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October 2018
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China Wealth:Why now is the time to invest into the world’s leading wealth management growth story
PwC2
International wealth managers have long viewed China as hugely attractive market - albeit one in which some have struggled to fulfil their potential, in part due to regulatory restrictions.
So it is not surprising that Beijing’s announcements in late 2017 that, for the first time, it would allow foreigners to hold controlling stakes in domestic Chinese mutual fund companies1 and apply for Private Fund Manager (PFM) licenses2 , rekindled excitement across global wealth managers in Hong Kong and further afield.
Part of this is because China’s nearly 1.4 billion citizens collectively held investible financial assets (including cash in bank accounts, but excluding property investments) of around RMB 133 trillion (just under US$ 20 trillion) at the end of last year.
China’s consumers are only going to get richer: we estimate total investible financial assets will grow to around RMB 175 trillion (US$ 26 trillion) at December 2020, driven by the richest sub-group - those with investible assets of more than US$ 1 million (being high-net-worth-individuals, “HNWIs”3). This would make China the world’s second largest wealth management market globally.
Source: AMAC, Wind, PwC analysis
Note: Due to rounding, figures may not add up precisely to totals
Figure 1: We expect China’s consumers to get wealthier
1. China's wealth management market is opening up ... and presents a compelling opportunity
1 Zhu Guangyao, Vice-Minister for Finance announced in November 2017 that the existing rules that had previously prevented foreigners owning more than a 49% stake in domestic mutual fund managers, were to be relaxed to 51% (and then removed in entirety in 3 years). These rule changes were formalised in August 2018.
2 The PFM license is needed to manufacture onshore investment products (i.e. private securities funds) that service Chinese qualified (i.e. HNWI and institutional) investors.
3 We also refer to “Mass” and “Mass Affluent” consumers in this paper - we define these groups as individuals holding less than US$ 100k; and between US$ 100k - US$ 1m, of investible financial assets respectively.
Whilst the longer-term opportunity to advise Chinese consumers on how to manage their wealth is, of course, attractive, elements of China’s wealth sector and capital markets are still in the process of opening up. In the short-term creating attractive investment products (both onshore and offshore) to meet the burgeoning demands of the domestic Chinese consumer will require continued navigation of the myriad schemes and quotas that are in place:
“The opportunity is substantial, but it all depends on the progression
of reform and deregulation”
Kelvin Chu, UBS analyst
0
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Tota
l inv
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ass
ets
(US
$ tn
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CAGR
UHNW/HNWI
Mass affluent
Mass
12-17 17-20F
2012 2017 2020FMass Mass affluent HNWI
25
30
3% 3%
18% 12%
27% 13%
123
8
12
6
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20
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3
“The China market is key for us, although it requires a different view
from a strategic perspective. We need to find or build a team with onshore capability”
Head of Corporate Development, Global Investment Manager
China wealth 3
Figure 2: How to play? China’s various licenses, programs and quotas determine how to access each sub-segment
2. Financial products are increasingly market-driven - which should level the playing field for international groups
Recent changes in regulation has resulted in China’s financial markets shifting towards the application of what, in London or New York, would be considered normal practice - which has not always been the case. We expect this to be a net positive for foreign asset managers.
For example, Chinese retail investors’ have long assumed that banks or other distributors who sell them financial products, will stand behind the advertised returns in the event of trouble.
This has hindered foreign asset managers (whom domestic distributors are less keen to provide implicit guarantees to). Removing the
perception that an implicit guarantee exists4, is one of a number of areas that Beijing has targeted in new guidance5 released earlier this year.
The new guidance also requires fund managers to mark-to-market underlying assets, and publish net-asset-values to allow investors to understand the market risks to which they are exposed.
Whilst the on-the-ground impact of these changes is still unfolding, we see signs that investor behaviour is already shifting - investors will increasingly demand diversification across asset classes, products or sectors (including allocating a proportion of investible
4 Beijing is concerned that the implicit guarantee encourages investors to favour products with ‘excessive’ risks, safe in the knowledge the advertised return on their investment is safe.
5 Guidance options concerning standardisation of Asset Management operations by Financial Institutions (关于规范金融机构资产管理业务的指导意见), released in April 2018.
assets in overseas, non RMB denominated assets), transparent fee structures, highlight the importance of a manager’s onshore track record and a move towards investment in exchange-traded assets. It may be that these changes result in the average investment duration of Chinese retail investors lengthening.
In combination, these should lead to increased opportunities for foreign players (the natural providers or manufacturers of foreign investment products), either independently or working with domestic partners.
