In China, technology companies are changing how retail investors allocate capital, but it is not a zero-sum competition with traditional financial services firms. Joshua Bateman reports.
China does technology well. The country is already a global leader in mobile payments, digital consumer finance, peer-to-peer lending and online insurance, to name a few industries. The next stage of China’s financial technology development could be even bigger – digital wealth management.
Launched in 2013 to manage surplus cash in online and mobile payment platform Alipay’s accounts, Ant Fortune’s Yu’e Bao (or “residual funds”) is the world’s largest money market fund. It has a minimum investment of 1 renminbi (15 US cents) and as of June 30, 2018, contained 1.4 trillion renminbi ($210 billion) from over 470 million investors.
“The year 2013 is when it all started,” says Ken Yap, managing director at research firm Cerulli Associates. “Now we’re looking at the new phase where you have more players coming in.”
Yap says Chinese investors are happy to invest and receive advice digitally because of the pervasiveness of financial technology, or fintech, in daily life.
CreditEase, one of China’s largest and earliest peer-to-peer lenders, began offering wealth management services in 2013, catering to both high-net-worth and mass-market investors. The high-net-worth solution is geared towards those with investable financial assets of at least $1 million. The firm uses an online-offline model and has approximately 2,000 relationship managers throughout the country, who provide an individualised service.
The mass-market option uses an online platform, where users select from a range of standardised investment options, asset allocation models and portfolio risk controls.
According to CreditEase senior vice president Yue Zhang, most retail investors have historically been limited to investing in bank deposit products. “For the mass market and middle class, before, they hardly could get any kind of real wealth management services,” she says. Digital platforms increased financial inclusiveness and made it economical for providers to broaden product ranges. “That made the services scope to this segment broader and more sophisticated.”
According to a report from Boston Consulting Group and fintech company Lufax, mainland China’s online wealth management services grew 50% a year over the past five years. In 2017, more than a third of wealth management products were sold online.
Founded in 2012, Jinfuzi (meaning “Golden Axe”) exclusively targets high-net-worth clients with at least a million renminbi ($146,000) in assets. According to founder and chief executive Kaixing Zhang, roughly two million Chinese exceed that. Many made their fortune in the new economy and welcome the efficiency, low cost and product access financial technology affords. “They are accustomed to online buying,” he says.
Seventy percent of Golden Axe trades come through computers and 30% through mobile phones. Like CreditEase, Golden Axe also employs an online-offline model. The firm conducts investment breakfasts, roundtables and roadshows. Three-fifths of the 650 employees are financial advisers.
Although online wealth managers compete with conventional bank and securities companies in some regards, they also cooperate. Unlike developed markets where investors may invest a majority of their assets with one adviser, it is typical for Chinese investors to transact with a range of banks, securities companies and insurance brokers.
“Chinese families, they have many accounts… very dispersed,” says Kaixing Zhang. He says online offerings complement traditional financial service products. “There are relatively more partnership opportunities,” he says. As an example, banks typically recommend direct stock investments, but online wealth managers offer more diverse fund solutions.
Kaixing Zhang says the mass market gravitates toward fixed income products while high-net-worth investors are more aggressive, buying variable income, equity and alternative solutions. Broadly, exchange-traded funds (ETFs) have also gained traction.
Although the concentration has declined over time, it has been estimated that three-fifths of China’s private wealth is still allocated to savings and property. Yap says money market funds offering a return of about 4% remain attractive to investors, particularly given recent stock market volatility. From January to August of this year, the main index of the Shanghai Stock Exchange dropped nearly 18%.
The transition toward riskier assets will take time, but there is a need for new solutions as funds are expected to continue gaining market traction. According to a report by management consultancy Oliver Wyman, assets overseen by traditional fund managers in China are forecast to almost double to 90 trillion renminbi ($13 trillion) over the next five years.
Yap says firms that apply artificial intelligence and big data in the portfolio construction process could see inflows. “There’s some appetite for managers to launch these products,” he says.
Meanwhile, Yue Zhang of CreditEase says the wealthy are increasingly diversifying beyond fixed-income products: “The percentage of alternative assets, including private equity and real estate funds, is getting larger, especially among high-net-worth individuals.” More investors are also diversifying globally, creating opportunities for international firms, she adds. “Very few [domestic] institutions do global investment advisory. Few have the product capability.”
Foreign firms enter China’s market in different ways. About two-fifths of China’s 113 fund managers are joint ventures. Others access the country via wholly foreign-owned enterprises (WFOEs) or the mainland-Hong Kong mutual recognition of funds (MRF) scheme.
The industry developed rapidly, but recent developments have increased regulatory wariness. Through July of this year, an estimated 330 peer-to-peer lenders defaulted on more than 30 billion renminbi. Defaults on principal and interest payments for trust and investment products have also increased many times over.
China’s stock markets are volatile because they are powered by roughly 140 million retail investors, who account for 85% of equity trading volumes. Individuals often rely on internet and social media scuttlebutt for their next investment, irrespective of the sources’ financial expertise. According to the South China Morning Post, during the first half of 2018, WeChat shuttered 4,000 personal accounts and 8,000 groups for disseminating stock rumours.
Consequently, regulators are acting across all financial sectors. Forthcoming investment management regulations are expected to disallow asset managers from guaranteeing a rate of return, restrict allocations to non-standard investments known as shadow banking products, and require marketed funds to be categorised by investment objective. Regulators are also tightening oversight of online platforms that distribute funds without appropriate licences.
“It definitely has a huge impact over the whole industry because of the tightened regulation over asset managers,” says Qing ‘Natasha’ Xie, a partner at law firm JunHe. “It’s quite comprehensive to cover many innovations in the asset management industry.”
For firms like CreditEase, they also need to be aware of regulations outside of China. According to the Embassy of the People’s Republic of China, 35 million Chinese citizens live abroad in more than 150 countries. CreditEase wants to assist them with services including financial planning, buying property, tax planning, buying insurance and philanthropic endeavours.
CreditEase commenced Singaporean operations in 2014. The following year, the firm expanded into Israel. In 2017, the company registered as an investment adviser with the US Securities and Exchange Commission.
Five years after the launch of the Yu’e Bao fund, other online wealth management offerings are finding success. As international firms determine how to participate in the Chinese market, Chinese firms are going international.
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