. economy is growing faster than 2% and when inflation starts to rise, will we see the treasury market with higher yields and lower prices. So anyone – not just China – holding treasuries will face the risk of losing money.

But central banks usually don't sell these securities. They hold them to maturity. There won't be any paper losses. In fact, that's exactly what we think the Fed will do.

Q: When these treasuries are paid many years later, how much are they worth is largely dependent on inflation. Why haven't we seen out-of-control inflation after this round of unprecedented money printing across the world?

A: The most famous monetary economist, Milton Friedman, pointed out that the lag between monetary policy (and its consequences) is long and variable. Any monetary policy's effect on inflation could be two years or more down the road.

The first phrase of quantitative easing before 2010 was about rebuilding confidence in the financial system. Programs initiated from 2010 onwards were the starting point of monetary easing that is likely to cause inflation. Also, bank regulation was tightened everywhere. The Fed could create money, but the banks didn't lend it. So the lag could be very long this time.

I do see U.S. inflation at 3% to 3.5% by 2016. It will still be a manageable problem. We are not going back to hyperinflation in the 1970s.

Q: Regarding China's currency, the RMB, you belong to the camp believing that it's already approaching its fair value. Why?

A: Since 2005, China has allowed the RMB to appreciate over 30%. So if you were to completely free up the RMB to trade today, I don't know whether it will go up or down. I expect that the Chinese government will surprise us and move much faster normalizing the RMB.

About Bluford Putnam:
Bluford Putnam is the chief economist at CME Group. Before joining CME in 2011, he served as president of CDC Investment Management Corp. and CIO for equities and asset allocation at the Bankers Trust Company in New York. He also held economist positions with Kleinwort Benson, Morgan Stanley, Chase Manhattan Bank and the Federal Reserve Bank of New York.

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Reflecting a still tough IPO market worldwide, this is Intel Capital's first IPO by one of its portfolio companies this year. Founded in 2004, ASPEED Technology is a software and network applications company.

“ASPEED's commitment to the semiconductor ecosystem through their research and development of remote server management ICs … will ensure the company’s growth well into the future,” Sudheer Kuppam, managing director for Asia Pacific at Intel Capital, says in a statement.

Intel Capital invested in ASPEED in 2011. The company used the funding to expand its research and development team and extend the company’s marketing program for cloud computing solutions.

The exit is another demonstration of the long and fruitful history between Intel Capital and Taiwan's IT industry. Intel Capital has invested over US$260 million in more than 40 technology companies in Taiwan since 1999.

The relationship is a two-way street. Intel Capital encourages its portfolio companies to use Intel products and services. For example, earlier this year, ASPEED said it would buy and use Intel's new Atom™ processor S1200 chips for its own products.

Intel Capital is the global chip-maker Intel's investment and Mergers & Acquisitions arm. In 2012, Intel Capital invested $352 million in 150 investments with approximately 57 percent of funds invested outside North America. Since 1991, Intel Capital has invested more than $10.8 billion in over 1,276 companies.

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Previously announced on December 19 last year, the go-private deal values the Shanghai-based Chinese advertising company at $3.7 billion at a price tag of $27.50 per American Depositary Shares (ADS), a premium of 17.6% over its last day's closing price before the announcement.

The group buying the company includes Focus Media Chairman and CEO Jason Nanchun Jiang, Carlyle Group, FountainVest Partners, CITIC Capital China Partners, China Everbright Structured Investment Holdings, and Fosun International Ltd.

Focus Media says approximately 78.7% of total outstanding ordinary shares voted, and 99.5% voted to approve the deal, which is expected to be completed in May this year. Afterward, Focus Media will become a private company and no longer be traded on Nasdaq.

Focus Media closed the day trading at $27.20 on Monday.

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Some 130 private equity funds closed with value slightly more than $69 billion during the first quarter. Among that, buyout funds took the lion’s share of volume, nearly doubling its fundraising to about $34 billion, according to Private Equity International.

Some notable funds include Silver Lake Partners' $10.3 billion technology-focused fund, and $3.5 billion KPS Special Situations Fund IV. StepStone Group (Listen and watch our interview with StepStone CEO Monte Brem here) raised $100 million more than its $350 million target for its latest secondaries vehicle.

The private equity industry is burning through the bulk of the remaining dry powder faster than before. The value of private equity deals announced in the first quarter of 2013 rose 16 percent to $114 billion. Leveraged buyout deal values doubled to $55 billion.

As dry powder is used or expires, LPs are increasing capital allocations available for new private equity commitments. On average, large U.S. public pension funds increased their allocation to private equity to 9.7 percent this year, up from 8.3 percent in 2012, according to Palico.

While fundraising is on the rise, capital is going to fewer GPs. In 2012, 466 private equity funds closed with an average fund size of $579 million. While in 2011, 513 funds closed with an average size of $448 million.

The reason may be that the number of private equity funds are increasing rapidly with greater diversification of geography, specialization and vehicle structure. On the other hand, LPs have less time and resources to learn about smaller or less-established funds.

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Headquartered in San Jose, California and founded in 1991, RAE Systems manufactures intelligent gas and radiation detection systems used in more than 120 countries.

Honeywell's price represents approximately 13 times RAE Systems' estimated 2013 earnings before interest, taxes, depreciation and amortization (EBITDA). RAE Systems had sales of $107 million in 2012. The deal is expected to close in the second quarter of 2013, according to a statement issued by Honeywell.

In June 2011, San Francisco-based American private equity firm Vector Capital and Hong Kong-headquartered CITIC Capital Partners took RAE Systems private for $138 million.

The Honeywell acquisition comes less than two years after the private equity firms' buyout, with a price tag 2.5 times that of the buyout deal. It demonstrates how private equity firms are increasingly making profitable exits by selling to cash-rich multinationals.

Vector Capital and CITIC Capital Partners also worked together to take New York Stock Exchange-traded Gerber Scientific Inc. private in August 2011 for $283 million.

Connecticut-based Gerber Scientific supplies sophisticated automated manufacturing systems for sign making and specialty graphics. CITIC took a minority stake in this deal and it is not clear if Gerber Scientific has any presence in China.

Vector Capital currently manages $2 billion. Part of the firm's strategy is to selectively take undervalued public companies private, and potentially spin out non-core businesses from corporations and fix balance sheets through recapitalizations.

CITIC Capital Partners is the private equity arm of CITIC Capital and currently manages $2.6 billion. It invests in companies globally that look to grow in China. At the time of RAE Systems' buyout, CITIC's managing director, Brian Doyle, said CITIC will "help RAE strengthen its sales, research and development, and manufacturing… in China.”

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Among the top ten most active development markets globally, seven are in China. Chengdu and Tianjin has 2.9 million and 2.1 million square meters of shopping center space under construction, respectively. Shenyang, Chongqing, Wuhan, Guangzhou and Hangzhou are all expected to deliver over one million square meters of shopping center space over the next three years.

The report also points out that this year, the under-construction shopping center space has reached a record, increasing 15% compared to last year. In 2012, there were 28 million square meters of shopping center space being constructed.

The breakneck growth of shopping centers in many of China's big cities has raised concerns of the market being overheated. According to global property consultancy, Knight Frank, the vacancy rate in Shenyang and Chengdu were 17% and 16.2% in 2012.

In Guangzhou, vacancy has increased to 10.2% in 2011 from just over 4% in 2011. This year, Guangzhou is expected to add another 6 big shopping malls with 660,000 square meters of space.

China is also expected to invest RMB300 billion ($48 billion) this year to build new shopping centers. The total number of shopping centers in China will reach 4,000 in 2015, making a five-time growth in a ten-year period.

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The consortium includes 3SBio's CEO Dr. Jing Lou and CPEChina Fund, a China-focused private equity fund associated with CITIC Private Equity Funds Management Co.

The revised offer aims to take 3SBio Inc. private for $16.70 per American Depositary Share (ADS) from $15.40, when the company previously announced the take-private plan on February 8 this year.

The revised offering price amounts to an 8.4% increase to its original proposal. It represents a 9.9% premium to 3SBio Inc.'s closing price on April 19 before the company's announcement of the revised offer, and 44.1% premium to the closing price on September 11, 2012, before the announcement of the original proposal.

The buyers say they intend to finance the increase in the buyout deal through a combination of additional convertible note financing from CITIC Private Equity and additional cash in the company.

Numerous high-profile accounting scandals several years ago have crushed international investors' confidence in Chinese companies traded overseas. Low valuations have spurred an increasing number of Chinese companies to "go private" in the hope of listing domestically or in Hong Kong to achieve better valuations.

Twenty-five Chinese companies have completed going private deals from U.S. exchanges between 2010 to 2012, including Shanda Interactive Entertainment, China Fire & Security, China Mass Media, China TransInfo, Harbin Electric, Tongjitang Chinese Medicines, according to a recent academic paper.

Fourteen companies' go-private deals are currently pending, including Focus Media Holding, 7 Days Group Holdings, AsiaInfo-Linkage, and China Advanced Construction Materials.

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Nomura also forecasts for further RMB appreciation against the U.S. dollar this year. It says RMB will be trading around 6.18 to 6.08 to the dollar in the third quarter.

Two past trading band widening actions took place weeks or days before the U.S.–China Strategic and Economic Dialogue (S&ED) meetings, on April 14, 2012 and May 18, 2007. This year's U.S.–China Strategic and Economic Dialogue is scheduled for July 8 to 12. Any trading band widening announcement could come before the Dialogue, Nomura says.

China's dramatic foreign exchange reserve increase during the first quarter – up $128 billion to a total of $3.44 trillion – is also drawing pressure from the U.S. for further currency policy liberation by Beijing.

Past experience shows that there is no established market reaction to a RMB trading band widening. Often, global environment remains the most significant market mover. After the April 16 band-widening in 2012, the actual trading range of RMB was even tighter following the Eurozone debt crisis.

Nomura's predictions follow recent comments by Chinese officials on the RMB's trading band. On April 17, Wang Yu, deputy director-general of the research bureau of the People's Bank of China, said that China will likely broaden RMB's trading range. A day later, the deputy governor of the Chinese Central Bank, Yi Gang, also made similar comment, saying that "the exchange rate is going to be more market-oriented," and the RMB's "trading band will be further widened in the near future."

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Founded in 2006, Mafengwo aims to attract high-end Chinese travelers from big metropolitan in China. It says the newly raised funding will be used for building “innovative business models and on mobile Internet services.”

