Alice Fan Yang is Assistant President at New China Asset Management Co,. LTD.(NCAMC). She has responsibility for delivering a steady stream of sound investment deals to support the growing and ever expanding commercial insurance arm. Here Alice outlines the challenges of succeeding in this developing and increasingly volatile market.
Alice has the unenviable task of managing the delicate balance between risk and reward in a now highly volatile and ever changing asset investment market against the backdrop of a slowing and rebalancing Chinese economy.
“There has been significant change in the market over the last 12 – 18 months” says Alice. “The whole asset management business has become much more market oriented”. The rebalancing of the Chinese economy and the speed of change in interest rates has meant many investment products have failed to launch. Just a year ago there were good asset based investment opportunities in real estate but these have evaporated in the wake of the well publicised over supply in that sector.
“Interest rates are now much more market driven as the central government has taken of the restrictions and allowed market forces to rebalance the economy and markets generally”. This has created problems for all industries but the significant fluctuations in interest rate returns from investments has made many investors think twice about putting their money into certain types of asset. “Infrastructure remains the most attractive option” reflects Alice. New airports, roads, power stations, rail and port developments have been seen as much safer bets than the corporate or private housing real estate market which is not only suffering from over supply but also very low future returns.
“There are more products in the market than ever before. Investors have more choices than ever before and this has not been seen in China until recently. The offerings have moved from being relatively simple and straight forward to highly complex, sophisticated and often mixed in their composition”. Alice believes that these changes are also leading to product offerings which are increasingly tailor made to specific investors. “I am spending most of my time directly connecting with the key potential investors. This is to really better understand what they want, what their investment appetite is and how we can satisfy that whilst managing our risk effectively. It is a tough market and a tough job!”
The whole of the market has also changed in this year as the Chinese Government has introduced measures to eliminate the middle men in the financial sector. “It used to be that there are several layers in the financing structure. That pushed up costs to the fund raisers and the end investor – including local government”. This meant returns for the real investors were reduced. That was ok to a point in the big growth years when margins were good but now they are not. Now the government, understandably, wants better returns to be passed on to all investors and the squeeze is on the intermediaries, including not only the banks, trust and investment companies, securities houses as well as insurance asset management company. That in turn has meant organizations such as Alice’s have had to totally change their market and customer focus. “We are looking at truly sustainable investments on a much longer term return basis. This is changing the dynamic of the asset investment and the way we can package deals to investors, which in turn affects how the sales teams can make offers to consumers and commercial insurance buyers”.
The Chinese insurance market is quite different to elsewhere in the world as the end consumers expect that the money which they are tying up in premiums is also giving them something back as an investment. “If you are trying to give end consumers a 6% return on their premium then you better make sure you are getting at least 8% on your asset investment return” says Alice. This need to find high yields for end consumers puts pressure on finding sustainable and lower risk investments as well as accessing those investors who are prepared to take the risk that goes with the high returns. “Somewhere along the line you have to take a very cool view of the risk profile of every potential deal” Alice comments. “That’s my job, to ensure the risk reward balance is there and that the asset really can deliver the returns which people demand. Sometimes it just is not possible but we have to manage the risk so we don’t get defaults and failures”.
Real estate used to be a good bet but the days are gone when a developer could build and not worry about the management of the physical shopping mall or commercial site. The whole market is rebalancing and now they have to really have a customer focus and to do the numbers as well as the market research to ensure that the market is really there and that it can sustain the sales, which sustains the rental, which delivers the return on investment of the site. “The game has fundamentally changed” says Alice.
“The investors are also faced with a myriad of different products, many of which only have small differences between them. They need to be much more sophisticated in their assessment of what they are buying”. With little between offers, or the offers being highly complex, then investors are having to make decisions as much about the asset management company and its brand as well as the seeming attractiveness of the deal. This is where Alice believes NCAMC has an edge. “We may be smaller now in terms of new products offering than others but we have a good brand and a track record for delivering consistent returns”.
Many investors still trust in the decisions of government either at a central or provincial level. They tend to follow the provincial government lead. However, there have been defaults and failures so investors are wary of those regions with a bumpy track record. “Provincial government has brands too” says Alice “and where there have been highly publicised problems then investors tend to be super cautious, preferring to look elsewhere for a safe harbour for their money”.
Alice reminds me that when a consumer insurance offer look too good to be true, it probably is! “There are a lot of aggressive product sales out there, even being offered on Taobao” (the widely used Internet sales engine of China). She believes this is a move destined to failure and investor disappointment. “Deals may look good but high returns in this market inevitably mean high risk asset investments somewhere along the line” says Alice. Several companies have had the regulators issue warnings and more are likely to come if the aggressive sales and seemingly high returns then bubble and burst. That will not be good for anyone in this new and emerging market.
Alice feels some of the market deals are very creative and could be attractive to many. Her only concern is the transparency of the associated risk. “Of course if investors are happy to take the risk for a high return that’s fine” she says “but I believe that there must be transparency and a full disclosure to the end investor of the risk level of the high return deals”. Listening to Alice you are reminded that this industry is in its infancy and as such it is undergoing enormous change. The expectations of the end consumer are high and the pressure on the assets investment business significant. Only time will tell how this industry survives the pressure of the rebalancing of China.