The Asset and Wealth Management Market in China
Liberalization of the asset and wealth management market in China has been underway for many years, following the establishment of the first Sino-foreign investment management joint venture in 2002. Recently, regulators and policymakers have strengthened the storyline, opening up the market and facilitating entry to international asset and wealth managers. Furthermore, such a positive attitude can be observed in Hong Kong as well, as a key hub for foreign investors entering China and the Asia-Pacific region.
One of the reasons why China is so attractive lies in the fact that the 1.4 billion Chinese population owns massive savings that are likely to be invested in wealth management products and services. With 45% of gross domestic product (GDP), China’s savings are still considerable and among the highest in the world. It’s a compelling opportunity for a wide range of stakeholders as a move away from traditional asset classes such as cash in bank accounts and real estate investments, standing as well as a great chance for international firms to expand their asset management and wealth consulting services and offerings in the fast-growing Chinese market.
The number of high-net-worth individuals (HNWIs), characterized as those persons owning assets exceeding 10 million RMB (approximately USD 1.5 million), came to 2.62 million in the 2021 year-end. Based on their wealth amount, in 2020 the HNWIs have accumulated around 84 trillion RMB (roughly equal to USD 12.4 trillion) in investable assets. A significant volume of this wealth has been amassed recently, largely due to a new generation of entrepreneurs who have been driving innovation and wealth accumulation.
HNWIs in China have progressively acknowledged the advantages of locating their assets abroad by investing overseas, and are still exploring alternative asset allocation opportunities to maximize long-term returns and diversify investments. As a result, their portfolio of assets has become broader and diversified, focusing on wealth management funds and products.
Multiple approaches to enter the expanding business opportunities available in China
Even though the long-term potential for advising the local HNWIs about their wealth management is certainly appealing, several portions of the Chinese financial sector and wealth management industry have not yet fully opened up to international market operators. In order to satisfy the increasing investor demands prevailing among Chinese high-wealth owners, market players can leverage a variety of solutions available today, according to licenses, programs, and quotas available for each market segment. International asset and wealth managers can play their roles by offering products located onshore in China, in Hong Kong, or offshore overseas, to domestic qualified Chinese investors, local Chinese investors, and global investors.
Under the Private Fund Management (PFM) program, foreign asset managers are allowed to set up a Chinese onshore fund primarily for capital raising in China as well as making investments within China, which serves as the private fund manager entity. The private fund manager entity can then raise an open-ended fund targeting qualified domestic Chinese investors such as local institutional investors and HNWIs. Instead, the Fund Management Company (FMC) licenses permit foreign asset managers to access China’s retail investor market, establishing Chinese onshore mutual funds sold to the general public.
Among other onshore asset and wealth management products are those made for global investors, including the Stock Connect, which is a China mutual market access program that opened up onshore stock markets to international investors, the Bond Connect, which is another Chinese mutual market access program allowing investors from Mainland China and overseas to trade in each other’s bond, the Qualified Foreign Institutional Investor (QFII), which is a program that allows specified licensed international investors to participate in Mainland China’s stock exchanges, the Qualified Foreign Limited Partnership (QFLP), which is a pilot program developed by various local authorities (e.g. Tianjin, Beijing, and Shanghai) to grant foreign investors access to China’s domestic private equity market, and Mutual Recognition of Funds (MRF) scheme, which allows foreign retail funds to be distributed in Chinese domestic market and local retails funds sold outside of Mainland China.
Locating in Hong Kong, international asset and wealth managers can provide Chinese investors access to stocks and bonds listed in Hong Kong through Stock Connect program and the Bond Connect program respectively, to funds domiciliated in Hong Kong through the Mutual Recognition of Funds (MRF) scheme; and to wealth management products in Hong Kong via Wealth Management Connect (WMC) scheme, which is a key initiative under the mutual market access schemes between the capital markets of Hong Kong, Macao and the Mainland China.
Concerning overseas-based options targeting qualified domestic Chinese investors, international asset and wealth managers can offer Qualified Domestic Limited Partnership (QDLP), which is a quota-based program allowing foreign and domestic asset managers to raise RMB from HNWIs and institutional investors in China for the purposes of overseas investments through a Chinese feeder product by which managers’ onshore Chinese subsidiaries invest in various offshore funds, and Qualified Domestic Investment Enterprise (QDIE), which is similar scope to QDLP but is only available in Shenzhen. Instead, the Qualified Domestic Institutional Investor (QDII) programs enable all domestic investors to invest in securities in foreign markets.
Nowadays, as mentioned above, players who want to reach Chinese HNWIs have plenty of options as means of entry points and distribution channels than in the past. The options available in the past years have evolved as well, whether it’s by adding more products or expanding quotas. However, reward and risk differ for each option, along with the amount of capital accretion and resources required. To be successful in China, commitment, perseverance, and patience are essential elements for international asset and wealth managers, regardless of whether operations will be conducted onshore in China, in Hong Kong, or offshore overseas.