Around 50,000 users book travels through Mafengwo daily. Its revenue sources include transaction-based commissions and advertising.

In 2012, Mafengwo integrated offerings from local and international online travel booking services including Booking, Agoda, Ctrip, and eLong.

Wafengwo had over 20 million downloads since it launched its first "Trave Guide" mobile app in 2011. A new version of the app will be released on May 7 at the Global Mobile Internet Conference in Beijing.

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The Schwarzman Scholars program is a $300 million scholarship program inspired by the Rhodes Scholarship, an international graduate program created in 1902 by British statesman Cecil J. Rhodes to send international students to study at the University of Oxford.

Similarly, the Schwarzman Scholars program will be housed at Tsinghua University in Beijing, and will support 200 mostly American students annually for a one-year Master’s program at Tsinghua.

“China’s economy is growing at three times the rate of the West, and if that growth continues, China will become the largest economy in the world within the next couple of decades,"Stephen A. Schwarzman says in a statement. "It is crucial that both countries and others around the world work hard…to develop a real and full understanding of each other’s cultures among the next generations of business and political leaders."

The first class of students is slated for 2016, upon the completion of Schwarzman College, a residential building designed specifically for the program. The admissions season will open in 2015.

The program's advisory board is filled with former heads of state and prominent American political and financial figures, including Nicolas Sarkozy, Tony Blair, Henry Kissinger, Colin Powell, Condoleezza Rice, and Henry Paulson.

The Schwarzman Scholars program has already raised $200 million (RMB1.2 billion), including Schwarzman’s personal gift of $100 million (RMB600 million). The other $100 million is donated by large international corporations, such as BP, Bank of America Merrill Lynch, the Boeing Company, China Resources (Holdings) Company, and GE.

Schwarzman co-founded the $210 billion-under-management private equity giant Blackstone Group in 1985. He has made numerous large donations in the past, including a $100 million gift to the New York Public Library in 2007, and an endowment to sponsor 200 children a year in perpetuity to attend Catholic schools in New York City.

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The new Asian strategy will be managed by MPA Capital Management, an affiliate of Marvin & Palmer Associates. Tiger Management is an investor in the fund. Todd Marvin, a portfolio manager at Marvin & Palmer, will be the portfolio manager and be based in Maryland. The strategy will be long-short equities.

Julian H. Robertson Jr., Chairman and Chief Executive Officer of Tiger, said, “Tiger is committed to hedge fund opportunities in Asian equities. Asia presents an ideal landscape for a hedge fund manager. We have strong confidence Todd and his team will thrive with the additional flexibility of investing on the short side.”

Headquartered in Wilmington, Delaware, Marvin & Palmer has $2.1 billion under management and was established in 1986. According to its website, the firm invests primarily in high quality, large-cap, growth stocks. Its investments focuses on region, country, currency and sector analysis, followed by a review of individual stocks. Holdings may be concentrated in a number of countries and sectors with diversification achieved through individual stock selection.

Todd Marvin became a portfolio manager in 1993 at Marvin & Palmer. Prior to joining the firm, he worked for Oppenheimer & Company as an analyst in investment banking. He earned a B.A. from Wesleyan University, and is a CFA charterholder.

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The report noted that despite a higher percentage of investors looking to allocate more capital into infrastructure in Asia, the absolute size of infrastructure investments in the region is still small when compared to Europe and North America.

For example, looking at the geographical breakdown of infrastructure deals during the first quarter of this year, 47% and 30% took place in Europe and North America. Deals in Asia only accounted for 7%.

For infrastructure funds hoping to raise new capital this year, a global focus will be the most attractive for fundraising. Thirty-nine percent of institutional investors with a global focus are planning new investments in the next 12 months. Next, Europe-focused and emerging markets-focused funds are also in strong demand, with 28% and 27% of institutional investors planning new commitments.

The Kuwait Fund for Arab Economic Development, the University of British Columbia Endowment, Santa Barbara County Employee's Retirement System are all planning new commitment to infrastructure funds in the next 12 months, according to the report by Preqin.

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The Japanese bank says that the potential tightening of the property sector could lead to slower property investment and GDP growth slowdown during the second quarter.

Among the 70 cities where housing prices are being tracked, 68 cities saw a month-on-month increase in prices in March. That compares with 66 cities with price increases in February. The pace of year-on-year increase is also significantly higher, with March's 3.1% compared with 1.7% increase saw in February.

Month-on-month price increase were 1.0% in both February and March, implying an annualized growth of 12.7%. That is way faster than the 9.3% growth of urban household income recorded in the first quarter this year, according to Nomura's report.

We believe the sharp rise in property prices suggests that central government will push for policy tightening in this sector in Q2, and property investment growth faces downside pressures in the coming quarter, which will likely contribute to the GDP growth slowdown

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Listen to the full-interview in the audio podcast, or read an excerpt below.

Q: Just today, China announced that it's first quarter GDP grew 7.7%, down from 7.9% in the fourth quarter of last year, lower than market expectations. What's your take on this?

A: First of all, it's a very surprising number. If you look at the quarter-on-quarter growth, it's only 1.6%, and that's about a 6.5% annualized rate, which would be the slowest growth rate since the crisis of 2008.

If you look at the numbers in detail, we see that the main cause of the slowdown has been a deceleration of investments. In this quarter, the contribution of investments (to growth) is only 2.3 percentage points, an extremely low number. It's difficult to reconcile this with the fixed asset investment data where both infrastructure and manufacturing sectors have seen a pick up. So a possible explanation could be that there has been a significant destocking process in the property sector. That means underlying demand could be stronger going forward, and we could see a rebound in the second quarter.

Q: Today, we'll discuss in detail an economic survey the OECD released last month on China's medium-term prospects. The one thing that caught the media's attention is the conclusion that China's economy will surpass the U.S. to become the largest in the world in 2016. How did you come up with this forecast?

A: First, this projection is not based on standard U.S. dollars. It's based on purchasing power parity (PPP), taking into account the differences in price levels between China and the U.S. Based on estimates from the World Bank, you find that the difference in growth rate is five percentage points a year between the two countries. So over ten years, China will grow 60% faster than the other.

If you use actual prices and market exchange rate, China's GDP will still become larger than the U.S. five years later in 2021 or 2022. Obviously, China has four times more people than the U.S., so even when the aggregate GDP is the same, GDP per capita will still only be a quarter of the U.S. In addition, the level of productivity and the ability to produce high tech designs and to innovate are still far behind of the U.S.

Q: In the OECD report, it also states that the Chinese economy will gradually slow but high growth can be maintained for some time. Last week, China's president, Xi Jinping, said that the era of super growth in China has ended. What is a realistic expectation for China's medium term growth?

A: Of course I agree that the era of double-digit growth over a number of years in China won't be repeated. We expect 8% to 8.5% a year for the next five years.

Why we do think this growth can be maintained? The driver of economic growth has been in the non-agricultural sector. Productivity in this sector has been growing at 7.5% to 8% for the past ten years steadily. Then the scope of growth depends on how many people are moving from the countryside to the cities. With our estimate of 2% a year increase in non-agricultural labor force, that should keep growth at least one percentage point above the labor productivity.

Q: In the OECD report, you recommend that monetary policy remain relatively accommodative in the near term but should guard against inflation risks in the future. In March, we've seen China's M2, a broad measure of monetary supply, rose 15.7%, much higher than the government's target for this year of 13% and also higher than market expectations. Are you worried that the system has too much liquidity?

A: I think you need to look wider than just the monetary supply figures, because credit is moving away from the banking sector to the capital markets. The growth in total credit is perhaps around 19% or even higher. Most economists expected that the growth in money and credit would have resulted in faster economic growth. But it hasn't happened, possibly because the government's restrictions on housing have prevented credit flowing into housing. That may be an area where the government is likely to tighten further.

So, is the rapid credit expansion a risk? If you look at on-the-balance sheet banking credit and total capital market credit, you come to a debt-to-GDP ratio of just under 2. It's maybe higher than other developing countries, but those countries that have run into financial problems, such as Cyprus or Iceland, their debt-to-GDP is 8. What really should concern people are perhaps wealth management and trust products that have seen growth as high as 75% in the past year.

Q: Last week, Fitch Ratings cut China's long-term currency debt to single-A-plus from double-A-minus. Is the rating agency barking up the wrong tree?

A: If you look at overall government debt, even if we count in local government vehicles, it still comes up to only about 50% of GDP. And, interest rates are well below the growth of nominal GDP. China also issues its own currency. The idea that China could default is not really on the cards.

Q: China has $3.4 trillion in foreign reserves while there is about $34 billion outstanding sovereign debt denominated in U.S. dollars. Fitch has an A+ rating for China's foreign currency debt. Does the rating make sense to you?

A: The risk of external financial crisis for China is very limited, simply because there are 50% of GDP in foreign reserves. In addition, there are capital account control measures. Also, I don't think domestic government debt pose a problem neither. The national government's fiscal deficit is expected to be 1.5% of GDP, which means debt to GDP ratio will fall in 2013.

Q: Back to the OECD report, you noted that consumption has contributed more than investment to the economy during the past two years. In 2011, consumption contributed 5.2% while investment contributed 4.5%. Last year, it's 4.1% from consumption and 3.9% from investment. And you expect this trend to continue in the next two years. Is it time for this argument to end now?

A: I think so. Over the longer term, you can expect real wages to grow faster than productivity, which will reduce the return on capital. So you will start seeing higher consumption and slower investment going forward.

All the signs point to a re-balancing occurring now. Essentially, the process has to be driven by labor shortage. That will happen in China in the next few years with the working and total population starting to decline.

About Richard Herd:
Richard Herd is senior economist at the Organization for Economic Co-operation and Development (OECD), an influential Paris-based international organization that promotes better government policies. Herd is the head of OECD’s China research team and has been researching the Chinese economy for eight years. He graduated from the University of Cambridge.

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The amount and the valuation of the investment are not available.

The investment will significantly increase Hertz's presence in China's rapidly expanding car rental market. China's domestic car rental business is expected to grow more than 15% annually through 2016.

Last July, American private equity firm Warburg Pincus sank $200 million for an undisclosed minority stake of China Auto Rental. The Beijing company had planned to IPO in the U.S. last April, but canceled after market deteriorated.

Estimating the valuations of the two deals is difficult. According to Securities and Exchange Commission filings last April, China Auto Rental's adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) during the first and fourth quarter of 2011 were RMB44 million and RMB125 million. It grew to RMB198 million in the first quarter of 2012. But as late as the fourth quarter of 2011, China Auto Rental ran a net loss of RMB34 million.

