How serving China’s ultra-rich is shaking up the global wealth management industry

Strong fundamentals and ongoing deregulation set the stage for product innovation and cross-border opportunities. The field of global wealth management is changing rapidly with a new breed of investor taking the stage. Fabian Gull, writing for the Swiss China Center (SCC), outlines how new opportunities exist for those that wish to navigate the complicated, but lucrative, Chinese marketplace consisting of an ever-expanding pool of private wealth.

Despite its growth slowdown in recent years, China remains at the forefront of a gigantic global economic transformation. China’s past three decades of rapid economic development and wealth generation are unprecedented, both in size and pace. The country’s ever-expanding pool of private wealth is approximately twice the size of the country’s gross domestic product and represents one of the fastest growing accumulations of wealth in modern history. Today, according to UBS Group AG, one billionaire is created in China every week.

The forces that set-in motion decades of extraordinary private wealth creation look poised to continue. This, combined with the new needs of affluent Chinese are creating vast investment and business opportunities for high-net-worth individuals (HNWIs) and financial service providers alike.

Soaring demand
In 2016, the number of wealthy individuals in China, with investable assets of more than Chinese renminbi-yuan (CNY) 10 million (m), was close to 1.6m. This was an expansion of more than eightfold within a decade, and the number is expected to grow by 18 per cent to 1.87m this year. At the same time, China’s private wealth has swelled to CNY 165 trillion (tn) (approximately US dollars 24tn), which is more than six times the 2006-level, according to a joint report from Bain & Company and China Merchants Bank. Recent data has shown that this growth is set to continue.

This growth is not limited to China’s first-tier coastal cities, but also includes areas that are lesser known to foreign businesses. The Swiss consul general of Chengdu, Frank Eggmann, concurs with this perspective on growth stating, “The wealth accumulation in western China is surprising by all standards, and it is interesting to see that there is a surging demand for sophisticated services where Swiss and other European players certainly have an edge.’’

While growing rapidly, China continues to have one of the world’s highest saving rates, mainly due to its still rather premature—although improving—retirement and healthcare schemes. The main challenge, and opportunity, in the wealth management industry is to connect China’s huge savings to attractive investment opportunities (i.e., bridging supply and demand in capital markets).

A new breed of investor
A multitude of factors are boosting HNWIs’ need for professionally managed wealth. Currently, a real paradigm shift is taking place and a new breed of client is evolving–the so called ‘Chinese global citizen’, and the consequent emergence of ‘family offices’.

The older generation of wealthier individuals, who were among the first to benefit from the government’s embrace of a market-based economy, tended to manage their money on their own, or with a small amount of assistance from select family and friends. By contrast, newer HNWIs, who often include the children of first-generation company founders, are more willing to seek professional advice. A new wave of entrepreneurs has introduced a fresh perspective and brought innovation to the Chinese marketplace, spawning new fortunes and new industries.

These ‘Chinese global citizens’ are more internationally minded, well-travelled, are often educated abroad and have international work experience. Along with China’s economy, this younger generation of Chinese entrepreneurs’ perspectives and investment needs have increasingly become more internationalised and subsequently more diverse. In other words, as the desires of China’s HNWIs become more complex, their willingness to seek advice increases accordingly. These trends create tremendous opportunities for banks and other wealth managers, especially those who are able to fine-tune their offerings to suit the needs of HNWIs.

Tapping family office growth
China is currently changing the global wealth management industry, and the needs of China’s HNWIs are shaping these market trends. Family offices, with a long and storied history in Europe, are essentially organisations that operate on behalf of a high-net-worth family with the goal of preserving and transferring wealth to future generations.

Yang Haodong, co-founder of the Swiss China Corporation headquartered in Shenzhen, sees family offices playing an essential role in the market professing that, “family offices are in the prime position to cater to such needs”. Foreign financial advisors are in a highly advantageous position due to having extensive experience, global exposure and a lack of competitive services in this particular sector.

Modern family offices offer additional services to their clients beyond the realm of finance in sectors such as education, healthcare or lifestyle. Family offices aim at becoming the ‘go-to-place’ for all upscale trappings, specialising in every area that intersects with the main goal of providing a better life for their client’s children.

Holistic investment approach needed
Global citizens’ needs are manifold. For example, a steadily increasing number of Chinese HNWIs have significantly increased the number of private investments made overseas. These new investments have expanded the role of HNWI services even farther as now they must cater to both onshore and offshore concerns.

Transferring wealth to the next generation requires comprehensive portfolio management and a holistic investment approach across all asset classes. Both onshore and offshore activities need to reflect the increasingly important intertwined fields of personal wealth, family wealth and business-related needs. Enabled by its global network, a family office can also act as a facilitator for direct investment opportunities both around the world, and in China.

High-tech vs high-touch
The traditional financial industry has been challenged in recent years from fintech start-ups, which are currently trying to grab a slice of the wealth management action. Mr Yang is convinced that the retail and mass market will increasingly become dominated by fintech players in the near future remarking, “But looking at the level of sophistication required to succeed in the segment of serving the ultra-rich, I clearly see personal relationship management having the edge over algorithms.”

A profound transformation is occurring among China’s affluent, which pertains to the way the affluent treat wealth they have already accumulated. More and more Chinese HNWIs regard money not just as a source of material well-being and social status, but as something to be used for a philanthropic or charitable cause. Some family offices provide ‘philanthropic consultancy’ and assist their clients with these types of investments.

Complex market specifications
Opportunities found in a highly regulated and complex market also come with their share of challenges. The regulatory environment is still in its early stage and the financial sector is much less mature compared to other more established global financial centres. The government is aware of these imminent challenges and therefore it constantly works to adjust and improve the financial system. The regulator’s main goal is to protect the economy’s stability as well as to protect small clients from fraud or overheated speculation (like what happened in several peer-to-peer loan schemes).

Despite having a complex and increasingly restrictive licensing regime, which includes imposed capital controls and limitations for Chinese investors to invest abroad, there are still several signs of overall improvement in China’s financial ecosystem which allows companies with the right setup to successfully carry out business with HNWIs.

According to Chris Carline, head of the intermediary desk at Schroders based in Beijing, the growth potential of the wealth management industry in China is enormous. Ongoing deregulation in the financial sector has set the groundwork for increased innovation and cross-border opportunities, which benefits foreign enterprises. Mr Carline believes understanding the local environment is important, emphasising that“the key remains to understand local market trends and continuously invest in its team and professional capabilities’’.

Deregulation continues in different areas, resulting in easier access to onshore investment and with ownership being allowed in onshore financial companies. A further sign of a market opening is the establishment of the Stock Connect link between China’s mainland markets and the Hong Kong Stock Exchange, which relaxes restrictions between markets. This opening is also being signalled by the ongoing internationalisation of the renminbi and the recently launched Silk Road Economic Belt and the 21^st century Maritime Silk Road Initiative.

The Swiss China Center (SCC) is a non-profit organisation with offices in Shenzhen, Chengdu, Chongqing, Jinan, Hong Kong and Switzerland (Geneva). SCC is creating opportunities primarily in the fields of business investments, education, tourism, healthcare, lifestyle and is catering to the needs of Chinese high networth individuals and their families. SCC was founded by a diverse group of Swiss and Chinese entrepreneurs with the main objective to provide an open exchange platform connecting Switzerland and China. For more information, you can find it on our website at http://www.swiss.org.cn.