Ass
et lo
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QDLP** program
• Allows foreign fund manager’s onshore Chinese subsidiaries to invest in various offshore funds
• Subject to set quotas (which can be suspended)
QDII*** program
• Allows mutual fund managers to invest offshore
• Subject to set quotas (which can be suspended)
HK
Fund managers able to offer onshore clients access to HK-listed stocks through Southbound Stock Connect and access to HK-domiciled funds via Northbound MRF (Mutual Recognition of Funds)
Ons
hore
Private fund manager
• PFM license allows foreign funds to serve qualified investors* onshore through private funds investing in onshore assets
• No AuM limit, each fund capped at 200 investors
Mutual fund manager
• Mutual funds sell to the general public (no eligibility requirements)
• Historically foreign ownership was capped at 49%, this was lifted to 51% in late 2017 (and will go to 100% by 2020)
International wealth managers provide access to onshore Chinese assets to their global clients through:
• Northbound Stock and Bond Connect• QFII and RQFII schemes• Southbound MRF
* Being institutions (with net assets >RMB 10m) and individuals (with investible assets >RMB 3m, or average personal income over last 3 years >RMB 0.5m).
** Qualified Domestic Limited Partners program, implemented in Shanghai (as a pilot) and administered by the Shanghai Municipal Financial Services Office.
*** Qualified Domestic Institutional Investor scheme, administered by the CSRC.
Qualified investors* All investors
Domestic Chinese investorsGlobal investors
PwC4
3. Domestic players are starting to transition their wealth offerings towards full-advisory models. Foreigners may have a head start
China’s largest banks, securities companies and 3rd party independent financial advisors (IFAs) have traditionally been the leading providers of wealth management services:
• The Big 4 and the Joint Stock banks have been building out their Private Banking propositions (generally targeting HNWI and the top end of the Mass Affluent segment) - on average, adding over 8,000 new customers and RMB 125 billion of AuM, over each of the last three years:
The new asset management guidance requires banks with custodian licenses to migrate their asset management activities into new subsidiaries before December 2020. The need to separately capitalise these businesses may result in foreign groups having a small window of opportunity to discuss strategic investment and / or a partnership opportunities. These larger banks in China’s financial eco-system already have critical mass and could become key distribution partners.
• Securities companies who typically run integrated business models with manufacturing, distribution, market-making, research and custodian capabilities may also be potential partners.
Figure 3: China’s biggest banks have developed sizeable Private Banking businesses6
ICBC Bank of China CCB Agricultural BankChina
Merchants BankOther Joint
Stock Banks (avg.)6
No of Private Banking clients
75,000 95,000 68,000 106,000 67,000 24,000
PB AuM (in RMB ) 1.3 trillion 1.2 trillion 940 billion 1 trillion 1.9 trillion 300 billion
Average AuM per client
RMB 18m RMB 13m RMB 14m RMB 10m RMB 28m RMB 12m
Private Banking threshold
RMB 8m RMB 8m RMB 10m RMB 8m RMB 10m RMB 6-8m
Source: PwC analysis, annual reports.
6 Data is as at December 2017 if disclosed, if not the most recent available data is used. The “Other Joint Stock Bank average” represents the average of 6 other banks who disclose data on their Private Banking businesses. Note different banks use different investible asset thresholds to define a Private Banking customer.
7 The regulation requires entities that sell Private Investment products to capture information such as an investor’s financial status, his / her investment knowledge, experience, goals and risk preferences.
“The accuracy of the traditional (questionnaire) method of assessing the
customers’ need is relatively low.”
CEO, PRC online wealth management platform
• Third party IFA’s, such as Eastmoney, Noah Holdings and Jupai have started to take market share from the banks (and are primarily servicing the Mass Affluent and UHNI segments) due to a combination of brand, customised product and a focus on growing their networks of financial advisors. These groups remain smaller relative to the banks in their absolute scale, but are growing sales volumes at high double-digit rates.
The needs of the average Chinese individual investor will continue to evolve. Based on mystery shopping exercises that we’ve completed for a number of our clients, compared to Western standards, the level of wealth and inheritance planning advice
clients receive around investment options is simplistic. Today - whilst wealth clients are required to fill in a risk appetite ‘questionnaire’ - this is almost always standardised based on a regulatory template7.
This is an area in which foreigners currently have an advantage. But to capitalise on this - moving fast will be critical.
China wealth 5
Whilst the Chinese asset management sector has grown rapidly, the majority of personal assets of Chinese consumers’ remain invested in cash and deposits. Just under 50% of household’s investible financial assets are held in wealth products (i.e. stocks, bonds, mutual funds, insurance products and pensions). This compares to over 70% in the US8.
The development of technology, including the growing number of online fund distribution platforms and robo-advisory mobile devices, has accelerated the way that Chinese investors’ access wealth products and will continue to drive the redeployment of consumer savings into wealth products. The distinction between competitors and partners is certainly increasingly blurred.