The filings also showed that Legend Holdings owns a 65 percent stake in China Auto Rental. Legend Holdings is the parent company of Chinese private equity firm, Hony Capital. It is not clear from whom Hertz purchased its 20% stake.

Mark P. Frissora, chairman and CEO of Hertz says in a statement that "China Auto Rental…doubled its revenues in 2012 to $250 million," and that is 2.5 times larger than any other Chinese car rental company.

According to Warburg Pincus' website, China Auto Rental has a fleet of approximately 32,000 vehicles as of June 30, 2012. It also has nearly 600 service locations in 66 major cities and 52 major airports across China.

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It means 36% of China's massive $3.4 trillion total foreign reserves pool is now in ultra-low yielding U.S. treasuries. The benchmark 10-year treasury yield is around 0.1% percentage in February, and has been mostly moving below 2% during the past 12 months.

On the other hand, the U.S. registered an inflation rate of 1.7% in 2012 and 3% in 2011. Even though the U.S. Federal Reserve anticipates that inflation over the medium term likely will run at or below its 2 percent objective, nearly 40% of China's huge foreign reserves are still potentially losing value everyday.

China is the largest foreign holder to U.S. government debt, and Japan is the second largest, with $1.097 trillion in total holdings. Japan has decreased its U.S. treasury holdings by $34.8 billion since last October.

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“Unlike large cities which are implementing waste-to-energy projects through public-private partnerships, smaller municipal governments have difficulty attracting private sector interest, which results in large amounts of untreated waste leading to harmful gas emissions and soil and groundwater contamination,” said Hisaka Kimura, Principal Investment Specialist of ADB’s Private Sector Operations Department.

The PRC is the world’s second largest producer of solid waste, generating more than 220 million tons annually. Although the per capita production of solid waste in the PRC is only about 20% of the average in industrialized nations, it is expected to grow considerably in small and medium-sized cities where huge population growth is expected by 2030.

Developing waste-to-energy plants for smaller cities will address these challenges, and generate a valuable source of renewable energy as well.

The ADB loan will help build at least nine plants capable of converting up to 6,300 tons of municipal solid waste daily into electricity. The plants are expected to generate around 610 gigawatt-hours of electricity a year by 2018, using clean technologies.

The project was identified and developed by ADB’s public sector operations and financed by private sector operations under its new Public-Private Partnership initiative.

Dynagreen, the environmental infrastructure arm of Beijing State-Owned Assets Management Company, will develop and operate these facilities under public-private partnership arrangements. Unlike many of its peers, Dynagreen employs technology which does not require coal as a supplemental fuel to burn the waste. By using fossil fuel substitute and avoiding methane emissions, the plants will reduce greenhouse gas emissions in the PRC by about 450,000 tons a year.

ADB is extending a direct loan from its ordinary capital resources of $100 million equivalent in yuan and a local currency complementary loan of up to $100 million equivalent to be funded by commercial banks. An associated technical assistance grant of $500,000 from ADB will also help Dynagreen enhance its corporate governance system.

About Asian Development Bank:
ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth and regional integration. Established in 1966, it is owned by 67 members — 48 from the region.

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It is expected that a number of second-tier cities will face peak office completions in the coming quarters, which in turn will continue to push up the market vacancy rate and cap the growth potential of offices. Some office projects may even postpone their completion to avoid the completion peak. Looking ahead, retail supply in the pipeline remains abundant. The increasing supply will on one hand enhance the average property quality and expand the retail markets’ geographic distribution, while on the other hand bring great pressure to the project pre-lease of cities with high supply. Developers may need to deal with the situation through strategies such as differential positioning, differentiated marketing and delayed opening for businesses. With constantly tightening regulation policies for the residential market, housing prices growth is expected to decelerate and transaction volume will decrease due to the wait-and-see attitude in the market. Due to the impact of limited supply of quality industrial property, relatively low land price and industry development trends, industrial property is expected to be one of the hot spots in the future property market.

Office Market

Net take-up nation-wide only reached 523,865 sqm in Q1 2013, down 21.8% q-o-q and down 37.8% y-o-y, the lowest level since Q1 of 2009. At the same time, new supply during also dropped markedly as a number of projects postponed their deliveries. As a result, nationwide office vacancy fell by 0.2 percentage points to 12.6%. The vacancy rate of first-tier cities declined for two consecutive quarters, but the vacancy rate in second-tier cities continued to rise since the fourth quarter of 2011. In this quarter, the trend of nationwide rents remained stable.

In terms of regional performance, demand from cities in Western and Central China (Chengdu, Chongqing, Xi'an, Wuhan) declined most in this quarter, with office net take-up in these regions down 60% y-o-y. The demand for prime offices in East China recovered to some extent, with regional net take-up increasing 11% q-o-q and the vacancy rate down 0.6% in Q1. As for rents among first-tier cities, rents in Shanghai and Shenzhen declined, while rents in Beijing and Guangzhou increased slightly. Of the second-tier cities, rentals in Chengdu and Dalian declined at the highest rate; Wuhan and Chongqing recorded more than 1% growth; other cities remained stable.

A number of second-tier cities will experience peak office completion and delivery in the next few quarters, which is expected to continue to push up vacancy rates. Second-tier cities in West China are expected to face greater pressure in office pre-leasing and leasing. As such, rent performance will be under pressure and some office projects may push back their deliveries.

Retail Market

In Q1 2013, national retail leasing activity remained robust. Except for the East China area, many cities in other areas all have new properties entering the market. Most of the newly completed retail properties achieved satisfactory occupancy rate upon opening. The international top luxury brands continued to expand in China, but at a decelerating pace. International and domestic fast fashion brands and F&B entertainment brands remained active in expanding into second-tier cities. Driven by strong demand, the vacancy rate of national prime retail dropped 0.3% q-o-q to 9.3%. The average retail rent edged up 0.9%, with first-tier cities registering a growth rate of 1.7%.

In terms of regional performance, retail supply in second-tier cities in North and West China stayed at a high level; new retail space from these two areas took up nearly 80% of the total new national supply in Q1. The average rental rate increased more than 8% y-o-y, led by Hangzhou, Beijing and Wuhan. Although there were no new projects entering the market in this quarter, impacted by previous stock and future large supply, the retail market in Shenyang remained bleak with vacancy rates continuing to rise, and rental rates continued to drop. In response to the bleak market situation, multiple projects chose to close for fit-out or actively conduct tenant adjustment. Some department stores faced brand withdrawal and stopped business for internal modifications.

As the growth of retail spending slows down and competition intensifies, it is anticipated that luxury retailers might slow down their expansion in China in the future and turn their focus on existing stores for quality and image promotion, especially those in first-tier cities, while also emphasizing more personalized services to distinguish their market positioning. In terms of the geographical distribution of retail properties, many second-tier cities represented by Ningbo, Chengdu and Chongqing have shown an obvious trend of expanding from core central areas to urban sub-centers or decentralized areas. It is predicted that this trend will be even more obvious as more new properties enter the market. Due to the relatively stable supply demand dynamic, it is predicted that retail performance of the first-tier cities will continue to stabilize. As many second-tier cities will usher in retail supply peak in succession in the future, the retail vacancy rates there may rise and the rental growth will visibly slow down. In view of the increasing pressure to recruit tenants, it is expected that there will be more retail projects in second-tier cities choosing to defer entry.

Residential Market

On March 1st, the State Council issued its Notice on Continuously Fulfilling Real Estate Market Regulations, reiterating the importance of housing price stabilization, strengthening of the construction of common and indemnified residences along with the enhancement of market supervision. The notice signals that stricter regulatory policies are likely to be implemented in limiting purchases, differentiated loans and taxation. Except for Beijing and Shanghai defining “basic stabilization” as its goal with respect to 2013 housing price control, local governments of many other places have confirmed that the increased rate of housing prices should not exceed that of the disposable income of local residents. Although numerous details are pending finalization for new housing price control policies and the short-term transactions of the common residence market are strong, the impact on the high-end residential market is still unclear.

It is anticipated that this policy round will send out a signal of tight control of the housing market by levying a 20% capital gain tax and with further tightening of loan policy on second home purchases. Such policy will effectively curb the rising expectations of the housing market since Q2 of 2012, and will hold down the growth rate of housing prices in the foreseeable future. The volume of housing purchases and sales according to estimates will decline because of the rising transaction costs and wait-and-see attitude of home buyers. However, considering that the total of new lands purchased by real estate developers were almost stagnant in 2011 and the first half of 2012, in the short run new supply and the probability of significant decrease of housing prices will be low. If housing prices continue to grow in some cities, there may be additional tightening policies put in place by local governments.

Industrial Market

Q1 has witnessed a stable increase of industrial markets nationwide. Regarding the prime logistics market, rental rates have shown little change due to balanced supply and demand in Shanghai, Hangzhou and Dalian while other cities have all seen rental growth of different degrees. Among first-tier cities, Beijing, Guangzhou and Shenzhen have seen robust demand and rental rates will further rise due to limited leasable space. Among the second-tier cities, most will experience strong logistics market except Chengdu, whose logistics market may contract due to a concentration of supply. Regarding business parks, the “spillover” from office spaces to business parks, which significantly appeared in Shanghai and Beijing, will also happen in many second-tier cities where the office rental rates are growing fast.

In view of the limited supply of prime properties, and the relatively cheap price of industrial land, the recovering manufacturing and prospering e-commerce and logistics industries , it is estimated that the future need of the industrial market will remain strong, with the scale of industrial facilities, especially that of logistics and warehouse market, will further expand.

About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2012 revenue). The Company has approximately 37,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.

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- China's official PMI (Purchasing Managers' Index) number rebounded significantly in March, consistent with the rebound shown in the HSBC PMI released earlier. The statistic further supports the view that China's economic recovery is gaining momentum.

- Economists agree that 2013 will have a "tiger head, snake tail," meaning a strong first half and more headwind during the second half. Investors should stay cautious for more tightening measures from the government on the property sector (and potentially from China's Central Bank) during the second half of the year.

- ANZ issues a report calling for a residential property bubble burst in Hong Kong. During the past 12 months, Hong Kong's economy expanded 1.4%, but residential property prices have increased 23%, surpassing the previous peak set in 1997. ANZ estimates that Hong Kong's actual residential property prices at the end of 2012 are 24% higher than its fair value, and are headed for a correction.