Operating onshore has many advantages, such as customer relationship ownership, control over products and services, deeper understanding of the needs of investors, improved brand perception among investors, increased awareness of market trends, easy access to local talent, a sense of commitment to the country, and possible synergies with local market stakeholders.
Regulators and policymakers in China are continuing to implement policies and reforms that offer increased prospects for asset and wealth managers. Since 2017, numerous changes in regulations have shaped the future of the industry, influencing the profile of the players in the market as well as the amount of assets they manage. Consequently, this has shifted the scales towards industry segments with more regulations, such as bank subsidiaries that provide wealth management services, and fund management companies (FMCs).
Assets under management (AUM) of the asset and wealth management industry stood at USD17.3 trillion during December 2022, with the landscape of investments in the sector moving towards standard market-oriented products, in contrast to nonstandard quasi-guaranteed products. Products that adhere to international standards are standard market-oriented products that are considered the norm, in which investors take responsibility and risks for their decisions while asset managers mark-up underlying assets. The term non-standard products refers to products that are often cited at par and have a quasi-guarantee of ultimate recovery from the manufacturer or distributor.
Increasing multidimensional awareness among Chinese high-wealth owners
In China, a large amount of wealth accrued rapidly, in comparison to Western countries, mainly due to its fast economic rise in previous decades. A large portion of this wealth creation has been invested in domestic bank accounts and real estate as a result of the absence of a properly functional wealth management industry. Aside from that, Chinese citizens have been limited to USD 50,000 in transfers outside of Mainland China per year, significantly limiting their overseas investments in funds, insurance, stocks, and so on.
As wealth continues to grow steadily, mainstream Chinese investors are focusing more and more on wealth management products to diversify their portfolios, along with investing in assets other than denominated in RMB. A growing number of HNWIs have realized the value of investing in assets located offshore and are proactively looking for new investment opportunities overseas. In such a scenario, Hong Kong remains a highly popular destination for Chinese wishing to access global investments.
HNWIs and ultra-high-net-worth individuals (UHNWIs) constantly change their demands, needs, and lifestyles, contributing to the development of new trends and innovations worldwide through the years. Ultra-high-net-worth individuals (UHNWI) are people with a net worth of at least USD30 million. They are often first-generation business owners and entrepreneurs, who search for complete financial counselling in all areas of wealth management. The growing demand for financial advice has also been attributed to an increase in financial literacy linked to the comprehensive framework of their needs. Wealth owners in China pursue distinctive investment plans and priorities. Generally speaking, younger generations are more concerned with creating wealth, and aging individuals are more interested in preserving and protecting their wealth instead.
HNWIs and UHNWIs prefer personalized asset allocation, along with highly qualified advisory and top-class wealth management services. In particular, digital maturity is becoming more and more important for financial advisors in order to meet UHNWIs needs and investment requirements. According to UHNWIs, portfolio details including real-time updates must be accessed digitally. As a result of the pandemic, travel has been hindered and financial advisors’ face-to-face interactions have been limited. Consequently, the need for virtual advisory has increased among HNWIs. For them, customer engagement will remain highly valued through physical touchpoints. Among wealthy populations, as pricing information becomes more transparent, price sensitivity increases, driving pricing competition in the industry. At the same time, traditional advisor-led tasks, such as purchasing funds and monitoring portfolios and performance, are being handled online through IT solutions.
In the coming years, there will be a massive transfer of wealth from one generation to another that will encourage the successors to revisit their financial planning, providing market players with an opportunity to develop their wealth management services accordingly. The massive transfer of wealth across generations, with trillions of dollars changing hands, will have profound implications. Estimates indicate that the next generation will inherit USD 3 trillion of wealth in 10 years, USD 8 trillion in 10 years, and USD 15 trillion in 30 years.
As China launches its policy of common prosperity, in addition to the worldwide move towards sustainable investments, wealthy individuals are donating and investing more in a range of causes, increasing their philanthropic activities and impact investments. In light of this trend’s growing popularity and collective expectations for affluent individuals to direct their capital toward economic development, wealth managers and asset management companies offering ESG and philanthropic solutions are likely to gain ground. Servicing Chinese wealth owners can be differentiated by this factor.
An overview of the emerging wealth management market and global players' business prospects
In the Chinese wealth management market, China’s domestic banks hold a dominant position since international private banks are almost absent. The Chinese Big-4 banks (the Industrial and Commercial Bank of China, the China Construction Bank, the Bank of China, and the Agricultural Bank of China), and most major local banks have been developing their own wealth management products, primarily focusing on HNWIs and upper mass affluents class. Independent financial advisors (IFAs) are also among wealth management services prominent suppliers.
Recently, asset and wealth management market share has shifted from banks to IFAs due to their brand differentiation, tailored products, and growth of their financial advisor networks, along with digital services and portfolio solutions that differentiate them from traditional market players. Compared with banks, IFAs scales continue to be smaller in absolute terms, despite their strong growth. Securities companies, whose business models usually combine custody services, market-making, research, distribution, and product manufacturing, provide wealth management services as well.
