Executive Summary China’s rapid economic growth has created many multi-millionaires, especially in the major cities and coastal regions. The wealth management business is an emerging business in China yet growing significantly fast. According to the Chinese Wealth Management Market Report by Boston Consulting Group(BCG), China is the largest wealth management market in Asia (exluding Japan), the total household financial wealth has reached $2.
5 trillion. From 2001 to 2006, China had the highest compound annual growth rates (CAGRs) in asset under management (AuM), at 23. 4 percent, while the global average stayed at 8. 6 percent. In 2006 only, total AuM in China increased by 31. 6 percent. BCG predicted that in the next years, the household financial wealth in China would keep increasing by around 17. 4 percent annually and by 2011 the total asset under management would reach $5. 5 trillion.
(Shanghai Securities Daily, 2007-10-31) The fast growing wealth management market in China is primarily driven by the soaring number of HNWIs (high net worth individuals), the fast development of the economy, the opening-up of its financial market, and the changes of its regulatory framework. However, due to the history of the Chinese economic development and the specialty of the country, the wealth management is mainly provided to mass affluent people. The true private banking business under western criteria can hardly be found in this market.
What is wealth management in China? There is no commonly agreed definition in the industry globally. According to UBS, a global leader in wealth management with history of 140 years in the industry, wealth management services are designed for high-net-worth and affluent individuals around the world, whether investing internationally or in their home country. Service providers provide tailored, unbiased advice and investment services — ranging from asset management to estate planning and from corporate finance to art banking.
The business, global in scale, is focused on growth. In China, the concept of wealth management is just beginning to take hold among Chinese banks. Personal financial service is believed to be the preceding of wealth management business. According to the Provisional Rules for Personal Financial Service of Commercia Banks, personal financial service refers to specialized services provided to individual clients by commercial banks, including financial analysis, financial planning, investment advisory and asset management, etc.
This business is provided by most commercial banks. China Construction Bank(CCB), one of the largest four commercial banks in China, set up its first wealth management center in Shenzhen in October 2007 . It provides client memebers with minimum personal assets of RMB 3 million (around $435,000) with tailor-made financial services include traditional banking services, advisory services, trading of bonds and stocks on behalf of clients, etc. , and other non-financial value-added services. (Tang, 2007)
Lian Ping(2007), Chief Economist of Bank of Communications, indicates that wealth management is different from personal financial service . Wealth management service is provided by financial institutions to HNWIs according to the demand of clients, to balance the relationship between the income and payment of the client accounts in order to add value to clients. The phylosophy is to plan and manage wealth on clients’ behalf with long term view. The service includes cash management, asset management, insurance, loans, retirement and legacy planning, and tax planning. Who are HNWIs and what do they need?
“The rapidly expanding population of high net worth individuals in China made it very clear that private banking was an area of real opportunity,” said Fred Goodwin, the Chief Executive of Royal Bank of Scotland. (Plafker, 2007) But who are HNWIs? National Bureau of Statistics of China conducted a survey concerning the HNWIs in 2007. The criteria was minimum annual household income of RMB 30,000, and owning commercial mortgage and automobile. A survey in 2005 indicates that the population with minimum household income of RMB 60,000 accounted for 247 million, covering 19% of the total population.
According to the Golden Sunflower Financial Index report of China Merchant Bank, HNWIs refer to people with minimum of personal or household financial asset of RMB 500,000. (Lian and Sun, 2007) Table 1 Number of HNWIs of Seven Major Cities in China CityTotal population (10,000)% of total populationNumber of HNWIs (10,000) Beijing974877. 92 Guangzhou566. 7634. 02 Shanghai1137556. 9 Wuhan749. 22. 518. 73 Chengdu445. 863. 515. 61 Xi’an393. 47311. 8 Shenyang485. 04314. 55 Sources: Approaching Private Banking, 2007 The HNWIs are concentrated in five cities including Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou.
The financial assets of the top 2 percent of retail clients of commercial banks contributed to over 50 percent of the profit. In a survey by Mckensey & Company concerning the Chinese personal financial services market(2001), more than 1. 2 million families owned deposits of more than $ 100,000, accounting to over 50 percent of the total personal savings deposits. These people covered four catagories: a) top 200 with assets of over $80 million; b) domestic businessmen; c) foreigners in China; d) domestic professionals in leading industries.
