CITIC Capital China Plus Fund, launched in August 2003, is
a Greater China equity long/short fund that aims to achieve
long-term, consistent capital growth, by investing in listed
securities whose performance is linked to the economic growth
of the Greater China region.
Interview with Dr Zhang Haitao
- Prior to joining CITIC Capital, you were Chief Investment
Officer at State Administration of Foreign Exchange (SAFE)
of China; what has been the most difficult aspect in launching
an equity long/short hedge fund?
Many people think that being the CIO in the Central
Bank is very different than running a hedge fund business.
I would say this is a value-added experience. When I joined
SAFE in early 1994, the AUM was approximately US$ 20 billion.
With the open door policy and the influx of foreign capital
into China, the AUM has grown tremendously and when I
left in late 2001, the AUM was more than US$ 200 billion.
During those years, I was also one of the key senior management
officers (apart from being the CIO) who initiated and
managed the process of infrastructure build-up for reserve
management. SAFE (originally called Bank of China), which
became the manager of China's reserves in early 1992,
was one of the most sophisticated reserve managers in
the world by late 1990s in terms of benchmarking, investment
instruments and risk management. The experience of engineering
those constructions and innovations has proved to be of
much help in formulating and implementing the strategies
in the China Plus Fund.
- Who are the other key members of the team and how
do they contribute to the stock selection process?
Yeh Ching Ju and Tony Zhang are both experienced managers
in cash equities. Ching Ju has over 15 years of experience
in investing in emerging markets equities. She was one
of the first managers that exploited investment opportunities
in North Asia, including Taiwan, Korea and China. Tony
has over 13 years of investment experience in direct investment
and portfolio management. He co-founded a Greater China
fund in 1997 from the U.S. before joining CITIC Capital.
We believe we have a well-balanced macro and micro investment
What are some of your pertinent macro views and from
these how are you currently balancing the portfolio?
Monetary policies, capital flow and political structure
are the major factors that transform our financial markets
into one with a shorter regional economic cycle and higher
volatility. In addition to capture growth potential markets,
i.e. China, we will also hedge / short any downside within
- What investments have done well for CITIC Capital
We believe that excess returns are generated by identifying
mis-priced securities. We have been actively looking for
under-researched and under-owned companies and identifying
the catalysts for a possible earnings upgrade or PE re-rating.
The investments that have done well during the last couple
of months are the stocks that are overlooked and most
of them happened to be in the mid-cap sectors (market
capitalisation of US$ 500 million to US$ 1.5 billion)
and their 2004 PE's are at below 10x.
- How does the inability to go short in China affect
your ability to fully exploit your ideas? What do you do
to get around this?
We understand the limitation of shorting China stocks
and will focus more on using futures and options for hedging
our portfolio. We will see more China-related indices
and derivative products being introduced in the market
in the next few years. For example, a H-shares index will
be launched in Hong Kong on December 8 this year.
How many China stocks are represented on exchanges
outside of China? Which countries? Can you short all of
There are 162 China companies listed in Hong Kong, 7
in Singapore; 15 in London and 21 (including ADRs) listed
in New York. About 80 Chinese stocks in Hong Kong are
shortable. Most of other markets are shortable either
outright or via derivatives. However, there is an increasing
number of major conglomerates that have presence in China
at different levels. The universe of China plays is estimated
to be in the several hundreds for both investment and
- How do you see the development of market indices and
hence derivative markets in China?
China will open up its capital market slowly, evidenced
by the introduction of QFII and the discussion of QDII.
Development of market indices and derivative products
within China will come at a later stage, as China has
to build a solid regulatory framework first. With increasing
demand and liquidity, you will see more offshore or OTC
products evolved in the near future.
- You are based in Hong Kong but is Shanghai a viable
alternative base for running a China hedge fund?
Hong Kong has the longest history of hedge funds presence
compared to other Asian counterparts as well as Mainland
China. It has a solid foundation of infrastructure, regulatory
framework and talent to run this business. Hong Kong is
part of China now and performing groundwork research or
company visits is as accessible as being in Shanghai or
any other part of the country.
Your average net exposure is relatively high when
considering the number of short positions you take as
a proportion of the book. Can you explain this conservative
stance on the short side?
We have deliberately taken a conservative stance on shorting
stocks in the last few months, as we believe the stock markets
are in an upward trend and the risk on shorting is too great.
However, we'll be more active in shorting stocks at current
How does the liquidity of China stocks affect your
decisions and how soon could you liquidate your portfolio?
What are your redemption and lock-up periods?
We have an internal report to show us the liquidity situation
of our portfolio. Our criteria is that the daily trading
of our stock cannot exceed 1/3 of that stock's average daily
turnover of the last 30 days. Currently, 80% of our stocks
can be liquidated within 2 days and 20% can be liquidated
within 3-7 days according to those criteria.
What do you see as the future of China's economy
over the next few years? How long can the current growth
rate be sustained before those in power within the politburo
have to make significant structural reforms?
China is going through a major restructuring, both socially
and financially. During the past ten years, China has been
focusing on attracting direct investment capital but this
is going to change in the next ten years. State Owned Enterprises
(SOE's) are facing severe competition and they are either
becoming obsolete or privatised. Increasing numbers of privately-owned
companies will create a great demand in fund raising via
capital markets, both domestically and overseas. Wealth
accumulation will continue and will add pressure to the
government to loosen or lift the capital control restriction.
Structural reforms have been underway and China is likely
to have a soft landing.
Do you see the removal of the yuan's peg to the dollar
and a move towards a market-driven revaluation of the
yuan an eventuality within the next 12 months?
The answer is No and I would prefer to have more informal
discussion on this topic.
What are your plans to raise your assets above US$14m?
For example, do you plan to raise assets from European
and US-based investors?
In CITIC Capital, we have the vision to provide a gateway
for international investors who have an appetite for Greater
China and to Chinese investors who are interested in investing
overseas. Our Greater China long/short strategy has attracted
a lot of international interest. When we launched the fund
in August this year, we started with US$ 13.4 million and
this has grown to US$ 23 million in three months without
any major marketing campaign. The capacity of the Fund is
US$ 200 million and we will organise more road shows to
market this product to international investors.
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