Most economic commentaries from China now contain more questions than statements of optimistic predictions and corporate intents. The latest note from French bank Edmond de Rothschild poses a number of major queries in its opening salvo about 2011 Asian growth prospects. Interestingly, Rothschild, like many competitors, now talks about risks before returns when discussing China’s future.
Can China continue to achieve sustainable growth in an unstable world? Even if corporate earnings continue to rise by more than 20 per cent, is there a risk of exports collapsing if growth begins to slow? What will be the effects of a potential property price drop? Will the Chinese authorities clamp down if inflation spirals out of control?
Yi Tang, Rothschild’s deputy CIO for asset management in China is keen to ask these questions at the beginning of his recent note. But, as with other banks and wealth managers, the conclusion remains a positive one. Rothschild expects exports to diversify, inflation to slow and more housing to be completed for low-income families. The period after the recent meeting of the People’s Congress could be decisive, with the authorities favouring growth-related policies, such as investment in heavy industry, expected in the forthcoming 12th five-year plan.
Strong economic growth coupled with a surge in private sector enterprise has seen tremendous wealth creation in China in recent years. Boston Consulting Group (BCG), estimates the country has the third largest population of millionaires in the world, behind the United States and Japan.
BCG’s latest wealth report states that China had 670,000 households with more than $1m of financial wealth in 2009, up 60 percent from 2008. According to the HSBC Asian Affluent Tracker Survey conducted from February to April 2010, the mainland Chinese held average liquid assets of $126,537, ranking in Asia’s top three behind Hong Kong and Taiwan. Meanwhile, Forbes magazine’s 2011 Billionaires List shows the number of Chinese billionaires has nearly doubled from last year to touch 115, making it one of the few countries with more than 100 billionaires.
It is not surprising that banks are actively courting this wealth management segment. While some of the large local banks had been offering priority banking services since 2002, private banking came into the picture only in 2007 when foreign banks first entered China.
The first bank to offer wealth management in China was Citibank, closely followed by BNP Paribas, Deutsche Bank and Bank of China (BoC). Subsequently, other foreign banks such as Standard Chartered and Bank of East Asia along with leading local banks such as Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), China Merchants Bank and China Citic Bank also entered the fray. But along with the drive to acquire new clients, there is also an increasing recognition that wealth managers, particularly the home grown ones, need to broaden their range of products and opportunities, if they are not to be outgrown by foreign rivals once currently restrictive regulations are inevitably relaxed.
Despite their global experience in wealth management and dominance of the offshore market, foreign banks currently lag behind local players in the much larger onshore market. Nonetheless, the market continues to lure new service providers.
“The wealth management market in China represents one of the most important business opportunities for UBS anywhere in the world,” states Graham Francis, CEO APAC Hub, at UBS Wealth Management. “Typically, wealth management assets grow at a multiple of GDP growth rates, so in light of the unprecedented economic growth and wealth creation in China in recent years, the market there is growing rapidly.”
In China, UBS offers wealth management services primarily through UBS Securities, a joint venture with state-owned firm Beijing Securities and through its Beijing bank branch as well.
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Commenting on the investment preferences of Chinese clients, Mr Francis notes the investment style of prospective clients in Asia and in China is more aggressive than that of their peers in the US and Europe, “Many have accumulated wealth over a relatively short period and demand aggressive investment returns although they remain willing to take on a greater degree of risk in order to achieve relatively high returns.”
Increasingly however, clients in the region are prepared to seek professional advice on asset allocation and investment, he adds. “This offers huge growth potential for the wealth management industry in the region especially in areas such as family governance, and generational asset transfer. More specifically, highly volatile markets in 2010 prompted an increase in demand for discretionary managed products and especially where clients seek absolute returns through a dynamic approach to asset allocation. We see this as especially positive for our longer-term business model,” says Francis.
Andy Koh, head of Customer Financial Services at OCBC China, the China-incorporated subsidiary of Singaporean lender OCBC Bank, which has been present in China since 2007, agrees that the risk appetite for Chinese investors is generally high as compared to developed markets.