All major Chinese financial institutions are focussing on their customer’s digital experience - ensuring this is seamlessly integrated with their offline services.
Yu’e Bao, now the worlds largest money market fund launched by Ant Financial (the fintech and payment arm of Alibaba) in 2014, is perhaps the best example. This was designed as a home for its payment customers to sweep their growing piles of cash in their accounts and has grown to an AUM of over US$ 250 billion at December 2017.
4. Technology has transformed the ability of wealth providers to reach the Chinese consumer
8 Source: Credit Suisse - 2017 Global Wealth Databook
Fund managers are used to working with online distribution platforms and the Chinese tech giants will undoubtedly be vitally important. Whilst the largest foreign players have built broad onshore distribution capability (e.g. a combination of banks, brokerage firms, IFAs and online channels), most are not yet focused on this and will need to quickly develop a strategy to forge strong partnerships - and above all, manufacture the product that the customers who use these platforms want to buy.
PwC6
So do we believe it is now time for foreign fund managers, who don't have an existing footprint, to enter into China?
The short answer is yes.
However, that is not to say that the challenges that have previously existed are no longer there. For example, the client on-boarding requirements and AML background checks that global firms are required to complete on potential clients, are in some respects significantly more onerous than the equivalent for domestic players in Shanghai or Beijing. Bridging the gap between the two is difficult to do.
Another challenge is defining a practical entry strategy, for example, whilst acquiring a controlling stake in a mutual fund company, may be attractive theoretically, finding a target with a domestic partner who you can work with is much harder in practice.
The good news is that foreign firms who have a good understanding of the market, are bold enough to localise decision making and come up with solutions to the practical challenges of being a foreign institution operating in China, will undoubtedly be well positioned for upside. Whilst this will require some faith about the speed of regulatory opening, we believe the path is clear - it is purely a matter of time.
The US-China trade war and tariffs on Chinese exports, may ultimately act as catalyst for Beijing further accelerating the timeline for market opening.
5. Ability to build an effective distribution strategy and brand will differentiate the winners and the losers
So what do we suggest foreign wealth managers do today?
Ultimately, whilst we expect the Chinese fund management industry to remain dominated by local competitors, the opening of the market and growing sophistication of investors, will lead to opportunities for those that are brave.
Ensuring local teams are empowered and localised; investing the time to understand what products are popular and positioning new products to meet investor needs.
Start developing onshore product
capability
It’s not too late to invest into local distributors or product manu-facturers and the recent decline in valuations may make this an attractive time to do so. Being creative in structuring partnership agreements – for example taking minority equity stakes to signal commitment, may make the difference.
Not too late for M&A
In addition to asset management, we expect new opportunities will open up in asset servicing (including custody and fund administra-tion). Global players in this space will continue to face challenges in interpreting somewhat ambiguous regulatory requirements. Whilst working alongside domestic banks will be critical, the ability to manage cultural differences will be a key determinant of success.
Consider asset servicing
The distribution landscape is changing, and winners are already starting to emerge. Digital is already key. Building a broad distribu-tion capability (particularly for those targeting HNWIs through the PFM license - which prohibits marketing products publicly) will be key. How will you stand out?
Build partnerships with distributors
Certain product classes in China remain relatively underdeveloped - examples include real estate, hedge funds and ETFs. Having a global capability in one, or several of, these niches areas would mean that you are a potentially a desirable partner for local groups looking to build this capability.
Niche’s remain open - can you take
advantage of these?
China wealth 7
How PwC can help?
The asset & wealth management industry faces an increasingly complex business environment. Greater regulatory focus, changing investor demand, new technology and shifting sources of investment returns create both challenges and opportunities to today’s asset and wealth managers.
We are increasingly helping our international clients to develop their wealth and asset management offerings in China, through leveraging our broad expertise of providing integrated strategy consulting, regulatory and compliance advisory, M&A diligence, assurance and tax services.
Please reach out to any of the individuals below for more information.
Contact us
Jane Xue
Partner
China Asset and Wealth Management Leader
+86 (21) 2323 3277
Chris ST Chan
Partner
Financial Services M&A Leader
+852 2289 2824
Harry Qin
Partner
China Asset & Wealth Management Consulting
+86 (10) 6533 5356
James Dilley
Associate Director
Financial Services M&A Advisory
+852 2289 2497
Matthew Phillips
Partner
China and Hong Kong Financial Services Leader
+852 2289 2303
Jeremy Ngai
Partner
Financial Services M&A Tax
+852 2289 5616
Fang Fang
Partner
Market assessment and entry strategy
+86 (21) 2323 2395
Oliver Kang
Partner
China Financial Services Tax
+86 (10) 6533 3012
www.pwchk.comThis content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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