Mainland Chinese high net
worth individuals are looking to invest beyond China’s borders and
are set to become one of the most important private client
segments, known as Global Chinese. Paul Golden finds that these
Chinese HNW want to move beyond Hong Kong to become truly global
investors.
Go deeper with GlobalData
The increasingly
international outlook of Chinese high net worth individuals (HNWIs)
presents a major opportunity for private banks to meet the changing
needs of this rapidly growing customer segment.
WealthInsight research shows that
over 50,000 Chinese HNWIs are looking to move abroad each year
(see Hangzhou: the next UHNW
hotspot).
This growing desire to offshore
wealth is based on several factors: the growth of China’s HNW
population, their increasing sophistication and also the difficulty
of being a high-profile wealthy investor in China’s political
environment.
The chief driver of this offshore
trend is the growing wealth of Chinese HNWIs and their desire to
diversify out of local markets.
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By GlobalDataA Deloitte Center for Financial
Services survey published in May last year predicted the number of
Chinese households worth more than $30m (approximately CNY190m)
would increase from 46,000 in 2011 to 327,000 by 2020.
Much of this wealth has been
created from rapidly rising domestic property values.
Prices rose 13.7% in 2010 according
to government statistics and the Hurun Wealth Report 2011
suggested that 20% of Chinese with personal wealth in excess of
CNY10m are property speculators, whose portfolios accounts for 60%
of their wealth.
Given that rising property prices
has been one the key drivers of wealth growth among China’s ultra
HNW (UHNW) – defined as those with assets of CNY100m or more – it
is hardly surprising that many retain considerable investments in
this area.
Hurun reported that property was
the main investment class for more than half of these individuals
with just 25% focusing on stocks.
The Deloitte Center for Financial
Services survey found that residential property accounted for 35%
of asset allocation among the wealthiest 1% of China’s population
(see chart), although it placed real estate second to
domestic stocks, which it said accounted for half of all
investments.
Property losing its
lustre?
The appeal of real
estate, however, may be losing its lustre. Bain & Company’s
2011 China Private Wealth Study suggest bricks and mortar
is waning.
The report noted a major shift in
asset allocation – alternative investments (5.4%) and stock and
equities (5.3%) recorded significant increases since 2009 while
investment in cash and deposits and property fell by 7.4% and 4.3%
respectively.
More than four in five respondents
planned to further diversify their portfolio in order to spread
risk (44%), improve their risk-reward profile (32%) and widen
portfolio selection (23%).
The survey also detected a move
away from high risk wealth management products toward moderate risk
investments over the last two years and increased emphasis on
wealth safety, suggesting heightened sensitivity to local and
global economic stability.
As Johnson Chng, head of financial
services for Bain & Company in Greater China observes, Chinese
HNWIs are exhibiting sophisticated investment strategies.
“They are no longer satisfied with
safe, stable investments such as cash, but seek increasingly
diversified portfolios that include a broad range of wealth
management products,” Chng says.
Interestingly, Bain & Company
found that brand awareness was the main criteria in selecting a
private bank, ahead of expertise or relationship management.
Rebecca Lum, market
manager for China of JP Morgan Private Bank, which provides
offshore private banking services to the UHNW segment, states that
this market has developed much more rapidly than in other parts of
the world.
“Ten years ago, Chinese clients’
needs would be simply basic banking products such as deposits,”
says Lum.
“Now some are beginning to consider
setting up a preliminary family office, which creates demand for
fund and trust services.
“Their mindset has become more
international in line with the development of their companies and
increased overseas exposure for these businesses creates strong
demand for financing.”
But just as this broader
perspective has not yet weakened their commitment to domestic
equities, Chinese HNWIs still appear to prefer local institutions
when it comes to wealth management.
The 2011 China Private Wealth
Study reported that 85% of those who use financial
institutions for wealth management selected at least one domestic
bank and 60% have designated a Chinese private bank as their
primary wealth management institution.
China Merchants Bank, Industrial
and Commercial Bank of China and Bank of China are all forecasting
significant growth in their private banking businesses over the
next few years.
Reshaping
strategy
In order to remain
competitive in this market, international private banks have to
carefully consider their strategies.
For example, BNP Paribas Wealth
Management works collaboratively with other divisions –
particularly its corporate investment banking arm – to acquire
target clients, explains Alfred Tsai, head of wealth management
(China).
“We provide investment analysis
from local experts and also have a range of investment solutions
created or selected by our international wealth management teams,”
he says.
“BNP Paribas [China] has a
dedicated team of relationship managers based in Hong Kong for its
offshore Chinese clients.”
BNP Paribas has also acquired a
strategic stake of more than 10% in Bank of Nanjing, doubtless
encouraged by Bain & Company’s findings that 45% of Chinese
high net worth individuals view private banks as a major investment
channel and that almost one in three will increase the percentage
of their assets managed by private banks.
The Bank Julius Baer representative
office in Shanghai takes care of offshore wealth that has been
created through the process of IPOs in Hong Kong or Singapore,
through the global activity of Chinese firms.
“The needs of and supplication
levels of wealthy individuals in China is changing and we see
greater need for wealth transfer and wealth preservation
discussions for that market,” explains Thomas Meier, CEO of Bank
Julius Baer in Asia.