However, Chinese individual investors’ demands will continue to change in the near future. Contrary to the West, investment options and planning advice are still evolving in China. In this regard, international asset managers have a competitive edge since they offer a wider range of asset types as well as a broader variety of services than domestic Chinese players.
Globally, wealth managers are renowned for their successful history of assisting wealth owners with wealth accumulation, succession, and legacy planning. By offering tailored and effective comprehensive wealth management options, foreign players in China can differentiate themselves from local providers. Furthermore, prioritizing the interests of investors and developing long-term loyalty is imperative, particularly since the market has gradually moved away from common product-pushing strategies. Advisory-based solutions designed to meet the needs of individual investors over mass product promotion are gaining traction, but China remains undergoing a change phase before the market transition finally switches towards advisory services.
Hong Kong as key link to China and the Greater Bay Area (GBA)
Since the strategic growth potential of China has made it an attractive choice for lots of global and domestic financial organizations, numerous institutions have chosen to access China by implementing an off-shore approach via Hong Kong. Such a client-centric market, requiring complex and tailor-made services, is largely under private banks’ control. Due to the various inbound and outbound investment channels mentioned earlier, offshore investment channels through Hong Kong remain a popular way for Chinese wealth owners to be serviced. Moreover, Hong Kong is an attractive service location and offshore investment hub due to its excellent accessibility, extensive talent landscape, efficient legal framework, favourable tax system, and adequate regulatory environment that promotes investment and service activities.
Mainland China’s rapid and ongoing wealth accumulation provides Hong Kong with many opportunities. In Hong Kong, Mainland Chinese investors accounted for 16 percent of the total assets under management (AUM) in private banking and wealth management institutions. Going forward, increasing affluent populations in China, particularly in the Greater Bay Area (GBA), represents a major growth opportunity for international asset and wealth managers. The GBA offers one of the greatest wealth management opportunities in China and holds immense potential for wealth creation. The GBA is one of the world’s largest savings reservoirs, where global and diversified wealth asset products and services are becoming increasingly popular.
In response to such a wealth accumulation tendency, regional regulators and policymakers introduced in September 2021 the Cross-boundary Wealth Management Connect (WMC) scheme in Guangdong-Hong Kong-Macao Greater Bay Area. As of today, the WMC scheme represents a significant innovation in terms of market access between Hong Kong and Mainland China’s wealth management markets, with the expectation that the scheme will be further developed over time and progressively improved following the success of the initiative.
New investment offerings are in high demand among GBA residents with high wealth. The 20% of China’s UHNWIs and HNWIs live in the GBA. About 40% of GBA’s UHNWIs take aggressive risks, while around 70% of UHNWIs and HNWIs in the region are very interested in diversifying and expanding their own investments in financial products from abroad whenever they become accessible.
Establishing a sustainable and efficient Chinese wealth management strategy
Regulators and policymakers have introduced a range of reforms in order to gradually open up the market to foreign financial institutions, leading to increased market accessibility and investor trust. China’s wealth management market is currently growing, offering a lot of opportunities for international players. However, replicating a strategy from a home market can be challenging for non-local asset managers. Entering the complicated China market without understanding policymakers’ and regulators’ directives would be unwise. Strong market growth has led to greater risks and challenges in operations. Rather than avoiding such risks, they should be properly managed. Global asset and wealth managers who deeply understand the market have the confidence to make decisions based on the local environment, adapting creative responses to Chinese clients.
To successfully enter China’s market, international assets and wealth managers have to acquire a comprehensive vision and appropriate strategies of how to provide meaningful solutions based on the specifics of the Chinese market, taking into account distinguishing features since the market is crowded by domestic competitive players. Furthermore, foreign institutions shall offer onshore products and services assuring that their staff is competent, well-equipped, and locally based, spending time to analyse dynamics in products and investors’ demands. International assets and wealth managers have to recognize the importance of deals or mergers and acquisitions (M&A), as making investments in domestic distributors and product manufacturers could be profitable, as well as designing agreements with local partners in a creative approach considering the market’s specific characteristics.
Taking a look forward, and implementing the appropriate commitment, resources, and strategy are crucial to success.
As far as China is concerned, numbers are huge in the wealth management industry as well. China’s wealth management industry has made significant progress since its creation, achieving unprecedented dimensions. Having a large domestic market certainly contributes to the industry’s appeal, but other factors play a significant role as well. Recent developments in investor demands, government regulations, legislative framework, market dynamics, and competition are driving forces encouraging businesses to revamp market strategies for China.
Global asset and wealth managers are observing and analysing the changing trends in the industry fuelled by investors and regulators before making any decisions regarding their strategies in China. A lot of global asset and wealth managers based in Hong Kong are present in Mainland China too, either through joint ventures with domestic parties or through fully owning a local company, but their presence is still relatively limited.
It is crucial for international asset and wealth managers to execute a tailored approach in their strategies when deciding whether to operate onshore in China or raise Chinese capital for investments offshore, rather than simply importing tried and tested approaches used in other markets. There are a number of aspects to understand before success can be found in the wealth management market, including the size of each segment’s market, competitor dynamics, licensing and regulations, and various channels of market access.
