Asset management in China goes global: reasons and opportunities
The Chinese Asset management industry, established only in 1998, is still young. But its transformations have been too dynamic and its unprecedented development too powerful to be ignored by the world. The planet’s biggest population with growing income and pursuit for sophisticated allocation of their capital is a seductive target for global AM companies and their managers. However, since Marco Polo and up until modern times, it’s not been easy for foreign companies to integrate into the Chinese market. Where exactly is this stream headed?
A primary characteristic of the Chinese financial market is a permanent transformation. Previously, the largest first-tier metropolitan cities such as Guangzhou, Shenzhen, Shanghai and Beijing accumulated the majority of wealth and HNWIs. Nowadays, second- and third-tier cities become wealthier and create a rapidly growing demand for investment solutions. Currently, such high demand could be fulfilled through licensed Qualified Domestic Institutional Investors (QDII) or as Foreign Direct Investment (FDI). QDIIs are a convenient way to access the global listed equity market, while FDI tends to be used for investments in private equities overseas, which is regulated by the Development and Reform Commission. Why then should Chinese investors unleash the opportunities by globalising their portfolios?
Firstly, the population’s demand for sophisticated capital allocation opportunities is growing. China has traditionally had one of the highest savings rates in the world. Over recent decades the fast-growing economy has willingly absorbed deposits and could offer relatively high rates in return, but it is not the same anymore. Moreover, the previously export-oriented economy cannot maintain the same societal status-quo, turning into a nation with higher income and urbanisation. Given the economy’s structural changes, national GDP growth naturally can’t have a rocket force speed, yet it remains in line with the world’s best performers.
Apart from the economy structure transformation, another significant factor that affects China’s capital allocation patterns is the population ageing: currently, the 60+ citizens make up 17.4% of population and according to the forecast (1), it might reach 25% by 2025 and 30% by 2040. This trend leads to potentially substantial challenges: significantly increased governmental expenses and simultaneous decreasing percentage of the labour force in the whole population. However, nowadays, the government is not the only player in the field in terms of providing retirement plans with an increasing role of the asset managers. This system is not fully functional yet, but it promises to offer new international capital allocation solutions that will make millions of citizens better off, decreasing the national budget burden and opening the vast market for local and international players, boosting new markets with Chinese capital.
Chinese investors’ mindset has also changed a lot recently. With increased educational capabilities, more people are looking for better and more sophisticated solutions. Thanks to technology and easier access to information, the stock market is now accessible for investors with any budget. In recent years, however, it has given retail micro-investors some bitter experiences: the Chinese local stock market has been volatile and around 75% of operations were executed by non-professionals (2). Thus, the companies are looking for more stable and predictable markets and investors – for steady returns. Under these circumstances, both retail and institutional investors are enthusiastic about the portfolio globalisation. It opens an opportunity to expand their presence on the developed markets that have a sustained performance record and provide long term confidence. Recently China has also been active on emerging markets, for example with the ‘One Belt, One Road’ programme, aimed at industrial, infrastructural, logistical and other projects in Asian, African and Eastern-European countries.
As Chinese investors started to invest more into foreign markets, there has been a foreign real estate rush. During the last couple of decades, with an unprecedented growth of the local real estate prices, the Chinese actively acquired properties both in developed economies like the EU and the USA, as well as in developing regions, especially tourist South-Eastern Asian countries like Thailand, Vietnam, Malaysia and Indonesia.
Foreign capital markets indeed have opportunities that broaden domestic investors’ horizons and go far beyond real estate ownership. For instance, investing in global listed equities could be an option for investors willing to benefit from capital growth in the long term. Whereas investments into each individual listed company seem complicated (especially the selection process from a huge variety) collective investment schemes (investment funds) allow the possibility to build a geographically and industry-wise diversified portfolio of global equities. Market volatility in 2020 has proven the need to reconsider and update the investment strategy to ensure portfolio resilience to market fluctuations.
Emerging markets growth is another attractive investment direction domestic investors could benefit from. Such investments foresee thorough risk management from a professional advisor, but the benefits speak for themselves: emerging markets have been outperforming developed ones. Countries in Asia, Eastern Europe and Latin America are now becoming more influential players in the global economy than ever, reducing the gap with developed countries. For many of them, China’s example is inspirational, as it has shown that efficient reforms and policy can change the lives of millions for better. India may become another economic breakthrough with its great demographic potential and implementation of structural reforms. Investing capital into such promising equity market is a way of investing in the future.
There is a category of domestic investors who choose foreign investments as an efficient way of managing their family wealth. Family unity and traditions have always been an integral part of Chinese culture, and the question is, how is it possible to keep the same principles when structuring family capital?
It is essential to consider the interests of various family generations when structuring family capital. Nowadays, people study, work and live in different parts of the world, which sometimes makes family wealth management complicated. In such situations, investors can establish their own (private label) fund, so that the assets of all family members are segregated according to individual needs, but at the same time, they are within one structure and more convenient to manage. Moreover, the fund can be managed either by an external asset manager or by investing family themselves. Based on BAO’s experience in constructing such private label funds in multiple jurisdictions, it is an effective solution for preserving and multiplying family wealth. Besides, such a framework of allocating capital enables family members to focus on their matters while the administration and portfolio management is performed with the expertise of the fund manager.
Taking into account the transformation of the domestic economy and growing demand for sophisticated investment solutions, Chinese investors may become a driving force for progress throughout the globe and make the next step to a better, wealthy future. Investing in foreign markets often carries fear of the unknown from domestic investors, but with a trusted professional advisor that will conduct a thorough risk assessment, could be a solution that unleashes tremendous global opportunities.