China

Emerging from COVID-19 with flying colours?

– A recap of China themes in 2020

While being first to be hit with COVID-19, China’s economy has turned out to be an outlier amid the pandemic induced global recession: it experienced a strong rebound after a rather gloomy 1Q20, took a more restrained and orthodox approach to monetary and fiscal policies, and called for a “dual-circulation” strategy to compensate lagging overseas markets with domestic demand. In the meantime, millionaire and billionaire wealth in China has been booming.

Such signs bode well for the onshore private banking and wealth management industry which has continued to mature and catch up with international trends — on the back of the gradual opening-up of the country’s financial markets and invigorated by competition from players at home and abroad.

2020 has witnessed milestones for the industry and will set the tone for the next decade — in terms of domestic transformation and global connection.

China is opening up to foreign investment, but tightens rules at home

China has long pledged to facilitate access to its financial markets for foreign investors — who remain underinvested in China, compared to the US, Europe or Japan.

Over the last year, Chinese regulators implemented the decision to remove quotas for the QFII (qualified foreign institutional investor) /RQFII (RMB qualified foreign institutional investor) investment schemes, and later effectively combined the two programmes and streamlined their application process.

Starting from October 2020, foreign institutional investors can easily participate in China’s trillion-dollar domestic bond markets, as the country’s central bank simplified and made rules consistent across the interbank bond market, the exchange bond market, and the Bond Connect programme. The continuous growth in the trading volume for the Northbound Bond Connect scheme has spawned optimism for a corresponding southbound scheme in the near future, according to Eddie Yue of the Hong Kong Monetary Authority.

But 2020 also had its fair share of regulatory sternness. The beginning of the year saw record AML fines from the PBoC for two major Chinese banks and a securities broker. To curb systemic risks, the PBoC issued guidelines that target expanding financial groups and tech giants that are wading into finance.

The regulators are gearing up for a stricter grip on the country’s shadow banking sector — for which they devised a clearer definition, as shadow credit made a comeback in 1H20 with the number of notorious wealth management products (WMPs) on the rise again.

Chinese wealth manager Jupai argued that the government’s deleveraging strategy is far from over, which means the country’s wealth management industry will have to transform and adapt to the new norm. Echoing this view, Noah Holdings believed current regulatory developments will force more Chinese investors away from private markets. Both wealth managers’ earnings reports in 2020 showed higher flows in public securities products.

The rush for Chinese assets goes on — not without caution

The thrill around Chinese assets — following a year of remarkable performances for China’s FX, equities and fixed income markets — is certainly to extend into 2021. Credit Suisse’s equity strategist maintained in July that it is still too early to call for the A-share bullrun, and further backing this thesis is China’s “dual circulation” strategy, which is believed to keep the rally going.

Coming on the back of warming investor sentiment towards Chinese government bonds (CGBs), FTSE Russell announced it will include

CGBs in the FTSE World Government Bond Index (WGBI), starting October 2021. While foreign investors search for yield in a low-rate, weak dollar environment, CGBs will act as the first leg of entry into China’s onshore fixed income market, Fidelity said.

Foreign inflows into China’s debt market jumped nearly 40% each year since 2017 to a record US$383 billion as of the end of June 2020, although this is just less than 3% of the US$16 trillion market.

However, there are looming fears of regulatory headwinds following the abrupt suspension of Ant Group’s behemoth IPO. Some investment analysts have contended that the fast-changing regulatory environment will be negative to China’s burgeoning e-commerce sector and hurt the private equity sector and IPO excitement.

On top of that, foreign investors such as asset managers continue to grapple with their concerns for fundamentals and transparency in China’s capital markets. This has been well reflected by the underused QFII quotas back in 2019. Noah Holdings sees rising ESG adoption by Chinese firms and growing investor awareness key in driving the country’s capital markets to mature — and catch up with trends on Wall Street.

FIs capitalise on their onshore and GBA growth stories

Within this year, Chinese regulators have greenlighted the securities joint ventures of Nomura, DBS, and J.P. Morgan Futures to operate onshore, and approved Credit Suisse’s taking a majority stake of its onshore securities JV.

Asset managers such as Value Partners and Pictet AM also made major leaps in their onshore strategy.

Onshore wealth management witnessed a hiring spree, led by UBS and Credit Suisse, to seize talent for the China domestic market. In addition, four foreign banks shared with Asian Private Banker how they plan to attract the vast pool of prospective HNW clients in China with differentiating onshore capabilities.

