On June 22, 2016, Industrial Bank and BCG have launched a press conference in Beijing, on which they have jointly issued an up-to-date report into the development of private banking institutions in China -- the Annual Report (2016) into Provate Banking Institutions n China: Tremendous Growth Clamors for Global Allocation. It is worth noting that up until now the two parties have conducted cooperation on private banking research for two consecutive years.
The report shows that High Net Worth individuals have achieved a steady growth in wealth in spite of slow economic growth at home. It is estimated that the number of HNW households in China will rise to 3.88 million, and the amount of investible financial assets is supposed to reach fifty per cent of the overall individual wealth at home. This will provide a favorable environment for the development of private banking in China.
The report notes that a volatile financial and investment market in 2015 has expedited the diversification of HNW clients’ investment. And there is an increasing demand for global asset allocation from HNW clients, especially when China becomes more globally involved. In the next five years, the proportion of personal overseas asset allocation will rise from 4.8% to 9.4%, and the market will be up 13 trillion yuan.
With a steady growth of HNW clients, private banking has achieved a significant growth against the background of a stagnant economy
The report reveals that, High Net Worth individuals have achieved a steady growth in wealth in spite of slow economic growth. It is estimated that the next five years (2015-2020) will see an annual growth rate of 15% in investible financial assets from HNW individuals, which is notably higher than the estimated growth rate of GDP over the same period. So, China is well on its track to become one of greatest markets in HNW clients.
Chen Jinguang, deputy president of Industrial Bank, took a highly positive view of private banking in China: “The number of HNW households in China is estimated to rise to 3.88 million by 2020, and the amount of investible financial assets is supposed to reach fifty per cent of the overall individual wealth at home. This will provide a favorable environment for the development of private banking in China. But there are inadequacies on the supply side of private banking services. HNW clients entrust less than 20% of their total assets to private banking institutions. Therefore, this is a segment that has considerable potential for growth. Moreover, the banking industry is currently accelerating transformation with a focus on light capital and light asset services. In this process of transition, private banks, with good combination of key advantages in in asset management and wealth management, will find an unprecedented opportunity for development.”
Accompanying high confidence among clients is an investment allocation that featured increasing diversification.
The report indicates that a volatile stock market, lower interest rates, the drift of RMB exchange rate, and the segmentation of the real estate market are four main factors that operate to predispose HNW clients to a more diversified asset allocation. Respectively, the four factors account for 69%, 43%, 41% and 29%. A volatile stock market has heightened an awareness of the risk while lower interest rates have boosted a demand for a more diversified asset allocation. Moreover, the reform of foreign exchange market has prompted a more global view of the market among Chinese investors. Along with segmentation of real estate market, the uncertainties of investment return has also the proportion of personal assets allotted for financial portfolios.
In spite of a volatile market, HNW clients are not lacking in confidence about prospects. “According to the research, 80% of the HNW individuals believe that their family wealth will rise or remain stable in the process of economic transition while 93% of UHNWI, who have investible assets valued at over a hundred million yuan, share the same confidence.” All this proves that HNW individuals are optimistic about prospects of their personal wealth and national economy.
As China is becoming more globally involved, the market in individual overseas investment will go further.
According to the research, China is far behind other countries in the measure of personal overseas asset allocation. But considering the increasing globalization of personal wealth, the proportion of personal overseas assets is estimated to rise from 4.8% to 9.4% in 2020, and the market will be up 13 trillion yuan. And the evolutionary trend in government regulation and market proved to be a significant factor behind a booming foreign investment market.
The research shows nearly 30% of the HNW clients currently hold foreign investments and 56% of HNW individuals who hold no foreign investments yet have responded that they are considering the possibility of buying foreign investment in the following three years. All this has shown a brisk demand on global asset allocation. As one of the most active players in the national economy, HNW individuals have become one of the front runners that are building a convergence with other countries in the process of globalization. As China is becoming more globally involved, the wealth of HNW individuals will show a more globalized allocation.
Accompanying a brisk demand for foreign investment is fresh business opportunities
The report notes that under the general background that featured a more globalized economy, the drift of RMB exchange rate and lower return on domestic assets, HNW individuals have a variety of reasons to opt in global asset allocation. A growing need for information privacy, a downward trend in immigration, and a buoyant demand for asset appreciation... All this has brought exciting business opportunities for banking institutions in China. For example, foreign investment clients have extended from UHNW individuals to HNW individuals, which has significantly prolonged the client list; investment projects, once limited to real estate, now incorporate a variety of financial assets, which has boosted the demand for wealth management; investment are featured with inward-flow and outward-flow and investors and banking institutions are building on their product category in the area of foreign investment.
A clear view on the path of development and a focus on five capabilities
The high demand of HNW individuals in foreign investment clamors for internationalization of private banking institutions in China. The report also presents an inside view of the industry. It notes that private banking institutions should adapt the path of development to their business scale. As regards international strategies, private banking institutions of small and medium size should give a sharper focus on cross-border business while those larger institutions might pursue the policy of simultaneous development, both cross-border and offshore businesses included. For those large organizations that have a fully fledged offshore business, they might consider the possibility of building up local business in overseas market.
The report also suggests that private banking institutions should enhance five crucial capabilities, namely, to accurately identify the target audience, to build a highly integrated system of domestic and overseas services, to build on professional advisory service, to conduct careful selection and firm management of outside products, and to establish risk control and introduce compliance management of overseas market.