(Yicai Global) July 17 -- China’s economy is slowly recovering, but deeper reform and opening-up of the capital market is needed to attract more long-term funds, according to the local head of Singapore’s state investment firm Temasek.

Investment, consumption, and trade data show that China’s economy is slowly picking up, Wu Yibing, president of Temasek China, said in a recent interview with Yicai Global.

That is because in the past three years, the balance sheets of large and mid-sized firms were impacted, though sentiment among residents has picked up rapidly, Wu said. But as consumption has not surged back as anticipated because of expectations on incomes, “residents need to rely on themselves to repair their balance sheets, so the recovery is slow,” he said.

China’s capital market has great investment potential, but is undervalued, Wu noted. If the stock valuations drop, solvency at listed firms will decline, their financing capacity will weaken, and balance sheets will shrink, he pointed out, adding that in response “enterprises can only reduce reinvestment, cut staff, and increase efficiency.”

For the Chinese mainland market, the key is to continue to deepen reform and opening-up and create the conditions for more long-term capital to enter the market, Wu stressed.

As the world is in the midst of a rate hike cycle, company valuations have generally fallen, about half of Temasek’s portfolio consists of secondary market assets, Wu said, therefore, total shareholder return was negative, as expected.

Temasek’s group net loss was SGD7.3 billion (USD5.5 billion) in the financial year ended March 31, and its one-year TSR was minus 5.07 percent, the lowest since 2016 and the fifth negative since 2003.

Overall, Temasek’s portfolio has recovered from the pandemic, as its three-year compound annualized TSR reached 8 percent and its 20-year and 10-year compound annualized return was 9 percent and 6 percent, respectively, according to Wu.

In the past year, Temasek stuck to a more cautious strategy, with a net investment of SGD4 billion, down 80 percent on the previous 12 months.

Temasek is anchored in Asia, as the continent accounts for 63 percent of its total portfolio. Singapore is the top destination at 28 percent, followed by China with 22 percent and the Americas with 21 percent. Last year, Singapore’s share rose 1 percentage point from 2021, while China's was unchanged.

Editor: Futura Costaglione