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 team.
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 the cycle.
- What investments have done well for CITIC Capital since inception?
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 these?
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 shorting purposes.
- 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 level.
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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