China’s wealth management market shows renewed promise

Avishek Suman

Priya Vaidyanathan

China is rapidly creating affluence and generating new high-net-worth-individuals (HNWIs), who are increasingly seeking professional wealth management products to protect and grow their assets. The country has registered a notable 14-times jump in per capita income since the turn of the millennium, and now ranks in the top-five HNWI populations globally.

With fast-increasing retail participation in financial markets, these individuals are actively diversifying allocations away from conventional banking products. In 2022, China had 96.71 million individuals investing in wealth management products (WMPs), up 19 per cent year-on-year, according to the China Banking Wealth Management Registration and Depository Centre.

This is impressive, given the introduction of stringent regulations on high-yielding WMPs in recent years. At the end of 2022, the WMP balance in China amounted to $4tn — down 4.66 per cent on the previous year due to adverse market conditions.

Big tech vs traditional banks

The proportion of Chinese HNWIs below the age of 40 has increased from 29 per cent in 2019 to 42 per cent in 2021. Individuals in this demographic are seldom fans of conventional banks’ traditional wealth management services, a modified version of institutional investment services. Young Chinese retail investors prefer a digital wealth management experience over conventional branches, offices and phone calls.

This is why Alibaba-backed Ant Group’s money market fund Yu’e Bao and its wealth management platform Ant Fortune — launched in 2013 and 2015 respectively — have been popular in China. LiCaiTong, an online wealth management platform launched by tech giant Tencent in 2014, has also grown exponentially.

Ant Group is a hugely popular company in China, but has garnered attention from regulators. Image via Bloomberg Mercury

These tech companies have carved out a niche in China’s wealth management market, previously dominated by traditional banks’ long legacies. Alibaba and Tencent should continue to benefit from their expansive customer reach through their respective digital payment gateways, Alipay and WeChat. Tech platforms can provide differentiated services that are easy to use and offer quick client onboarding. Their technological wherewithal allows them to use big data, machine learning and other analytical tools to offer the right products to clients and make asset allocation decisions.

Traditional banks are also investing in big data analytics and robo-advisory capacity. However, owing to increased regulatory scrutiny over robo-advisers, banks are slowing down growth in this area for now.

Crackdown subsides

China’s restrictive policies have proved the single largest risk for the industry. However, the crackdown on tech companies, which began with the government thwarting Ant Group’s initial public offering (IPO) in 2020, seems to be nearing its end.

Observers say Beijing has extended an olive branch to Mr Ma, welcoming him to come home and guaranteeing his safety. This should be viewed against the backdrop of Mr Ma’s January decision to cede control of Ant Group, paving the way for its potential IPO. In March, Alibaba decided to split itself into six business units and seek individual IPOs, in what is widely seen as the start of a truce between the government and indigenous tech giants, with the potential of spurring foreign investment in Chinese tech companies. Businesses will be keenly observing the role that the chastened Mr Ma plays in future.

Jack Ma visits a school in Hangzhou. Image via Hangzhou Yungu School

While there have been reports about the rich in mainland China moving — or contemplating moving — assets to countries such as Singapore, such news has been countered by the burgeoning average assets under management of family offices, which more than tripled over the past five years. China is increasingly softening its approach, since abandoning the much criticised zero-Covid policy. The country will also need the support of private companies on its path to macroeconomic growth.

Regulation benefits

China is also doing its best to weed out excessive risk from the wealth management market. WMPs were initially sold into China on promise of guaranteed returns. However, in 2018, regulators implemented rules to prevent such promises being made and to ensure transparency on underlying products.

The country has also warmed to the idea of granting wealth management licences to foreign banks — for example, in March 2023, Credit Suisse obtained licences to launch its wealth management business in China. However, the Swiss bank is now in the process of being acquired by rival UBS, and it remains to be seen how these licences will benefit UBS in China.

Along with Guangdong and Macao, Hong Kong (pictured) is part of China’s Greater Bay Area. Image via Getty Images

Moreover, China’s move to initiate the Wealth Management Connect programme will provide Chinese investors in the Greater Bay Area (GBA) with an opportunity to invest outside the mainland while opening the GBA market to wealthy residents from Hong Kong and Macau.

Clearly, there are several challenges remaining for China, both internally and geopolitically. But with expectations of reasonable growth and a more conducive regulatory backdrop, the story of wealth management companies in the world’s second-largest economy will be one to watch.

By Avishek Suman, director, investment research and Priya Vaidyanathan, associate director, investment research at Acuity Knowledge Partners