Category b covered most in both number of people and size of assets owned. A survey by Horizon group, a Chinese consulting firm, together with China Merchant Bank(CMB) gives details about the HNWI behaviours in the past years from 2003 to 2006. In 2007, the survey was conducted among 956 samples from 7 major cities, including 145 CMB clients of sunflower product, a wealth management package. Education From the figure below, we can see that most HNWIs are well-educated with bachelor’s degrees or above. Figure 1 Education of HNWIs Sources: Approaching Private Banking, 2007
Investment preference Although HNWIs invest in insurance most, as shown by Figure 2, investment in real estates covered largest proportion of HNWIs’ personal assets and contributed to the highest return, as shown in Figure 3 and 4. Stocks and funds ranked the second and the third in both products preferred and returns. This was mainly due to the prosperity of the real estate market and stock market in 2006 and 2007. Figure 2 Products of investment Sources: Approaching Private Banking, 2007 Figure 3 Proportion of investment in total personal assets Sources: Approaching Private Banking, 2007
Figure 4 Returns of investment Sources: Approaching Private Banking, 2007 As Dr. Jia Mi(2007) from BCG mentioned at the Second Wealth Management and Private Banking Forum, different from western investors who prefer low-risk investment, Chinese investors invest more in high-risk industries such as real estates and stocks to generate high return. Who are major players and what services are provided? Domestic players and services provided As the number of wealthy Chinese grows, so too do the efforts of Chinese financial institutions to attract them.
Most Chinese banks now grant them fee waivers and separate no-line service areas, and in some cases provide them with dedicated relationship managers. Chinese banks providing wealth management services include Bank of China, China Merchant Bank, China Construction Bank, CITIC Bank, Conmunications Bank of China, China Minsheng Bank, etc. Bank of China, originally a specialized bank in foreign exchange and now a shareholding commercial bank, announced in March 2007 the creation of a jointly established private bank together with the Royal Bank of Scotland, operating in both Beijing and Shanghai.
Focusing on customers holding more than $1 million worth of investable assets, the new service promises “confidential day-to-day banking services delivered in an exclusive and luxurious environment” and “a VIP card which gives clients access to a range of practical and exclusive concierge-type services. ” Besides these services, Bank of China wealth management clients can benefit from the global private banking services of Royal Bank of Scotland. A recent report by Xinhua News Agency says that the Bank of China’s private banking clients will mushroom from several hundred to more than 1,000 in the next two years.
But Dr. Huang Jinlao, a senior wealth management expert with the bank, says this figure only represents a single branch of the bank’s private banking service, although he did not reveal which specific city the number represents. (Bank of China, 2007) China Merchant Bank, a leading retail bank in China, started its private banking business in 2007 as well. Danxu Yuan, Deputy General Manager of Retail Banking Department, introduced the services as private banking business including tax planning, insurance planning, property trust and offshore capital manageemnt except traditional ratail banking services.
The bank set its service threshold at investable financial assets of RMB 10 million(around $1. 46 million). They extimated that the number of clients qualified amounted to 10,000 among the client group of the bank. (China Merchant Bank, 2007) Foreign players and services provided With restrictions on their local currency operations easing, foreign banks are working on the same ground. Although foreign banks lack of advantage of large network, they focus on serving high-end clients by providing wealth management services which do not need large network.
Many foreign banks, including HSBC, Citibank and Standard Chartered, which have established a presence in China, are focusing their efforts on developing personal banking services to high-net-worth clients. Backed by their wealth of experience in overseas markets and their extensive global reach, these foreign banks are poised to grab a big share of the burgeoning business when the market opens to them in accordance with Chinas commitments to the World Trade Organization (WTO). The threshold of services are different.
In May 2007, HSBC unveiled the Chinese version of its global “Premier” service for wealthy depositors. To qualify, Chinese clients must maintain a monthly balance of 500,000 yuan, or about $65,000. (HSBC, 2008) Citibank has two types of retail banking services. The first is regular banking offering, which requires a minimum balance of RMB80,000 and includes savings and investment products, mortgage loans, insurance and remittance services. The second type is offered by Citibank’s CitiGold wealth management business, which it provides to customers with a minimum balance of RMB800,000.