- Historically, a widening gap between actual price and fair value (like it is right now) has preceded a significant price correction. For example, the fourth quarter of 1997, second quarter of 1998 and fourth quarter of 2008, all registered price declines of more than 16%. That provides some indication of the extent of the price correction.

- Alliance Bernstein releases a report on China's listed banks performance from fourth quarter of 2012. Overall results beat market expectations by 1% on average, which Alliance Bernstein explains are made possible by the following factors: 1, net interest margins were up 2 basis points quarter over quarter, while the market expected a 5 to 10 basis point decline. 2, fee income grew 25% for the group, in particular in cards and custody businesses. But watch out: Alliance Bernstein predicts that net interest margins will compress 5 to 10 basis points in the fist quarter of this year.

- Standard & Poors released a report on China's shadow banking sector last week. The U.S. rating agency estimates that China's shadow banking is as large as RMB23 trillion (US$3.7 trillion) at the end of 2012. That's equivalent to 34% of the total loans in the banking sector and represents 44% of China's GDP in 2012. This 44% ratio compares with 111% for G20 countries and the Euro-zone.

- But after careful analyses, S&P doesn't believe that China's shadow banking has reached a point to destabilize China's financial system. It is because: 1, the size of China's shadow banking is relatively modest compared to the regular banking sector; 2, the risk profile of shadow banking products are not all rotten apples. Only a small portion may become bad; 3, the official banking sector is in a relatively healthy state when you consider capitalization, earnings and funding profiles.

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In this episode of China Money Podcast, founder and CEO of Beijing-headquartered, $500 million-under-management HAO Capital, Simon Eckersley, talks with our host, Nina Xiang, on HAO Capital's investments in the healthcare and environmental protection sectors, the firm's plans for future fundraising, and some key methods it uses to help portfolio companies grow.

Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt below.

Q: First, give us a brief introduction of HAO Capital?

A: HAO Capital is a Beijing-based private equity firm. We take minority stakes in growth businesses in China, and focus on healthcare, consumer and light industrial (including clean tech) sectors.

We started raising our first fund in 2005, and closed in 2007 with $100 million. We raised our second fund of $400 million from 2007 to 2008. We've done a number of co-investments worth around $50 million as well, so we currently manage over $500 million.

Q: Going back in history, can you share with us your experience of raising your first fund back in 2005 and 2006?

A: At the time, there was less competition in terms of the number of (China-focused) funds. But then, a lot of LPs (Limited Partners) were also not really focused on China, as it's still a fledgling private equity market. It's different today. Looking at our own LPs, they are invested in (many more) China funds compared to back then.

Q: What is the average size of your investment, and how many active investments do you have now?

A: On average, we look at investments in the $20 million to $50 million range. We currently have 14 active investments between the two funds. The first fund is almost fully paid back. We've exited a lot of the investments from that 2006 and 2007 investment vintage, and are only managing a couple of investments from that fund.

We started investing the second fund in 2008, and is now about 80% invested. We've exited or partially exited a couple of investments, but are still managing most of that portfolio.

Q: And one of the portfolio companies is SKR, a company focused on diagnostic imaging medical equipment. It has a joint venture with Chinese electronics maker, TCL Corp. Can you share with us the latest on this investment?

A: The per capita spending on medical equipment in China is a few dollars compared with hundreds of dollars in the developed countries. It's obvious that China's healthcare market has enormous potential for growth.

But there are actually very few medical equipment companies of any scale in China. There are a lot of small regional companies. Many of them don't have the research capabilities to develop Generation II or Generation III products after launching Generation I products. They also tend to lack management talent.

Today, the high-end medical equipment market in China, such as MIR, PET-CT scan, ultrasound, is really controlled by GE, Philips and Siemens. They take, in certain subcategories, 75% to 100% of the market share. So, we partnered with a group of executives headed by Zhi Chen, former president of GE Healthcare in China, to form SKR. And SKR has a joint venture with well-known Chinese consumer product manufacturer, TCL Corp., to create TCL healthcare whose vision is to enter that high-end medical equipment market and become a national champion.

Several decades ago, GE, Philips and Siemens, all moved from consumer products to healthcare equipment, leveraging their manufacturing capabilities, brand and scale. So from TCL Corp.'s perspective, it is following the trajectories of its Western predecessors.

One of the central themes for this business' growth is through acquisition. That's something we have been focusing on during the past six months. There are a number of opportunities that we are in the process to realize and will give a significant boost to the business.

Q: It sounds very ambitious, and no doubt there will be plenty of challenges that you will encounter. So far, what's the biggest challenge?

A: Sure, these things don't happen overnight. To have a full suite of products will take time. So initially, we will focus on penetrating certain sub segments.

Q: But every private equity fund has a fund life and faces pressure to realize returns. What's your thinking on exits for this investment?

A: The likely exit is probably an IPO, and we are considering other exit possibilities. Sometimes, it takes much longer for a company to achieve their full potential than we are allowed to stay invested. But I believe we will be able to achieve an attractive return within our time frame.

Q: HAO Capital also invested in an interesting company called LP Amina in the environmental protection sector. Can you share with us the progress on this investment?

A: The enormous challenges China faces in managing its environment also present great investment opportunities. LP Amina is one great example. Founded by William Latta, a former executive from Lastom Power, it provides products that improve coal-fired power plants' emissions and efficiency.

In the beginning of last year, China released new nitrogen oxide emission reduction regulations. As a result, revenue increased a couple of hundred percent. The company's backlog at the end of 2012 was almost four times of the total revenue of last year. So it was a breakout year for the company.

Q: Last time when we chatted, you pointed out trade sales, secondary transactions between GPs and share repurchases as alternative exit possibilities, considering the IPO market remains essentially shut. From LPs' perspective, have you heard from any of your LPs discussing selling their China private equity stakes?

A: We know of an LP who pulled out from private equity completely, not just its exposure in China. So we were part of this secondary process. As a result, one of the world's best-known private equity investors took over the position. So it actually worked out quite well for us.

Q: You have plans to raise a third USD fund? And, any plans for raising a RMB fund?

A: Our intention is to go out and raise a third USD fund during the second half of this year. As far as raising a RMB fund, it's something we flirted with several years ago, but ultimately decided to see how the market will evolve. If we were going to raise a RMB fund, it won't be a "me-too" approach. It will be separate from what we do on the dollar side: Either the size or the strategy will be different so that the two don't directly conflict.

About Simon Eckersley:
Simon Eckersley is a co-founder and CEO of Beijing-based HAO Capital with over $500 million under management. Previously, he spent eight years at Goldman Sachs, and was an executive director in the investment management division of Goldman Sachs International in London. He also worked at Charterhouse Development Capital and Morgan Grenfell & Co. previously.

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Standard Life is the first of four external managers selected to partner with CalPERS in the MAC program.

“We’re excited to have Standard Life on board as our first partner,” said Joseph Dear, CalPERS Chief Investment Officer. “Standard Life’s approach presents us with an excellent opportunity to add value to our portfolio, and to our investment operations by bringing in an outside perspective as we work toward our long-term investment goals.”

Standard Life’s investment approach for the MAC fund is modeled on their Global Absolute Return Strategies (GARS) approach. GARS is based on the key beliefs that marginal investors have a short-term time horizon which leads to market inefficiencies, and that by taking a three-year market view, those inefficiencies can be taken advantage of to create positive investment outcomes.

"This innovative relationship, the first of its kind, presents a great opportunity for Standard Life Investments to work closely with the CalPERS investment team,” said Keith Skeoch, CEO of Standard Life Investments. “What is really exciting about the partnership is the knowledge exchange element of the program, and strong alignment of our interests with those of CalPERS and its participants. We look forward to a long and successful relationship.”

The MAC Program has two strategic objectives. First, the Program is intended to outperform the CalPERS total fund over a market cycle, using primarily public market assets, and doing so with lower volatility and less risk.

Secondly, the Program is expected to facilitate a transfer of meaningful information from the MAC Partners to CalPERS investment staff, to help develop scalable, sustainable, and efficient methods of increasing the likelihood of meeting long-term CalPERS investment return goals.

CalPERS is the largest public pension fund in the U.S. with approximately $256 billion in assets. The retirement system administers retirement benefits for more than 1.6 million current and retired California State, public school, and local public agency employees and their families on behalf of more than 3,000 public employers in the state, and health benefits for 1.3 million enrollees. For more information about CalPERS, visit www.calpers.ca.gov.

External Affairs Branch
(916) 795-3991
Robert Udall Glazier, Deputy Executive Officer
Brad Pacheco, Chief, Office of Public Affairs
Contact: Joe DeAnda, Information Officer

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In this episode of China Money Podcast, head of non-listed real estate Asia in APG, one of the largest pension fund asset managers in the world with assets under management of approximately €325 billion, Daan van Aert, discusses with our host, Nina Xiang, APG's investments in China such as car parks and logistic warehouses, his views on the Chinese residential property market and if distressed properties in China present good opportunities for investors.

Listen to the full-interview in the audio podcast, watch the shortened video version or read an excerpt below.

Q: APG is one of the largest pension fund asset managers in the world with €325 billion under management. Give us some background on AGP's investments in Asia, and what kind of role does Asian real estate play in APG's overall strategy in Asia?

A: APG started an office in Hong Kong in 2007 with a mandate for private equity real estate and infrastructure investments. Shortly after, we expanded our team to include listed real estate equity and emerging market equity. Since we started, our portfolio in Asia has grown from €1 billion to €9 billion under management.

Of the €9 billion assets currently under management, €6 billion is in both listed (€4 billion) and private (€2 billion) real estate. In terms of geographical breakdown, about 70% to 75% of our total real estate portfolio is in developed markets such as Japan, Hong Kong and Australia. The rest is in emerging markets, and China takes about half of this portion.

Q: How much capital are you deploying every year into private real estate?

A: We don't have a target. What we do is to look at our already large existing portfolio and focus on strategies and the right partners to add value. If we can find interesting strategies and strong partners, then we will invest more money.

During the last few years, we have been investing considerable amount of money continuously. Our real estate portfolio has grown from €1 billion in 2007 to €6 billion, from both investment appreciation and new allocations. That gives you a sense of our growth.

Q: What is the average size of your investments and how many investments do you usually keep in your portfolio?

A: We serve very large institutional clients, therefore we won't look at transactions under $75 million. In terms of the number of investments we have, we don't really have any preferences, as our global real estate portfolio is already very diversified.

