The author of this article reflects on the current strong wealth growth in China and what investment ideas make sense.

This publication has written before about the wealth transfer issues arising in mainland China. The country’s government has enacted a raft of laws to curb capital outflows from high net worth individuals, while at the same time it wants to attract foreign inflows. The recently-loosened One Child policy – controversial both on practical and moral grounds – has created a situation where for some HNW individuals, there are no or few offspring who can inherit. At the same time, China remains a hotbed for creating millionaires and billionaires, as demonstrated by a study from UBS and PricewaterhouseCoopers last year. 

Against that background, what sort of considerations arise when considering China’s wealth management sector and which areas investors should invest in? What are the opportunities here? To address them is Klyzza Lidman, an investment analyst working on Aubrey Capital Management’s global and emerging markets strategies. An Edinburgh University graduate, with an with an MSc in banking and risk management, Klyzza joined Aubrey Capital Management in 2015. She is a Swedish national and attended education institutions in the Philippines, Sweden, Bahrain, the United Arab Emirates and Saudi Arabia.

The editors of this news service are pleased to share these views; it does not necessarily endorse all the views of guest writers and invites readers to respond. Email tom.burroughes@wealthbriefing.com

An increasing number of Asian countries are expected to break into the list of the top ten largest economies by 2030. Spearheading this development is China, which is on track to overtake the United States as the world’s largest economy by 2020, based on purchasing power parity exchange rates and nominal gross domestic product. While the growth in the region is largely attributed to a burgeoning middle class, none has a greater impact than China’s. With 2,000 millionaires created each day, the development of household wealth is difficult to ignore. 

China’s evolving demographics have seen a dramatic change over the last 10 years as a result of the declining birth rates from 2.7 to 1.6 per household which is having a knock-on effect for family succession and wealth management. Family wealth has consolidated over time as a majority of households are now made up of the “4-2-1” structure (four grandparents, two parents, and one child). In addition, over a third of the Chinese population is expected to be over 65 years old by 2050, driving the discussion for succession planning. Currently, there are no nationwide specific inheritance or estate taxes but speculation suggests that change is increasingly likely. 

As wealth consolidates from one generation to the next, we clearly see behavioural changes as the demand for more diversified wealth products increases. One reason for this has been attributed to the improvement of financial literacy in the country. China ranked first place in the OECD’s 2015 Programme for International Student Assessment Report, on financial literacy; an impressive result of the government’s ambition to improve the population’s financial literacy through national policies. 

Yet, Chinese households still value bricks and mortar as the most important wealth management instrument with 60 per cent of households having at least one investment property, outside of their own residential home, accounting for more than 10 per cent of their total family assets. 

This behavioural change is reflected by the growth in asset management which is expected to see a compound annual growth of around 10 per cent in assets under management of $14 trillion - accounting for 15 per cent of the global asset management market. The investable wealth of ultra-high and HNWs is estimated to reach $17 trillion by 2022 from $8 trillion in 2016. This is a significant feat for an industry that only emerged only 20 years ago. Fund management firms have seen their AuM grow to an estimated $2 trillion in 2018 from $1.27 billion in 1998. KPMG expects to see continued momentum, reaching $5.6 trillion by 2025, to become the number two market for asset management, globally. 

With demand comes innovation. East Money Information, a leading online finance company providing news, decision aids, investor trading tools, is building a one-stop retail wealth management platform. Noah Holdings Ltd, a wealth and asset management service provider, is focusing on global investments and asset allocation services for HNW individuals. Companies such as East Money and Noah Holdings attribute their success to their ability to adapt to the consumers’ needs, whether that is technology and convenience or diversifying wealth into non-Chinese assets.

Players in other industries are also taking visible steps into the financial services sector. Tech giants, Tencent, Alibaba and Baidu, have all invested heavily and have a presence through their respective digital fund distribution platforms.  Baidu is the latest tech giant to acquire a licence for their fund distribution platform, Baiying. Ant Financial, Alibaba’s financial services subsidiary, runs the world’s largest money market fund through their online fund product, Yu’E Bao. Tencent is a close third, after being granted a licence in 2018 to sell mutual funds to its +1bn WeChat users through its wealth management platform, Licaitong. The latter two, are also the largest shareholders in China International Capital Corp (CICC), an investment bank arguably considered the “Goldman Sachs of China” and is well known for the accelerating growth of their own investment and wealth management businesses. 

Demand for associated financial products is also evolving, China is now the second largest life insurance market in the world, only behind the United States. From 2012 to 2017, China was the largest contributor to global life insurance premium growth, 4.6 times more than the rest of the world combined. According to wealth manager Bernstein, with GDP per capita increasing towards $9,000, the country is reaching the inflection point at which demand for life insurance accelerates. Ping An, the largest life and property and casualty insurance insurer in China, is expected to continue to benefit from these tailwinds. 

The rise of China’s middle class has been driven by the development towards an open economy; however, this has been supported by households benefitting from consolidating wealth through the intergenerational wealth transfer impact of the one-child policy. The asset and wealth management industries are expected to continue to benefit from these long-term tailwinds as Chinese households become more financially literate and increasingly demand products that diversify their wealth. The aforementioned companies are well positioned to capitalise on this growth as they continue to offer products that best capture the convenience and diversification that the financially savvy Chinese investor seeks.