(Datamonitor, 2007) Main drivers for growth Strong Economic Growth China started the opening-up reform in late 1980s. In 2001, China entered WTO, further strengthening its linkage to the whole world. In 2006, in comply with the promise to WTO, China opened its financial market to the whole world. The opening-up of the Chinese market brought a lot of opportunities which prospered the economy. The whole world has witnessed the strong growth of its economy. The Chinese GDP increased by 9. 8 percent in the past 29 years, and 10. 8 percent in the past five years.
(XinhuaNet,2008) Development of Financial Market The financial market developed fast and provided investors more opportunities for investment. More and more credit facilities are available in the market. These have boosted the development of various industries. Stock market has contributed to personal wealth building. In 1990 and 1991, Shanghai Stock Exchange and Shenzhen Stock Exchange were formed respectively, giving both Chinese and overseas investors platform for investment. In 1992, China Securities Regulatory Commission was established to better regulate the market.
In 2001, Chinese domestic investors were allowed to invest in B shares which were originally issued to overseas investors. These options have given Chinese investors more opportunities to accumulate and manage their wealth. Real estate market is another market for wealth accumulation. Before 1998, houses or flats were allocated by state to individuals. In 1998, China started its reform in the housing market. State’s allocation of houses was stopped and people started to get allowance for housing. Commercial mortgates became an alternative to many ordinary Chinese.
House trading boosted since then and the real estate market started its prosperity for almost 10 years. Despite the macroeconomic control, the real estate market is still in the spotlight for most investors. The soaring of real estate market made it heaven for wealth accumulation. According to Hurun 2007 Top 100 Richest Individuals report, individuals from real estates industry ranked the first among the top ten, with a percentage of 24. The top one was a 26-year-old lady called Huiyan Yang whose wealth was passed from his
father who wrote the legend of the amazing success from a farmer to a real estate magnate. Yang is not unique among the richest. Real estate market has made uncountable wealthy people in China. In addition, commodity exchange and future exchange are developing gradually with the fast development of the economy and other financial market. Centralization of wealth allocation The social wealth of China is centralized among minorities. According to BCG(2007), millionaire households represented the richest 0. 7 percent of all households, and they owned $33. 2 trillion – or about one third of the global AuM.
China had the fifth largest number of millionaires after the US, the UK, Japan, and Germany, yet ahead of major European economies such as France and Italy, amounting to 310,000 in 2006, increased by 150% from 2001. These top households covered 0. 1% of the total households, yet controlled 41. 4% of the total wealth in China. The report predicted that by 2011, the number of millionaire households were expected to reach 609,000. (Xinhuanet, 2007) Corruption due to unhealthy legal system The incompleteness of the legal system provides an environment in which some people are willing and able to take chances to do illegal things.
The weak regulation and oversight, deep-seated government corruption and poor risk-management practices are to blame for allowing fraud artists and looters to run off long before investigators discover that anything is amiss. weak regulation and oversight, deep-seated government corruption and poor risk-management practices are to blame for allowing fraud artists and looters to run off long before investigators discover that anything is amiss. (David Barboza, 2005) In the last years, tens of senior government officials have been sentenced to death for accepting bribes and kickbacks.
Hundreds more are serving lengthy prison terms. But still, the number of fraud cases increases. In many ways, the corruption scandals offer a telling glimpse into the darker side of China’s remarkable ascent. The economy is soaring, incomes are rising (per-capita income grew to $1,100 in 2003, the last year figures are available) and foreign investment continues to flood into the coastal provinces, though the China’s finances are in a mess. (David Barboza, 2005) The middle age population benefit from the opening-up reform The Chinese opening-up reform started from the late 1970s.
The middle age population aged from 35 to 50 now benefit from the reform in the past 30 years. They are at their ascent period of career, accumulating wealth for the retirement. Many of them join the middle class and some even the richest group. Future trend for development More mature service providers As the Chinese economy continues to grow at around 10% annually and the market becomes more open to the outside world, more and more overseas wealth management providers will enter the market, bringing in more professional knowledge and products.