When asked about the kind of
relationship Chinese HNW clients look to have with their private
bank and how they differ from their Indian counterparts, he refers
to the importance of local nuances.
“Investors throughout the region
like to consider investments with content they can relate to,”
Meier adds.
“In practical terms
this means that Chinese investors like to buy stocks such as Levono
or Geely, while Indian investors may buy Tata or Infosys. Both of
these groups have a tendency to be actively involved in the
management process and are open to utilising leverage.”
According to Tsai, it is impossible
to classify wealthy Chinese as a homogeneous group due to the sheer
size of the country, the existence of different provinces where
different dialects are spoken and the influence of local culture on
personal preferences and behaviour.
However, the continuing education
provided by foreign banks over the past decade means Chinese
clients have become more sophisticated and also more demanding, he
says.
“They are usually served by more
than one private bank, depending on their net worth and exposure.
They expect a set of comprehensive and high quality wealth
management services at reasonable fees,” Tsai says.
The key is to demonstrate your
commitment to their future, he continues.
“To a certain extent, they are
quite similar to Indian clients in that India is another major
emerging market,” Tsai adds.
“However, Indian clients are
generally perceived to be even more demanding and price
conscious.”
It is vital to adopt a different
strategy for Chinese clients compared to those in mature wealth
management markets such as Hong Kong, Singapore, the US or Europe
where investment behaviour and mindset are quite different,
confirms Tsai.
“As most Chinese
HNWIs are first generation entrepreneurs who are in their 30s or
40s and still growing their business they prefer to have control
over their investment decisions and are mostly still in need of
financing services and advice,” says Tsai.
“Compared to clients from the
mature markets who are usually second or third generation of
wealth, there seems to be an ongoing education process for Chinese
clients in terms of wealth management philosophies and
practices.”
To underline that point he refers
to the fact that most CHNW clients have become more conservative
and susceptible to the concept of investment diversification after
suffering heavy losses during the global financial crisis in
2008.
Meier adds that the demands and
requirements of high net worth Chinese individuals have shifted in
the even more recent past.
“We have seen a strong trend
towards wealth preservation, especially on the back of the
difficult markets of 2011,” he says.
“We see particular interest in
managing the generational transition process, be that in relation
to inheritance related matters or simply educational issues.”
Customised
offshoring
A report issued in
December by Boston Consulting Group in conjunction with China
Construction Bank found that Chinese high net worth individuals
were most interested in fixed-income products and trust
products.
It also noted that second
generation wealth inheritors have become professional investors
with a higher tolerance for risk and a preference for more
complicated investment products and that 22% of those with assets
of CNY50m or more had already used offshore products and
services.
Two-thirds of ultra high net worth
individuals expected to increase their offshore exposure in the
near future.
While some Chinese clients continue
to maintain most of their assets onshore in CNY (business assets,
real estate holdings, securities and cash), others have transferred
a substantial part of their wealth offshore via IPOs or other
means.
Customised strategies for onshore
and offshore product offerings are therefore necessary, says
Tsai.
“For onshore clients we offer yield
enhancement investment products that differ from those on offer
from the local commercial banks, given the fact that onshore
Chinese clients still tend to be very product driven at this
evolving stage,” Tsai adds.
For offshore clients, BNP Paribas
Wealth Management provides securities brokerage, investment
advisory, discretionary portfolio management, trust and estate
planning, tax planning, usually in partnership with tax accountants
and lawyers, monetisation strategies, usually working closely with
its investment bank, lifestyle services – such as advice on
purchasing vineyards/chateaux in France, art financing,
philanthropy services, private plane and yacht financing – and
family office-type services.
“Chinese HNW clients are looking
for value-added offshore services and products, including
immigration consultation services, timely and accurate market
advice, good quality equities research materials, capital
protection structured products and reasonably priced brokerage
services,” adds Tsai.
“As the market starts to develop,
more and more Chinese clients realise the importance of
diversification, hence they look to diversify a portion of their
assets offshore. For offshore wealth management services, they are
looking for confidentiality, security, estate and tax planning and
in recent years demand for lifestyle services has increased.”
Emigration plans on the
rise
Bain & Company revealed that
almost 60% of the CHNWIs surveyed by the consultancy would emigrate
or are planning to apply for emigration (see chart). But
while Tsai acknowledges that some wealthy Chinese have moved to
Canada and Australia, it appears that many more want to remain
closer to home.
The most popular destinations are
Hong Kong, Singapore, Australia and Canada, he says.
“Singapore has become more popular
in recent years due to its geographical proximity to China as well
as their cultural similarity and the shorter time required for
obtaining citizenship status.”
There has been a significant
Chinese overseas community for a long time now, concludes Meier.
Immigration schemes in Hong Kong and Singapore have facilitated
permanent residency possibilities, which he describes as an
extension of the natural process of globalisation.
Other commentators suggest this
trend for Chinese HNWIs to offshore their wealth will be the shot
in the arm international offshore centres need, following the
concerted scrutiny from global regulators.
Singapore, Macau, the Caribbean,
Channel Islands and even specially designated offshore islands near
China’s mainland could all be destinations for Chinese offshore
wealth. Working out the best model to service this demand, is the
key to cornering this emergent segment.
No matter where they move their money, the trend is clear: the
demand for Chinese HNWIs to internationalise their assets will suit
global private banks well.
