PAG Boss Warns of a China Economic Crisis Just Months Before IPO

Aiming for a $2 billion Hong Kong IPO in the coming months, private equity firm PAG is headed by Beijing native Weijian Shan, but in the last four years has launched platforms and made major acquisitions in India, Singapore, Japan and Australia.

Now that series of initiatives around the region, which includes setting up the Flow data centre platform in Singapore last year and purchasing a commercial building in Singapore for $603 million in January, has been declared by Shan to be part of a conscious diversification beyond China, as the veteran executive points to risks facing mainland markets.

“We think the Chinese economy at this moment is in the worst shape in the past 30 years,” Shan said in a video of a private meeting with investors viewed by the Financial Times and reported by the newspaper late last week.

The PAG chairman tied the economic crisis in China to government policies, including lockdowns intended to maintain the country’s COVID-zero mandate, according to the FT account. PAG representatives declined to comment on the report or on Shan’s economic perspectives when contacted by Mingtiandi.

Mainland Anxiety

Shan made his remarks to limited partners in PAG funds at the same time that the firm is preparing for an initial public offering which is expected to be among Hong Kong’s largest this year, after a prospectus was filed last month.

Those circumstances put Shan, who as a youth was sent to work in the Gobi desert during the cultural revolution before later teaching at the University of Pennsylvania’s Wharton School, in the position of having to reassure investors who have grown increasingly anxious over China risks, while maintaining good relations with mainland authorities.

“With his comments, Shan is walking a fine line,” said Brock Silvers, chief investment officer at Hong Kong-based Kaiyuan Capital. “In order to drive IPO interest, he must address PAG’s view of China. In order to maintain regulatory approval for the IPO, Shan must be moderate.”

With lockdowns intended to halt the pandemic having paralysed Shanghai for more than one month and now threatening to spread to Beijing, analysts at Fitch Ratings today downgraded their forecast for Chinese GDP growth this year to 4.3 percent from 4.8 percent, noting that retail sales fell by 3.5 percent in March compared to the same month a year earlier.

In the presentation Shan called Chinese pandemic lockdowns “draconian” and predicted that they would have a profound impact on the economy.

“Shan Weijian, the ultimate insider, may be right that China is mired in “deep economic crisis,” but draconian zero covid policies are only partially to blame,” said Silvers. “China also suffers from a sluggish economy, a bankrupt real estate sector, and a national economic model in urgent need of reform. A deep cloud of regulatory instability is also increasingly driving away foreign capital, which has long been a fundamental driver for China’s booming economy.”

Spreading the Risk

With China struggling with rigid political solutions to complex problems, Shan made clear that PAG, which has $50 billion in assets under management globally, is a regional investor.

“China feels to us like the US and Europe in 2008,” the FT quoted Shan as saying. “While we remain long-term confident in China’s growth and market potentials, we are very cautious towards China markets.”

During this year PAG made its first major acquisition in Singapore’s commercial property market with its purchase of the Cross Street Exchange near Raffles Place. That deal was uncovered around half of a year after the firm set up Flow Digital Infrastructure in the Lion City during August of 2021.

Earlier last year, PAG completed its purchase of Australian workplace design firm Unispace and teamed up with Ivanhoe Cambridge to launch a $400 million Japan last mile logistics joint venture.

With a significant segment of its real estate team operating from Tokyo, PAG has long been a major player in the Japan market with local news reports in the country during 2020 saying that the firm was targetting $8 billion in Japanese property investments by 2024.

In 2019 PAG expanded its India operation with the hire of former KKR executive Nikhil Srivastava to run its buyout strategy in the country, and Shan in 2020 said that PAG would invest more than $3 billion in India via its private equity strategy over the next three years, according to local news reports.

Note: This article has been updated to indicate that Shan Weijian’s remarks were from a private conversation with PAG limited partners. An earlier version stated that the comments were part of the IPO roadshow. Mingtiandi regrets the error.