More mature customers Chinese investors are becoming more knowledgeable of investment. More second generation millionaires will emerge. Clients’ need for investment will diversify and become less easier to meet. Mixed operation of banking, securities and insurance sectors The current strict segmentation of banking, securities and insurance sectors will be broken in the future though the regulators have not release the timing. We have seen large banks establish joint venture asset management companies with foreign financial institutions, entering the funds marekt.
We will see large groups operating in all the three sectors. This will facilitate the wealth management industry. Recommendations The Chinese wealth management market is like a well of gold. The strong boosting of economy, opening up of the market gives more opportunities to both investors and service providers. The market is to be better regulated and more rational. For service providers to succeed, the following recommendations are raised. Cooperation between Chinese and foreign service providers Chinese banks have large client base including HNWI clients, and extensive branch network.
Big western banks are usually experienced in wealth management expertise, knowledge and professional staff. The combination of the advantages of both will make strong performance and fast development of the industry. Training of qualified wealth management professionals Successful development of the wealth management business need more qualified wealth managers and relationship managers. Qualification certificates for wealth management are encouraged to be granted by regulators or qualified institutions for new professionals to enter the industry.
Urging the regulators to abolish the segmentation of banking, securities and insurance sectors Although several senior officers from different regulators have mentioned the trend of break down the segmentation of banking, securities, and insurance sectors, the progress is still very slow. Service providers in all three sectors should urge the regulators more in order to achieve the opportunity to operate in all three areas as soon as possible. References Lian J. H. , Sun H. M, , Approaching Private Banking, Social Sciences Academic Press (China), 2007 Maude D.
,  Global Private Banking and Wealth Management: The New Realities (Chinese Version), Economic Science Press (China), 2007 The Number of Chinese Households with Minimum Liquid Financial Assets of $ 1 million Ranked the Fifth Globally, Xinhuanet [ 2007-10-30], http://news. xinhuanet. com/newscenter/2007-10/30/content_6975867. htm, Date accessed: 16/07/2008 BCG Report:Chinese Asset under Management increased by 23. 4% annually in the past 5 years, Shanghai Securities Daily, 2007-10-31, http://news. hexun. com/2007-10-31/100985504. html, Date accessed: 16/07/2008 Aerni V.
, De Juniac C. , Holley B. , Tang T, 2007, Tapping Human Assets to Sustain Growth, 2007 Global Wealth Report, Boston Consulting Group, September 2007 Tang Y. H. , China Construction Bank set up the First Wealth Management Center in Shenzhen, Securities Times, 2007-10-30, http://www. cs. com. cn/yh/05/200710/t20071030_1236239. htm, Date accessed: 16/07/2008 Lian P. , Banks should Develop Wealth Management Business, Minutes of 21st Century Asian Financial Annual Meeting, http://bank. jrj. com. cn/news/2007-11-24/000002969070. html, Date accessed: 12/07/2008
Ted Plafker (2007),Wealth management comes to China, but not every customer is happy, May 22, 2007, Herald Tribune: http://www. iht. com/articles/2007/05/21/business/rwmchin. php, Date accessed: 15/07/2008 Minutes of Second Chinese Wealth Management and Private Banking Forum, 2007, , http://topic. news. hexun. com/bank/blank2_5911. aspx, Date accessed: 15/07/2008 Citibank: expanding Chinese presence with new Hangzhou branch, 2007, Datamonitor, September 2007, P108 A wealthy class was generated with the strong growth of the economy. , XinhuaNet,2008,http://news. hsw. cn/2008-04/25/content_6932499.
htm, Date accessed: 12/07/2008 2007 China Hurun Top 100 Richest, , SinaNews, http://finance. sina. com. cn/focus/2007hrbfb/index. shtml, Date accessed: 12/07/2008 David Barboza ,Wave of Corruption Tarnishes China’s Extraordinary Growth, New York Times March 22, 2005, http://www. globalpolicy. org/nations/launder/regions/2005/0322tarnishes. htm, Date accessed: 12/07/2008 UBS website: http://www. ubs. com/ HSBC website: www. hsbc. com. cn/ Bank of China website: www. boc. cn/ China Construction Bank website: www. ccb. cn/portal/cn/home/index. html China Minsheng Banking Corporation website: www. cmbc. com. cn/