Q: Among some major categories of real estate: residential, retail, office buildings, logistics, which segment(s) do you find the most attractive in China right now?

A: We think logistic warehouses are the most attractive sector. China's strong growth – not only in imports and exports, but also in domestic consumption – is leading to enormous amount of flow of goods. The need for quality logistic warehousing is gigantic. In addition, the amount of capital spending for developing logistic warehouses is less compared with office buildings and retail properties, for example.

The challenge is that it's difficult to buy land to develop logistic warehouses, as the land sales and tax revenues are less attractive to local governments. We have already invested in a logistic property in Shanghai, and we think there is still room to increase our investments in this category.

Q: You've invested in Australian logistics properties, Indian hotels and car parks in China. Are there any sectors that you would avoid in China now?

A: In general, we are less interested in the office sector because of its cyclical nature. In China, you usually cannot buy and hold a whole office building because lots of transactions are what we call "strata title sales," where the developers are selling the building floor by floor. This makes it harder to buy and manage a whole building, and creates difficulties later on when you want to sell.

We are interested in the residential housing market in China because we believe there is still ample demand for quality housing. The government's new tightening measures are also healthy for the market's long-term prospects.

Q: Are you finding lots of opportunities in the distressed property market in China now?

A: There are some distressed opportunities, but not on a large scale. Sometimes you see certain developers needing more capital, but not on a scale that we have found attractive opportunities.

Q: Can you share with us your investment decision-making process?

A: We first look at country dynamics, such as political environment, financial stability, growth prospects, inflation, etc. Then we examine the real estate industry dynamics, including the depth of the market, legal framework, government policy, regulatory environment, etc.

Afterward, we zoom in on the specific real estate opportunity. We look at strategy, partners, structures of the transaction, corporate governance, tax structures, etc.

We receive advice both internally on legal and tax issues, and externally on valuation, sustainability, control risks systems, and so on. So we have a very vigorous and thorough due diligence process.

Q: APG committed $150 million for the first close of a fund with China Overseas Land & Investment and ICBC International Holdings last February. How is that investment developing?

A: We have started several projects in different cities, and they are going well.

To emphasize, we are strategic financial investors. We don't have teams based in China, though we have people with deep experience in the Chinese markets. So we need strong local partners like China Overseas Land & Investment and ICBC International to be on the ground to source the best projects. But of course, we are very engaged on the strategic direction of our investments, and work closely with our partners, whose interests are closely aligned with ours.

Q: What's your target return?

A: We look at each investment's risk profile and assess a target performance case by case. The target returns vary, from high single digits for core products to high double digits for very opportunistic strategies.

Q: Going forward, what's your outlook for APG's investments in Asia and China?

A: We definitely see our investments growing. We see growing demand for high quality real estate in the emerging markets, and we can fill the gap as a capital provider. Currently, 24% of our global real estate portfolio is in Asia. I certainly see that ratio growing over time.

Q: Can you share some of your investment mistakes and also the lessons you've learned?

A: Since the global finance crisis, we are more cautious about using leverage. We started to refocus on the real estate fundamentals, rather than using leverage to drive returns.

Now, our target globally is to have leverage ratios lower than 40% (loan-to-market value). At this stage, our leverage is around 30% globally and in Asia.

Q: One major challenge of investing in private real estate is illiquidity. What are you doing to mitigate that risk?

A: First of all, we are long-term investors. Secondly, if your investment portfolios are good, selling some stakes is doable right now. We see future growth in the secondary market in private funds, which is a global trend. But if you have very opportunistic strategies where you are developing projects and hoping to sell, it will be more difficult to sell as most of the value is generated at the end of the fund's life span.

About Daan van Aert:
Daan van Aert is head of non-listed real estate of APG Asset Management Asia, a subsidiary of APG in the Netherlands. APG is one of the largest pension asset managers in the world with assets under management of more than €325 billion. Van Aert is responsible for APG’s €2 billion non-listed real estate investments in Asia Pacific.

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Listen to the full interview in the audio podcast, or read an excerpt below.

Q: First, give us a brief introduction of Dalton Investments and Dalton's Asian equity strategy?

A: Dalton Investments was founded on the opportunities that arose from the Asia Financial Crisis in the late 1990s. Dalton is a value-oriented investment management firm with a focus on capital preservation and long-term growth. Today, we manage about $2 billion in separate accounts in hedge fund strategies for a number of pension funds, endowments, foundations and family offices.

Our main strategies include global equities, Asian equities, distressed debt and distressed mortgages. About 50% of our total assets are in Asian equities. We run a Dalton Asia Hedged Strategy, which was launched in the beginning of 2008. Since the inception, the Dalton Asia Hedged Strategy is up nearly 50% while the MSCI Asia Index is down nearly 20%. As of the end of this February, the strategy is up over 6% while the MSCI Asia Index is up 4%.

Q: Your Asian strategy uses long-short tactics. What kinds of stocks do you normally short?

A: From the long side, we want to invest in entrepreneur-led undervalued companies. On the short side, it is exactly the opposite. Our short book is mostly filled with state-owned enterprises (SOEs) where senior executives tend to be former politicians or state appointees.

One of our current short positions is a state-owned oil and gas exploration company in Thailand. The company was pressured by the government to expand aggressively overseas and has made a series of over-priced acquisitions in Canada and Africa. Since 2010, their intangible assets have grown 20 times. We believe if the goodwill gets written down – and we think it will – it will hurt the share price.

Q: Within the Asian equities market universe, how attractive do you find the H-share market right now?

A: We generally invest in the H-share market and do not invest in the A-share market. There are far more entrepreneur-led companies listed in Hong Kong that are focused on increasing shareholder value, while the Shanghai (Stock Exchange) is filled with SOEs. Currently, we are running about a 30% net long exposure in China through Hong Kong listed stocks.

Q: Among your China-themed investments, do you favor any particularly industry?

A: We don't. We do, however, favor those family holding companies that are trading at a large discount to Net Asset Value (NAV).

Family-led and entrepreneur-led companies in Hong Kong tend to have a pyramid structure. The holding companies at the top own controlling stakes in the groups of operating companies below. The families or entrepreneurs have a lot of their personal wealth tied to the holding company. We want to be as close as possible to the top of the pyramid.

Also, many operating companies trade at a discount to their intrinsic value. So, if you are buying the holding company at a discount, and each of the subsidiaries trade at a discount, you are getting a discount upon discount by investing at the top of the pyramid.

Q: What are some other valuation metrics you look at?

A: We look at many other metrics such as price-to-book and EV (enterprise value)-to-EBITDA (earnings before interest, taxes, depreciation and amortization) on a regular basis.

Q: Surely, your due diligence process goes beyond the computer screen?

A: Absolutely. Investors have to be careful in emerging markets such as China as managements are not always shareholder friendly. We try to mitigate this risk by investing in companies that are run by entrepreneurs with significant skin in the game. Also, we favor companies that are run by second or third generation entrepreneurs who have experienced previous downturns.

Moreover, our process involves research on the executives themselves, including understanding the family background and whether they have large outside interests. We want to make sure the family's wealth is tied to the publicly listed entity. If they have a lot of outside interests and each entity is doing business with each other, then investors are susceptible to transfer pricing and other risks surrounding corporate governance.

Q: How many stocks do you usually hold in your portfolio? Do you have a more concentrated portfolio or you tend to focus more on diversification?

A: For our Dalton Asia Hedged Strategy, we usually hold between 60 to 90 companies counting both long and short positions. The size of each position is typically between 2% to 5% of Net Asset Value (NAV) of the Dalton Asia Hedged Strategy.

In North America, you can make a value strategy work by investing in cheap companies (alone) because internal and external pressures will eventually make the company change (and its stock prices converge with its intrinsic value). But in Asia, those pressures don't exist. So we try to promote management actions to increase shareholder value through what we call "friendly activism." We write letters to management and meet regularly with the entrepreneurs to encourage (value enhancing) actions such as increasing dividends or share buybacks.

Q: Can you give us an example of your successful investments that has contributed to your returns?

A: One of our best performing investments over the past year is a U.S.-listed Taiwanese company called Himax Technologies, one of the largest producers of LCD display drivers (An LCD display driver is the chip that controls the voltage and timing to move the pixels on a LCD screen). So every LCD screen in the world needs a display driver, and Himax produces a billion display drivers a year.

When we initiated the position in the fall of 2011 the stock had a market capitalization of less than $200 million, and traded at a price-to-book ratio of less than 0.5 times.

Q: Any particular reason why it's trading so low?

A: In late 2010, Himax's largest customer, one of the largest LCD panel makers in the world, decided to diversify its suppler mix. So Himax's sales to them went from nearly 70% of its total sales to 30% in a short period of time. Its share price collapsed, but Himax adapted quickly and was able to increase sales in the fast-growing small panel segment for smart phones and tablets. Since then, Himax’s stock has significantly outperformed the market. We think it still trades at a reasonable valuation given its growth prospects.

Q: Share with us some investment decisions that you regret and the lessons you've learned?

A: A few years ago, we shorted a Chinese state-owned construction company that was extremely overvalued at the time. (After we took our position,) the stock price rallied, and it became a larger position in our portfolio. Moreover, as the share price moved up, we added to our position as we believed the fundamentals of the company were still not right.

In the end, the share price did fall and we made a profit. But initially the stock price shot up for the next three months after we shorted it, and it took about eight to nine months for the share price to collapse.

The lessons learned are that we can't time the market, nor do we try to time the market. We are patient investors and allow time for our thesis to play out.

Q: Lastly, what's your outlook for the H-share market this year?

A: I think overall there will be a lot of volatility, and stock pickers like ourselves will benefit. In 2008, pretty much everybody lost money, and most people made money in 2009. From 2010 onward, we have seen some real alpha being generated by stock pickers. I think 2013 will be the same.

About Tony Hsu:
Tony Hsu is portfolio manager of Dalton Investments, a Los Angeles-headquartered investment management firm with $2 billion in assets under management. Hsu manages Dalton's Asian equities strategies and co-manages Dalton’s Pan-Asia and Greater China portfolios. Prior to joining Dalton, Hsu held positions at Foxconn International Holdings in Shenzhen and at Goldman Sachs.

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The report features in-depth analysis of trends affecting economic growth and wealth creation around the world, including rankings of locations of importance to the world’s wealthy by assessments of four key measures: economic activity; political power; quality of life; and knowledge & influence.

