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China’s Sovereign Wealth Fund Targets Japanese Small and Medium Enterprises and Services

China’s sovereign wealth fund, China Investment Corporation (CIC), with assets totaling $1.2399 trillion, is targeting Japan’s small- and medium-sized enterprises. The plan is to allow Japanese companies with high-quality services and undervalued corporate value to thrive in China’s massive consumer market. While information disclosed is limited, this move by Beijing could trigger discussions in Japan and abroad around economic security.

In Shenzhen, the Japanese massage parlor “KA·RA·DAfactory” has attracted many Chinese customers seeking out high-quality Japanese services. Priced at 688 yuan for 60 minutes, about 1.7 times higher than in Japan, the parlor requires around 100 hours of training for its therapists to provide consistent, high-quality services. Japanese quality services, honed in years of deflation, are now praised even in the birthplace of massage – China. In the first year since the parlor’s March 2023 opening, around 60% of customers have become regulars, including many customers from Hong Kong who were attracted by the Japanese brand. The company operating the massage parlor is Factory Japan Group, which was 100% acquired by CIC’s Japan-China investment fund in 2022 in partnership with the Nomura and Daiwa Securities groups. Factory Japan Group plans to expand through franchising in China, targeting 53 outlets by 2026 leveraging CIC’s huge influence.

CIC’s Japan fund primarily targets unlisted medium and small enterprises, or businesses that can increase value through joint Chinese-Japanese operations. In April, CIC invested in a Japanese language education institute catering to students aspiring to study in Japan.

Since 2017, CIC has launched overseas funds in collaboration with top financial institutions from the US, UK, Japan, Italy, France and Germany. By 2022-end, they had invested in over 20 companies in advanced manufacturing, healthcare, financial services and consumer sectors.

CIC views Japan’s unlisted medium and small enterprises as highly valuable acquisitions. However, Chinese investments could pose economic security risks for Japan. M&A deals with China as the buyer peaked around 2016 at around 20 annually.

As China enhances sanctions against advanced manufacturing like semiconductors, and as its market matures demanding quality goods and services, Japanese service and manufacturing sectors may become prime acquisition targets.

While CIC has an international advisory board displaying transparency, information on specific investments is limited. Improved transparency and accountability are crucial for CIC’s global acceptance as a trusted investor.

Source: Nikkei, May 15, 2024