Meanwhile, the newly-launched Wealth Management Connect (WMC) scheme through the Greater Bay Area (GBA) — connecting Guangdong, Hong Kong, and Macao — aims to bring in an estimated RMB 200 trillion (US$29.80 trillion) in investable assets of around two million Chinese HNWIs. As a result, the region’s private banks are eyeing a share of the wealth pie and are keen on offering advisory to onshore clients.

While many are still awaiting more clarity on the glossy picture painted by the GBA concept, HKMA said that the initial stage of the WMC will come with quotas — aggregate transactions are capped at RMB150 billion for either direction, whereas each individual transaction is limited to RMB1 million. Retail clients are most likely to be the target in the initial phase, bound to start in 2021.

For foreign financial institutions, challenges still abound in onshore China, noted Lan Wang at Moody’s Investors Service. “From a regulatory perspective, the market opening will not completely level the playing field for foreign companies,” argued the AVP-analyst, financial institutions group. “They will still face constraints in establishing full business and increasing their geographic footprint.”

But Wang added that foreign firms’ competitive advantage lies in experience and expertise in providing investment, asset allocation and operating investment advisory services.

“While there is no explicit restriction against granting these licences and business qualifications to foreign companies, the process will take time and is subject to regulatory uncertainties and fast-changing rules.” Wang cautioned that initial regulatory approval is only the start for foreign FIs’ onshore operations, and “the pace of expansion is likely to be limited”.

BE WITH US BE WITH WORLD

Bank of China Private Banking

In March 2007, Bank of China launched its private banking services, becoming the first domestic bank to offer bespoke wealth management services to mainland high-net-worth clients. Today, it is one of the biggest state-owned private banks in China and has established an integrated service platform. By the end of June 2020, Bank of China operates 49 private banking centers in mainland China, and offers such services in Hong Kong, Macau, Singapore and London.

Benchmark for global offerings In 2019, Bank of China expanded its network to 61 countries/regions and offers personal financial services in more than 30 of them. This means that besides global investment options, which include a variety of offshore products such as negotiable certificate of deposit, life insurance, REITs, bonds and structured products, Bank of China can also provide crossborder retail, transaction banking and capital market services for its clients.

Bank of China’s unparalleled global reach is key in serving the growing needs of China’s wealthy individuals, many of whom run business operations and own assets across continents. As their go-to bank when navigating unchartered waters, Bank of China Private Banking invests heavily in its research capabilities to make sure that they provide the most up-to-date guidance for its clients. For example, it has published “Report on personal global asset allocation strategy” for two consecutive years to analyze macro-economic trends and the performance of various types of asset in major global markets.

As China rolled out development plans for the “Guangdong-Hong KongMacau Greater Bay Area” last year, Bank of China Private Banking has also put its emphasis on interlinking its private banking services in the region, knocking down many barriers of financial transactions between the mainland and the two SARs, as encouraged by the new policy.

In the meantime, Bank of China’s offshore private banking business has been an important contributor to its outstanding overall performance. In 2019, both the number of clients and AuM in the Asia-Pacific region increased greatly, in which the AuM increased faster, meaning that the average account balance ticked up. Focus on wealth succession Another feature that makes Bank of China Private Banking stand out from competition is its high-quality offerings to facilitate safe and convenient succession planning.

According to a recent survey done by Boston Consulting Group, more than 50% of responding wealthy individuals in China are already (or going to, in three years) making inter-generational wealth transfer plans. This trend will unequivocally lead to a huge demand for financial vehicles such as trusts and insurance, as well as corresponding services.

Bank of China Private Banking has long foreseen this trend and started to improve such products and services. It has integrated group-wide resources, together with law firms, accounting firms and other external service providers to build a comprehensive service platform for customers. As a result, the size of its family trust service recorded an average annual growth of more than 50% in the past three years. In 2019, Bank of China introduced family trust service with optimized processes, which greatly simplifies the planning work for those clients with homogenous needs.

Compared with the 108-year history of the group, Bank of China Private Banking is still young. However, building on generations of rich legacy of serving generations of clients in drastically different times, the bank is no doubt one of the most highly respected and anticipated wealth manager for Chinese around the world.

Address: No.1, Fuxingmennei Avenue, Xicheng District, Beijing 100818 Call Center: +86 (area code) 95566