Liam Bailey, Head of Residential Research, said: “According to our Global Cities Survey, London and New York are still the most important destinations for the world’s wealthy but in ten years’ time there will be more Asian cities at the top of that list. By 2023, our survey of HNWIs will show Shanghai and Beijing joining the top 10 at the expense of Geneva and Paris.”

This year, Shanghai is ranked the fifth most important economic centre in the world, under New York and London (numbers 1 and 2, respectively) but above regional economic centres Hong Kong and Singapore (7 and 8, respectively). Beijing comes second as a centre of global political influence, one spot under Washington DC and, crucially, one above Brussels.

Following Shanghai’s and Beijing’s move up the ranks, many other top-tier cities led by Guangzhou and Shenzhen are also creating wealth very quickly and expect to see triple-digit increases in HNWI population and global importance. “Spurred in large part by growth from emerging economies around China, wealth creation in China has not slowed down in the wake of the financial crisis,” said Nicholas Holt, Knight Frank Research Director, Asia Pacific. “Chinese investors are making their impact felt around the world. While Western HNWIs are becoming more risk tolerant as the global financial slowdown continues, many wealthy Chinese are structuring their portfolios differently. We are seeing multiple different trends at work as they seek more conservative real estate investments on one side, but they also are making investments that allow them to enjoy their wealth, too,” he commented.

Lawrence Wong, Alternate Chief Executive of Bank of China International Limited, the private banking service arm of BOCI Holdings, added: “HNW clients in the region are looking for safe havens, having experienced the credit crutch in the EU. Clients are rebalancing their holdings to shift more investment into China.”

Knight Frank’s luxury investment index has shown that collectable assets such as art, fine wine, classic cars, coins and watches have accrued cumulative gains of 175 per cent over 10 years (and 6 per cent last year). Chinese HNWIs are leading this trend, reshaping the global markets for art as well as antiques, jewellery, and other luxury items.

Additionally, the report shows an evolution of the map of the world’s wealthy, with a new concentration of wealth in Asia. Globally, the number of billionaires will increase by 85 per cent over the next 10 years, with the biggest increase being in Asia, 119 per cent. The Top countries for billionaires is still the US with 543 and will grow by 103 per cent by 2022 but China in that time will increase from 154 to 483, an increase of 214 per cent.

China’s property among the most expensive worldwide

Prime residential property in China has the potential to provide huge gains to investors, as the 2013 Wealth Report released today by Knight Frank shows. Especially in cities like Shanghai and Guangzhou, prime property values demonstrate sustained growth far above that of other globalized centres of property investment.

Policies aimed at cooling the property markets in major cities have nevertheless led to a marked difference between growth rates in Beijing, where policy controls have been tightest, as compared to other tier-one cities such as Shanghai and Guangzhou. Investors seeking speedy capital gains should consider these cities and other major real estate markets in China, which grew significantly faster: Shanghai at 10.8% and Guangzhou at 12.5%, compared to Beijing’s 2.3% growth year-on-year.

For example, prime real estate in Upper East Side, a centrally located prime development near Beijing’s CBD, has risen in value 3% from a year previous; similar property at Shanghai’s One Park Avenue development rose 10% in the same period. In fact, prime property in Shanghai now ranks among some of the most expensive in the world, 10th place. This puts Shanghai squarely above key locations such as Tokyo and Los Angeles (14th and 15th place, respectively), however Monaco takes the top spot with Hong Kong in second place.

According to the report, Knight Frank predicts further gains for prime property values in Shanghai and Guangzhou, as demand remains high. As these two markets are targets for investment from other areas in China, they are subject to the economies of other areas of the country, however they also benefit from increasing urbanization and wealth creation in lower-tier cities. Even in uncertain economic times, residential prime real estate remains the largest share of investments for most Asian investors, and for real estate investors in general.

The value of prime property in Chinese cities rises in tandem with a growth in the number of high net worth individuals investing in those cities, however as the report notes, this group’s investment habits are notoriously risk-averse. Chinese buyers’ impact is being felt outside of Mainland China as well, pushing up real estate values in Southeast Asia, Australia, and New Zealand. Fueled in part by money coming in from China, prime real estate values in Jakarta rose 38% in 2012 compared to 20% in Bali, and 12.7% in Auckland. Even Hong Kong, where legislation designed to limit foreign real estate investment came into effect this year, saw gains of 8.7% in the prime sector. Top markets worldwide such as London and New York continue as safe havens for investors from around the world, and analysts are seeing signs of a resurgence in prime markets elsewhere as well following inflows of capital from emerging economies in Asia and the Middle East.

Beijing commercial real estate values up as private investors realize huge gains

Private Chinese investors’ recent interest in commercial property mirrors a global trend, according to the 2013 Wealth Report. In order to diversify their portfolios, private investors worldwide are turning to commercial real estate, according to the report, with a total of USD 92 billion spent by private investors on commercial property in 2012 as compared to USD 47 billion in 2009.

Regulatory environments around the world are also a key factor pushing this trend. Following the Chinese government’s stricter controls on residential property in the wake of the rapid price acceleration in 2010-11, many Chinese investors have been exploring commercial property to continue to benefit from rising land values. Crucially, in Beijing, the market where restrictions on residential real estate purchases were most closely regulated, commercial real estate grew 23% in value in 2012, a full 20% more than Shanghai in the same period.

Knight Frank expects these cities to continue to improve in value in the near future, especially Beijing. Shanghai in particular is expected to remain constant in its low growth as supply increases with a large number of mixed-use developments including retail space and office space are set to come online this year. Beijing however expects supply to remain relatively constant.

Knight Frank’s research also shows high potential for growth in lower-tier cities as many developments enter these markets. In the wake of infrastructure and economic pushes undertaken by local governments, many lower-tier cities are developing potentially lucrative commercial property markets with accelerations both in demand and supply, as mixed-use developments are expected to come onto the market in the near term.

Nick Cao, Knight Frank China Manager, Head of Investments and Capital Markets, said: “Beijing’s growth in this sector has been phenomenal, and we expect this to persist as long as restrictions on residential real estate continue. As for lower-tier cities, retail is a good option to consider as demand from local consumers is quite strong while many cities’ comparative focus on manufacturing and the industrial sector pushes down the value of office and hotel space.”

International markets showed growth that, while sustained, was more conservative than that of Mainland China. Hong Kong’s retail market in particular has been very strong and is expected to push retail space values up by 10-15% in 2013, spurred in part by a near-constant influx of shoppers from the Mainland. Retail space in Kuala Lumpur is also predicted to grow by 6% for the same reason. Retail and office space in London and New York is a particular bright spot for investors from around the world.

Chinese investors show their passion

Wealthy Chinese investors worldwide are looking for assets that satisfy both head and heart. Knight Frank’s Luxury Investment Index maps the place where investment meets personal passion.

As new research compiled by Knight Frank shows, across Asia, a net balance of 19% of high net worth individuals (HNWIs) spent more last year on luxury goods than in 2011 as Chinese wealth makes itself felt around the world. As HNWIs from Europe and America spent less following the global financial crisis, their Chinese counterparts have not slowed down, helping to push Chinese luxury brands such as Moutai and Sun Valley Ice Wines up world rankings. Ledbury Research shows that Asia-Pacific’s share of the world’s leading luxury brand outlets increased from 39% in 2009 to 44%, while North America’s fell from 30% to 24%.

Luxury spending comes from Chinese HNWIs’ desire to enjoy the fruits of their labour. This same impulse leads to investments of passion, such as art, wine and classic cars, which occupy a unique and fascinating niche that combines aspects of luxury spending with collecting and investing. When asked to select the most collected passion investments, respondents in all regions of the world chose fine art. Art was also the sector where spending activity increased the most last year, with a net balance of 19% of respondents predicting clients to spend more on art in 2012 and 13% expecting the trend to continue into 2013.

“China is now the world’s largest market for art,” says Viola Raikhel-Bolot, Head of International Art Advisory at 1858 Ltd, a leading art advisory firm. China’s share of the global market in 2011 was 30%, up from 23% in 2010, compared with 29% for the US (down 5%) and 22% for the UK.

The next most-collected asset overall was watches. In November 2012, an Asian collector bought a platinum chronograph Patek Philippe wristwatch owned by British rock guitarist Eric Clapton for the equivalent of US$3.6m at a Christie’s sale in Geneva. Wine was the third most popular passion investment, scoring highly in all areas bar the Middle East. Jewellery and classic cars complete our global top five.

Keith Heddle, Investment Director at Stanley Gibbons, says philately is definitely on the up among HNWIs, including in China. “Chairman Mao banned stamp collecting as bourgeois; now there is a resurgence,” he says. As with art, collectors in emerging nations tend to be patriotic when choosing what to buy and this can cause local markets to overheat, adds Mr Heddle. By contrast, most serious investors have very little interest in the stamps themselves, he says. “They have often just been badly burned by more traditional investments.”

The Knight Frank Luxury Investment Index is based on the weighted performance of existing indices for nine collectable asset classes: art; Chinese ceramics; classic cars; coins; furniture; jewellery; stamps; watches; and wine.

To download the report:

www.knightfrank.com/wealthreport

HNWI

Throughout this report, we use HNWI as an abbreviation for high-net-worth individual. Unless otherwise stated, an HNWI is defined as someone with US$30m or more in net assets. Net assets include homes and take into account debt and liabilities where ascertainable.

Prime Property

The most desirable and most expensive property in a given location. Prime markets often have a significant international bias in terms of buyer profile.

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Listen to the full interview in the audio podcast, or read an interview excerpt below.

Q: First, give us a brief introduction of Palico and Triago, two companies you founded and currently hold positions in?

A: I started Triago over twenty years ago. The objective back then was to help private equity fund managers in Europe to raise money from limited partners (LPs) in the U.S. Triago, (as a placement agent), has grown to be one of the market leaders in both fundraising and secondary transfers (meaning we help LPs sell their stakes in private equity funds to other LPs). I am still chairman of Triago, but am no longer involved in the daily operations.

I am now very involved in the daily operations of Palico, which is an online "dating service" for private equity GPs (general partners), LPs and service providers such as placement agents or lawyers. We will soon reach 1,000 members from 60 different countries with many blue-chip LPs and GPs.

Q: What has Palico achieved in attracting China-focused private equity GPs and LPs?

