Canada Pension Plan Investment Board spent months mulling its latest investment in a Chinese bank, even as the country's markets were rattled by volatility and weak economic indicators.
Against that backdrop, and six interest-rate cuts by China's central bank in the span of a year, the pension fund ultimately decided to invest anyway. In the long term, CPPIB said it still finds China's growth prospects compelling.
CPPIB is investing about $500-million (U.S.) for an equity stake of 1.2 per cent in the Postal Savings Bank of China, alongside other investors. In total, the bank will raise $7-billion in exchange for a 17-per-cent stake in the business. CPPIB will also support the bank by bringing fresh perspectives on risk management.
Postal Savings is the largest bank in China by number of customers, with 400 million across the country.
CPPIB is treating this more as an investment in China overall, since the company's 40,000 branches span struggling resource-focused towns as well as higher-growth technology regions. The company already has equity investments in other Chinese companies, including passive investments in the shares of some banks.
Postal Savings is the sixth-largest bank by total assets in China. That has a lot to do with the kind of services it offers. And it is in part those services that give CPPIB confidence to invest amid the market turmoil.
Many of its customers live in rural areas and use the local branch not only for banking, but also for sending mail, as the bank's name indicates. Major services offered include deposit-taking, some insurance and small loans.
"They look like a post office, with a bank branch attached. They're not huge. It's not like walking into an RBC branch here," said Scott Lawrence, managing director and head of relationship investments at CPPIB. "But I've got to tell you, they're very busy. And it's quite funny to see ATMs in the middle of nowhere."
Having individual savers as clients offers some protection from the rise in non-performing loans that has swept through China as businesses struggle to repay heavy debts in a lower-growth environment. Profits at many major banks have stagnated as a result.
Postal Savings "has the lowest non-performing loan ratios among the major Chinese banks. And the loan book is relatively small, relative to its total assets," Mr. Lawrence said.
The pipeline of initial public offerings in China has been gummed up by the sheer volume of companies looking for government approval to come to market. On Wednesday, the Chinese State Council said it would begin introducing reforms to ease that pressure, but those changes could take two years. As the Wall Street Journal recently reported, there are 675 companies waiting to sell $63-billion worth of shares.
Postal Savings is among those looking to undertake an IPO. CPPIB said the company will be able to do so, given the right market conditions,
"It goes without saying that we have a constructive view on China's long-term prospects," Mr. Lawrence said. CPPIB has an office in Hong Kong, and investment interests include private equity and real estate. "Even if you think it's slowing, GDP is still growing at 7 per cent."
Not everyone agrees that the Chinese data is reliable and growth is really that strong. But even if it's not, Mr. Lawrence said that China is still attractive compared with rest of the world. "Even if you're a disbeliever, there's still a lot of growth to be had."
Mr. Lawrence added that CPPIB was also encouraged to be making the investment alongside other large financial firms such as JPMorgan, high-profile state-owned enterprises in China and even a division of Internet company Alibaba.