hina’s high net worth (HNW) market has crossed the tipping point and entered into the next phase of maturity,” says Kenny Lam, group president at Noah Holdings, a wealth management provider in China. The HNW domain in China has showcased the most fascinating development over the past decade, explains Lam, with the market growing rapidly in the past three to five years.
Noah Holdings, founded in 2005, is a quiet but fast-growing entry in the Chinese wealth management field. Their assets under management (AUM) stand at US$80 billion, while US$16-20 billion per year is being added to their AUM. Total AUM expanded at a compound rate of 97.5 per cent in the five years to the end of 2016. Much of their early focus was on the wealth of second tier cities, overlooked by international wealth management firms.
“On the demand side, the population of Chinese HNW individuals is growing rapidly. On the supply side, Chinese banks and wealth managers are quickly adapting to the changing needs and upscaling their offering. The whole domain is evolving and going beyond domestic boundaries,” says Jennifer Zeng, partner at Bain.
The 2017 China Private Wealth Report issued by Bain and China Merchant Bank highlights that over the past decade, China’s total private wealth has grown sixfold since 2006 to reach RMB165 trillion (HK$ 194 trillion) at a CAGR of 20 per cent. In the same period, the number of HNWIS has grown more than eightfold to 1.58 million in 2016. Collectively, China’s HNWIS have about RMB49 trillion (US$7 trillion) in investible assets.
The growth numbers are impressive, but the bigger story is the newfound maturity of this market. The report points out that in 2009, first generation business owners accounted for 70 per cent of HNWIS, whereas today that figure is 40 per cent. In addition to second generation business owners joining the ranks, there is a new generation of so-called gold collar professionals – highly paid, top-ranking executives. Gold collars now account for 30 per cent of China’s wealthiest people, up from 10 per cent in 2009.
The top objective of these HNW individuals has shifted from wealth creation to wealth preservation, wealth inheritance and education of children. The ultra HNWIS whose investible assets exceed RMB100 million are seeking professional guidance on more traditional matters such as family governance and philanthropy.
They are also looking to invest. The emergence of venture capital, private equity and other alternative investments are attracting investors to put their money in hotspot industries in the real economy via private wealth managers. Financial institutions now manage 60 per cent of the investible assets of HNW individuals in China, and of that, private banks manage close to 50 per cent of assets.
Local banks and independent wealth managers have responded by deepening their expertise, building differentiated models, and enhancing long established relationships with clients. They are ramping up their digital capabilities as well as setting up branches overseas. This has resulted in mainland Chinese private banks widening their lead in the domestic market over foreign banks.
Noah Holdings has set up its own training institute for its top tier clients, Enoch Education, the only licenced educational unit of a financial firm in mainland. “We train 1500 clients every year and hold around 120 educational events annually,” says Lam. These clients are the core ultra-high
net worth clients with individual transactions of US$1.5 million. Noah also facilitates them to go to the top schools such as Wharton, Yale and Stanford to learn about advanced concepts of wealth management such as family office and inheritance structures.
Noah is also investing in technology and offshore expansion. The firm got its SFC license in 2012 and set up an offshore office in Hong Kong, which already brings in US$2 billion of new AUM annually. A year ago, they set up an office in Silicon Valley and now they are opening offices in Canada and Melbourne. “We want to extend our onshore relationships globally,” says Lam.
Wing Lung Private Bank has its own success story, benefiting from being the offshore private bank of China Merchants Bank – 84 per cent of Wing Lung’s clients are mainland Chinese.
Brenda Tian, head of private banking and wealth management at Wing Lung Private Bank, thinks that overseas expansion is very important to keep pace with investors looking to globalize. The number of Chinese HNWIS who are looking at opportunities overseas has increased dramatically, she says, adding that “key destinations are Hong Kong, United States, Australia and Canada (in preference order).”
“Wealth management products now take up 25 per cent of HNWIS’ investment portfolio, which is nearly double 2015.” To match her clients requirements, Tian has prioritised better wealth management products, and services such as overseas education advisory, art investment advisory and overseas property investment advisory. The bank has launched a real estate fund that invests in Asian logistics, with an investment horizon of eight years and an internal rate of return greater than 10 per cent.
Stricter regulation and compliance adherence, going digital through online trading platforms, mobile application, artificial intelligence and enhancing international connectivity are the focus points for her. As of August 2017, the bank’s wealth management revenue was up 27 per cent year on year and AUM was up 17 per cent against year end, 2016.
ICBC Private Banking in Mainland China is serving over 77,000 HNWIS with cumulative AUM of RMB1.3 trillion at the end of June 2017. Deputy Head of ICBC Private Banking Zheng Yuan thinks that growing demand for customised products and services in China has left plenty of room for development in providing comprehensive, trans-sector, trans-product and trans-border financial services. He cites a 2016 report by PY Standard, a financial data provider, that said 22 commercial banks now provide private banking services in China. Yuan says he is focused on staff training and certification in anticipation of more standarization in the mainland private banking business.
Tapping into this growing demand requires better service, something that some early participants in the wealth management space may not have managed so well. Companies like Noah are turning the tide of a relatively domestic focused industry. Better products and services, and digitial development are all focal points. But enhancing international presence is a key point for ICBC’S Yuan, as well as the many other new breed of Chinese private bank.
In an April interview this year, on the heels of opening a private banking office in Singapore, China Merchant Bank Vice President Liu Jianjun spoke of his bank’s desire to become one of the top ten private banks globally. Though he noted the difficulty of facing international competitors, he added that the growing numbers and wealth of China’s high net worth population, who would trust a Chinese bank like CMB, would be their key strength as the join the global fraternity.