A: Actually, fund managers and investors based in China account for about 14% of our membership base. That is a much higher percentage point compared to their weighting in total fund number and asset-under-management globally. We estimate China represents about 6% of the $3 trillion asset-under-management out there globally.

Q: In 2012, the volume of China-focused private equity fundraising has dropped by 50%, mostly due to the decline of RMB fundraising, but USD fundraising also suffered. How have LPs changed their mindset about allocating to Chinese private equity funds?

A: According to Palico's own database, fundraising (both RMB and USD fundraising) in China has dropped about one third last year from 2011's all-time high. So the severity of the decline depends on which source you look at. Though a one-third drop is still high, at about $11 billion in total funds raised, 2012 still represents the third best year ever for China fundraising, following 2011 and 2008.

Considering growing interests among our LP members and what will be available for global fundraising as private equity "dry powder" (see explanation below) expires, we expect at least the same amount (of last year's fundraising total) will be raised for China funds this year.

We estimate there is $100 billion of "dry powder" in Chinese funds, meaning money that GPs haven't invested and that they can still draw down from their investors. This is one eighth of the global private equity "dry powder" of $800 billion. We feel China should take a greater share of global fundraising in coming years as the Chinese economy recovers. Those well structured USD and RMB denominated China funds with good track records will continue to raise funds with ease in 2013.

Q: What do you think will happen to that $100 billion "dry powder" in China this year?

A: You have two groups of GPs out there. Those with good deal flow and discipline, they will be able to put money at work in good terms. Those with poor deal flow and less discipline, they will probably either use the money in the wrong way, or they will have to leave the market at some point. We estimate that at least 50% of this "dry powder" could vanish in the next couple of years if the market condition doesn't change.

We feel the Chinese private equity market will rationalize. Out of the 1,000 or so GPs in China, close to a quarter will fail to raise a new fund in the years to come.

Q: Does this mean the number of private equity funds in China will decrease?

A: Probably not. When a group of managers disappears, you probably have at least one spin-off, or sometimes two. So the overall number could increase. I think the Chinese private equity business will only grow, and we are just at the beginning of this growth, both in asset-under-management and total number of firms.

Q: For GPs in China and other emerging markets wanting to raise a new fund this year, what do you think the fundraising environment will be?

A: Private equity is still an interesting asset class to investors as it is one of a few places where returns can get returns in the two-digit range. The issue is exits.

The amount of money that's still "trapped" in private equity portfolios is staggering. Over the last forty years, $3.8 trillion were raised for private equity funds globally. But if you look at the four bubble years from 2005 to 2008, close to 50% (or $1.8 trillion) were raised during this period. Only 22% of this money has been returned to investors.

Since most LPs invested "big" in this past cycle and they are still waiting for their money to be returned, it means they are over-allocated to private equity. So even if LPs love private equity, they will have to wait a bit for exits to happen before they can recommit.

There is one exception. LPs who trade on the secondary market (meaning buying and selling of private equity fund stakes among LPs) have more flexibility. Ten or fifteen years ago, the secondary market was tiny with a small number of sellers, usually distressed institutions, and professional secondary funds who specialize in buying private equity fund stakes from LPs. There were about 30 players doing a few deals each year.

Today, there are 500 to 600 buyers including specialized secondary funds, fund of funds, family offices, etc. Last year, there were about $25 billion of secondary transactions. Ten years ago, the volume was $2 billion. So if you are a seller today, you can get a decent price for your private equity fund stake, around par at this point.

The reason for this growth is not only the difficulties in exits on the GP level, but also because LPs are more willing to manage their private equity allocation. They may want to sell some under-performing stakes and buy more stakes that they think will perform well in the future. We estimate the secondary market will grow to at least 5% of the total asset-under-management of $3 trillion, or $150 billion, in the next five or more years. And we think the IPO backlog will boost China-focused fund secondary deals to about 8% of this market in 2013 from around 4% last year.

Q: What will be the impact from this increased trading of private equity fund stakes among LPs?

A: Performance at the GP level won't be impacted. As to the LPs, it depends on if they sell their stakes at par or take a haircut.

Q: You are also predicting growing secondary transactions of portfolio companies among GPs in China? What kind of growth do you see?

A: The fact that a private equity fund is selling a portfolio company to another fund is a sign of maturity. It shouldn't grow too much, otherwise it could look like artificial sales.

If this type of secondary transactions takes about 30% to 40% of total deals, the market is okay with it. In Europe and the U.S., when secondary buyout deal takes up to 70% of total deal numbers, people were fearing bad times because it means fund managers have difficulty exiting their investment outside of their peers.

About Antoine Dréan:
Antoine Dréan is founder and CEO of Palico, an online marketplace for the global private equity fund community. In 1992, he founded Triago, Europe's first independent private equity placement agency and now one of the leading agencies in fundraising and secondary transactions. Antoine holds an MBA from the Wharton School of the University of Pennsylvania.

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She made the comments during a press briefing held by the Foreign Correspondents' Club Of China (FCCC) in Beijing on Monday, Feburary 25, 2013. Listen to the full interview in the audio podcast, or read a summary below.

On China's economic recovery and its key drivers:

We've certainly had a rebound since late November (last year). The recovery has been underway for a good three months now. It's important to keep in mind why we've had this recovery. I think the key reason is a significant increase in liquidity. There has been so much money pumped into the economy during the past several months. In January, aggregate social financing went to an all-time high of 2.54 trillion RMB. Total bank lending also surged to over 1 trillion RMB, meaning bank lending has become less important to the overall liquidity picture in China. But now three months into the recovery, we already have some concerns about overheating.

On potential overheating of the Chinese property sector:

It's becoming more apparent that the property market is running into potential overheating territory (as indicated by price increases, transaction volumes and aggressive expansions by property developers). Sometime over the next few months, we could have some government measures to restrict the increase of property prices.

One, restriction policies on home purchases will be more strictly implemented. Those measures were never removed, but the implementation became a bit more relaxed since mid-2012. Secondly, other cities (currently with no purchase restrictions) could be subject to the same tightening rules if their property prices are seen as rising too fast. Then, on the financing side, especially for second or third mortgages, the cost and availability of financing will also become more hostile to home buyers. Lastly, recurring property tax will be rolled out to a larger number of cities from just Shanghai or Chongqing today.

On how China's infrastructure investment will evolve in the future:

In the last ten to fifteen years, China's infrastructure investment was focused on supporting its export-manufacturing sector. In the next ten years, infrastructure investment will shift to support Chinese people's livelihood, such as urban subways, light rail and environmental improvement. The amount of money the government will spend on these will be still humongous.

On if China's state-owned enterprises will pay more dividend to support China's social welfare build-up:

There is an unspoken rule that state-owned companies listed on the domestic A-share market should pay 30% or 40% of their profits in the form of dividends. The listed companies pay dividends to their parent company. The parent company is owned by the State-owned Assets Supervision and Administration Commission (SASAC), which is under the State Council.

Take China Mobile for an example. China Mobile Hong Kong (CMHK) pays dividend to its parent company, China Mobile Holdings. Other shareholders also get the same dividend. China Mobile Holdings pays the money to SASAC. SASAC reallocates those dividends from companies that are successful to companies that perhaps need cash. Some cyclical industries, such as aluminum smelting or shipping, are loss-making right now. So there is some reallocation of resources among the SOEs. But I think it's a fare assumption that China will expect the large SOEs to contribute more to the broad social welfare agenda. But for now, the Central Government has plenty of money. So it doesn't really need the dividend.

In addition, when a state-owned enterprise does a public listing overseas, 10% of proceeds goes to the National Social Security Fund. That is supporting China's overall pension system, although the NSSF is a fund of last resort. It doesn't pay out anything right now, but eventually, that money should benefit China's retirees.

About Jing Ulrich:
Jing Ulrich is chairman of global markets, China at J.P. Morgan. She is responsible for covering the firm's most senior global clients across all asset classes and for maintaining relationships with executives of China's leading enterprises and government entities. Previously, Ulrich was managing director of Greater China equities at Deutsche Bank. She also spent eight years at Credit Lyonnais Securities Asia, where she led the top-ranked team covering China.

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The arrangement would be used to finance trade and direct investment between the two countries and to support domestic financial stability should market conditions warrant. They have agreed that the Bank of England and the People’s Bank of China (PBoC) would work together to sign the final agreement shortly.

Commenting, the Governor of the Bank of England said: “London is growing rapidly as a centre for RMB business. The establishment of a sterling-renminbi swap line will support UK domestic financial stability. In the unlikely event that a generalised shortage of offshore renminbi liquidity emerges, the Bank will have the capability to provide renminbi liquidity to eligible institutions in the UK. Our announcement today marks a significant milestone in constructive bilateral dialogue between the Bank and the PBoC. I am grateful to Governor Zhou and the staff at the PBoC for their contribution to this collaborative dialogue.”

1. Offshore RMB, widely denoted as CNH, refers to any RMB used outside of mainland China. Liquidity can move freely between a number of other offshore centres, including Hong Kong (the H in CNH), London, Singapore and Taiwan.

2. For further information on the City of London Corporation’s initiative to develop London as a centre of renminbi business, please see http://www.cityoflondon.gov.uk/business/support-promotion-and-advice/promoting-the-city-internationally/china/Pages/London-as-a-centre-for-international-renminbi-business0425-3959.aspx

- END -

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Listen to the full interview in the audio podcast, or read an summary below.

Will China's property market return to the path of recovery this year?

S&P released a report today to upgrade the outlook for the Chinese property sector from negative to stable. This is in consideration of the following three phenomena that we have observed from the thirty or so large listed Chinese property firms that we cover.

Number one, property sales have been robust since the second quarter of last year. In January 2013 in particular, we have seen those firms posting very strong sales. Two, the funding channels for Chinese property developers have been favorable, and funding costs appear to be lowering. Lastly, many companies have shown discipline in terms of expansion and financial management.

Our upgrade today meant that in 2013, S&P won't have as many negative rating actions as we did last year. We will even possibly have some rating upgrades this year. Of course, these are the large listed developers that we cover. For small-and-medium sized developers, their situations might not be so smooth.

Outlook for property sales and policy

In 2012, the roughly thirty developers that we rate have posted strong sales. Most companies exceeded their annual target, and on average, sales were 12% over target. Compared to 2011 levels, on the whole, sales were up 23%. Some companies even realized growth of 50%.

This year, however, we don't think growth will be as strong as last year, partially because 2012 is now a higher base to compare with. Though we still believe sales will be reasonable this year as the policy environment won't worsen. We believe the government will fine-tune policy according to market developments, but won't have any significant loosening or tightening.

