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China's growth potential remains unmatched despite risks: GIC

Many challenges remain but it's important to examine the issues closely and from different perspectives, adds sovereign wealth fund's CEO

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"By being an early and steady investor in China, we have benefitted financially, learned valuable lessons and built many strong partnerships," says Mr Lim.

Singapore

GIC has benefited from being an early and steady investor in China and stays committed despite various risks.

"By being an early and steady investor in China, we have benefitted financially, learned valuable lessons and built many strong partnerships," Lim Chow Kiat, chief executive officer of Singapore's sovereign wealth fund, told guests on Oct 18 at GIC Insights Forum in Beijing. The event marked the 20th anniversary of GIC's first China office.

Mr Lim, however, stressed that a long-term orientation did not mean blind faith or a rigid position.

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"There are challenges and risks which could knock us off this expected trajectory. Hence, it is important to examine the issues closely and from different perspectives," he said in a speech released on Tuesday.

Even 40 years after China began its economic reform and opened up to the world, there are still significant challenges. These include the credit excesses built up since the Global Financial Crisis and the potential property market bubble. While progress has been made, problems remain large, especially in ensuring that growth is not derailed, Mr Lim said.

Trade and strategic conflicts with the US appear to be worsening too.

"The issues appear to have moved beyond short-term political posturing and into long-term geopolitical competition. This complicates internal economy management. But this may also provide additional impetus for deepening reforms," he noted.

Other key challenges highlighted during a panel discussion include the rebalancing of growth drivers away from external-led demand towards domestic-led one; tilt away from investment towards domestic consumption; improving corporate governance as well as controlling pollution and poverty reduction.

GIC's approach has been to stay invested in China through the cycles to benefit from the compounding effects on its investments, and to have a better chance at identifying top companies.

"We don't have a crystal ball to know what Shanghai Composite will do tomorrow or next year. What we do know is China leaders has met all sorts of challenges before. And each time, they have faced up to them, analysed them carefully, and found ways to deal with them," said Mr Lim.

"Over a long period of time, a basket of the top companies in China would be worth significantly more than what they are worth today."

China's transition to a 'new era' of economic development is seen driving growth in many sectors like consumer goods, healthcare, education, financial services and technology.

A globally connected Chinese market will be a powerful funding source to take growth to the next level, even as China exports more capital to the world.

Its innovation and technology space is also fast evolving. Technological disruption has been an area of focus for GIC for some years now.

"We have found traditional companies with such capabilities but trading at "old economy" valuations. They are good investments and we want to keep looking for more of them," Mr Lim said.

Companies, which are able to create a powerful network effect where cross-selling, rich data, high customer switching costs and scale are reinforcing one another, producing high and sustainable returns on capital, are likely to form the core of GIC's portfolio.

Some of the best investments in the tech space are the fast followers and good executors, not necessarily the first movers.

In 1998, GIC set up its ground presence in Beijing, China, having invested in the mainland for a number of years and seeing opportunities arising from the Asian Financial Crisis. In 2007, it set up a second China office in Shanghai.

Today, China accounts for a "meaningful" share of GIC's Asia ex-Japan portfolio which was 19 per cent on March 31, 2018.

"We expect over time to see China featuring more in global investment portfolios, as more of its markets open. For example, its bond market currently has only less than 2 per cent of foreign participation, versus about 30 per cent in the US," Mr Lim pointed out, adding that many of GIC's portfolio holdings are directly affected by what happen in China, which accounts for about one-third of the world gross domestic product growth.

Recently, GIC partnered GLP to set up a US$2 billion fund to acquire income-generating logistics facilities in China.

It also invested in Linklogis, a Chinese supply chain fintech firm, and CStone Pharmaceuticals, a Chinese pharmaceutical firm.