Predication for Chinese property developers' funding environment

In January, we've seen some Chinese property developers issuing debt. Some companies not only raised large amount of money, but also achieved low interest rates. We've seen rates on bond issuance drop from 13% to 8%. We predict the funding environment for Chinese developers will be similar to last year's, but it won't go back to the tight environment we saw in 2011.

Many developers exhibited financial discipline that we didn't see during 2009 when the industry was recovering. This year, we have seen developers being very careful in expansion and debt issuance. Many companies used the proceeds from their debt issuance for refinancing, rather than acquiring new land or adding on new debt.

Overall, we see the Chinese property sector under less pressure and staying steady this year.

About Bei Fu:
Bei Fu is a Hong Kong-based analyst at American rating firm, Standard & Poors. She is responsible for the analysis and rating of the Chinese property sector and its developers.

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The flash overall conditions index improved further into expansion in February at 61.79, up from 55.16 in the final January result and 52.22 in December.

The flash indicator is based on around 80% of the responses gathered for the official indicator release on the last Friday of every month. The flash indicator is released exactly one week ahead of the official result and is designed to give a preliminary reading of Chinese business sentiment every month. The final MNI China Business Sentiment Indicator is released at 0935 Beijing time (0135 GMT) on the last Friday of every month. (Due to the Chinese New Year, this month’s final result will be released Thursday, February 28. The flash result is based on unadjusted data and is compared with the unadjusted data from the previous final survey.

The complete survey contains 13 indicators for current conditions, plus a further 13 questions concerning expectations for conditions in three months.

More information about the MNI China Business Sentiment Indicator can be found at https://mni-news.com.

About MNI China Business Sentiment Indicator

Questions in the Flash MNI China Business Sentiment Indicator are modeled on Japan's Tankan survey and the U.S. Institute for Supply Management's Report on Business. Results are compiled for both current conditions compared with a month ago and for expectations of conditions three months ahead.

Indicators were compiled using the Institute for Supply Management's example: adding half of the percentage saying conditions were unchanged to the percentage of those saying conditions had improved generated the index. Therefore, a result higher than 50 indicates a net positive response. Companies agreed to participate in the survey, and to provide comments about business conditions, under the assurance that individual responses would not be divulged except as part of the overall results.

Companies surveyed were all listed on domestic stock markets or in Hong Kong, although some also have foreign listings. The companies chosen were a mix of manufacturers and non-manufacturers with about 75% of the companies responding involved in manufacturing.

About MNI

Market News International (MNI), a wholly owned subsidiary of Deutsche Boerse Group, is a leading real-time news agency dedicated to providing global capital markets with trading relevant information. Founded in 1983, MNI is a financial news agency with press credentials recognized by the governments and central banks of all G-7 nations. Market News International has bureaus across Europe, Asia and the United States.

About Deutsche Börse – Market Data & Analytics

Deutsche Börse is one of the world’s leading service providers for the securities industry with a product and service offering for issuers, investors, intermediaries and data vendors. The Group covers the entire process chain from trading, through clearing, to settlement and securities custody. Deutsche Börse Market Data & Analytics collects, refines and disseminates capital market-relevant data. The product range includes price data, trading statistics, analyses, master data and approximately 6.100 indices that document what is happening on the international financial markets and make it transparent.

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Related personnel at the CSRC says that the newly amended "Securities Investment Fund Law" will put private equity funds under the oversight of the CSRC. The "Temporary Rule" is to protect investors and stimulate the healthy development of the private equity industry.

The "Temporary Rules" adopts the principle of industry self-regulation and moderate administrative oversight. They set detailed rules regarding private equity fund managers' registration requirement, qualified investors' qualifications, funds' marketing principles and related legal requirements.

It is proposed that sunshine private funds, private equity and venture capital funds should register with the Asset Management Association of China if the total investment value in publicly issued securities exceeds 100 million yuan, or $16 million. There are a range of other requirements listed for private funds to register with the regulator.

The Statement in Chinese is listed below:

2月20日，中国证监会召开新闻通气会，公布了《私募证券投资基金业务管理暂行办法（征求意见稿）》（以下称《暂行办法》），并向社会公开征求意见。

证监会有关部门负责人表示，新修订的《证券投资基金法》（以下简称新基金法）将非公开募集基金（以下简称私募基金）纳入了调整范围，根据法律授权以及当前资产管理行业的格局，证监会起草了《暂行办法》，以规范私募基金业务活动，保护投资者合法权益，促进私募基金行业健康发展。

考虑到私募基金运作形式灵活、投资者具有一定的风险识别及风险承受能力，且不面向公众发行，外部风险相对较小等特点，《暂行办法》贯彻了充分发挥行业自律管理作用、实施适度行政监管的指导思想，主要对私募基金管理人的登记条件、合格投资者标准、基金宣传推介、基金备案、从业人员管理等法律明确要求的事项进行了规定和细化。此外，对基金份额持有人利益优先、防范内幕交易和利益输送、严禁侵占、挪用基金财产、欺诈客户以及“老鼠仓”行为等基金管理人及其从业人员应当遵守的底线规范作了规定。对于私募基金管理人的日常管理、私募基金的投资运作等不作限制性要求，由基金管理人根据自身情况、基金合同约定自主安排。《暂行办法》的主要目的在于明确私募基金管理人的法律地位，掌握行业基本情况，基本不会改变现有私募基金行业运营现状，不增加其监管成本。

《暂行办法》共7章，38条，分为总则、基金管理人登记、合格投资者、业务规范、监督管理、法律责任、附则等部分。

在调整范围方面，《暂行办法》将目前尚未纳入监管的、投资于公开发行的股份有限公司股票、债券、基金份额以及证监会规定的其他证券及其衍生品种的私募基金纳入了调整范围，还包括新基金法第154条规定的“类基金”，但不调整商业银行、保险机构、信托公司等受其他金融监管部门监管的机构从事的私募基金业务活动。上述机构从事私募基金业务的规范，可由其他金融监督管理机构依据《证券投资基金法》的规定另行制定。此外，因证券公司、基金管理公司、期货公司等从事的资产管理业务已有相应法规规范，也暂不适用《暂行办法》的规定。

在基金管理人登记方面，《暂行办法》要求证券资产管理规模超过1亿元的机构应当到基金业协会进行登记。这些机构不仅包括目前的“阳光私募”管理机构，还包括PE、VC等机构，只要其管理的产品中，投资于公开发行的股份有限公司股票、债券、基金份额以及中国证监会规定的其他证券及其衍生品种的规模累计在1亿元人民币以上，即应当进行登记。此外，申请登记的机构还须满足实缴资本在1000万元以上、最近三年没有违法违规行为记录、有两名持牌负责人和一名合规风控负责人等条件。基金业协会根据其制定的规则具体办理登记手续，经登记的基金管理人可以向证券登记结算机构、相关交易所申请开立基金相关账户。

在合格投资者方面，《暂行办法》规定：自然人需符合个人或者家庭金融资产合计不低于200万元人民币、最近3年个人年均收入不低于20万元人民币、最近3年家庭年均收入不低于30万元人民币三项条件中的任一条件；公司、企业等机构需满足净资产不低于1000万元人民币的条件。合格投资者投资于单只私募基金的金额不得低于100万元人民币。

《暂行办法》还根据新基金法的规定，对私募基金募集方式、财产托管、信息提供、从业人员、管理人禁止性行为及内控和风控要求等进行了原则性规定，对违反办法的行为规定了相应的处罚措施。此外，《暂行办法》对证监会与基金业协会的信息共享机制进行了规定，对单只规模超过1亿元人民币或者基金份额持有人人数超过50人的私募基金，基金业协会应当向中国证监会报告。

该负责人表示，下一步将根据社会各方面的意见，将《暂行办法》修改完善后拟与新修订的《证券投资基金法》同步实施。

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Regina Yang, Director of Research for Knight Frank Shanghai comments, “China’s economy remains relatively strong compared with Western countries.  China, in particular Shanghai, is still a focus for multinational companies considering expansion and new business opportunities and therefore demand for commercial and residential properties will remain buoyant.  Supported by investors’ strong interest in commercial real estate, commercial prices are set to stay firm.  Both office and retail sectors will see significant increases in large-scale transactions.”

Residential

The Ministry of Housing and Urban-Rural Construction restated in December that they would be further enforcing current restriction policies in 2013, with restrictions on home purchases and curbs on speculative housing demand continuing into the new year.  New luxury residential supply reached 140,000 sq m in the fourth quarter of 2012, a quarter-on-quarter increase of 102%.  Luxury home sales decreased, whilst prices remained on an upward trend.  The sales volume dropped 5.4% quarter on quarter to 114,000 sq m, whilst the average transaction price increased 10.3% to RMB55,712 per sq m.

Grade-A office

Demand for Grade-A office space dropped due to the waning desire to expand or relocate as well as limited budget growth for many enterprises.  The average Grade-A office rental dropped by 1.5% quarter on quarter to RMB9.1 per sq m per day, decreasing for the first time since the third quarter of 2009.  In the fourth quarter, only one Grade-A office building, namely Verdant Place, was completed, adding 25,350 sq m of office space to the market.  Due to limited new supply, the average vacancy rate of Shanghai’s Grade-A offices remained at 5.1%.

Retail

Despite the overseas economic malaise and China’s slowing economic growth, retailers’ confidence in the market remained and they continued to open new stores in Shanghai.  Ground-floor rents in core retail areas reached RMB54.7 per sq m per day, an increase of 1.7% quarter on quarter and 11.6% year on year.  New retail supply in quarter four increased 41% compared with the previous quarter.  However, these new malls were relatively small with average mall size less than 100,000 sq m, thus the annual new supply decreased by 44% compared with the previous year.

You can access all three reports here:
Residential report
Office report
Retail report

About Knight Frank:

Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and its New York-based global partner, Newmark Knight Frank, operate from 243 offices, in 44 countries, across six continents.  More than 7,067 professionals handle in excess of US$817 billion worth of commercial, agricultural and residential real estate annually, advising clients ranging from individual owners and buyers to major developers, investors and corporate tenants.

Knight Frank has a strong presence in the Greater China property markets, with offices in Hong Kong, Beijing, Shanghai, Guangzhou and Macau, offering high-quality professional advice and solutions across a comprehensive portfolio of property services. For further information about the Company, please visit KnightFrank.com.cn.

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