Navigating the Chinese wealth management market

China offers one of the biggest opportunities for international wealth managers in the world today. Our recent research into the Chinese wealth management (WM) market finds that the country is home to the world’s second largest population of USD millionaires: 6-7 million Chinese possess a net wealth of more than one million USD (High net worth individuals, HNWI). The number of ultra-high net worth individuals (UHNWI) with USD 30mn or more is estimated at around 70,000 people. Most of them are located in the four tier-one cities of Beijing, Shanghai, Guangzhou, and Shenzhen. This elite group, representing the key target segment for international wealth management banks, doubled in size between 2018 and 2021 and is forecast to further grow going forward. By 2026, rich Chinese individuals are expected to hold 20 percent of total global HNWI wealth¹.

Exhibit 1: Size and growth forecasts for the Chinese Wealth Management market

However, alongside its powerful attractions, the mainland’s wealth management market operates under a very different set of rules compared to other jurisdictions. The country’s data security, privacy and cybersecurity regulation is rapidly evolving and more complex to navigate than in European or North American markets, for example. Digital wealth propositions have also gained greater traction among the tech-savvy Chinese UHNWIs compared to the traditional Western private banking clientele.

Wealth managers with ambitions to grow in China therefore require a bespoke approach that combines their traditional strengths in holistic wealth planning and client servicing with the ability to adapt to local differences and a willingness to learn from China’s digital-first players.

The mainland market opens up as financial regulation matures

In recent years, China has developed its financial markets regulations in ways that also benefit foreign players and enable further opening of the market. In particular, regulation now allows foreign wealth managers to establish wholly owned onshore subsidiaries as an alternative to joint ventures with local players. This enables international banks to take ownership of Chinese customer relationships and to decide on their product and service offering independently. For banks serving the market via Hong Kong, “Connect Schemes” now allow financial products and services to be distributed within selected mainland areas from the offshore hub. All in all, these developments provide international banks with a wide range of options to choose from when defining their own way-to-play in the Chinese onshore market.

In our view, China’s financial markets regulation has steadily professionalized, for example with the adoption of more sophisticated rules in areas such as Know Your Customer (KYC), investor education, product information disclosure, and suitability assessments. The aim of these efforts to regulate product distribution more stringently is both to protect investors and to ensure a more secure and predictable operating environment for banks and other product providers. The Chinese regulator has also taken steps through other policies to protect small- and mid-sized players and so ensure a diverse and competitive financial services landscape.

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Yet, the onshore opportunity remains largely untapped by Western wealth managers

The leading European and North American wealth managers have developed significant operations in Asia-Pacific, but they have limited exposure so far to what is by far the region’s biggest market – onshore China. Most international players address this market via offshore operations in financial centers such as Hong Kong and Singapore, while a handful have established joint ventures with banks, asset managers or fintechs on the mainland. Their offerings vary in sophistication, with few providing a broad onshore UHNWI/ family office proposition built around a strong domestic team of relationship managers.

To date the number of international banks with a full-service wealth management presence in China remains small. The opportunities unlocked by recent regulatory changes to create wholly-owned local subsidiaries are also largely untapped.

Exhibit 2: European and other international competitors in the Chinese onshore wealth management market

Despite their limited track record and experience in catering for high and ultra-high net worth clients, domestic banks dominate China’s onshore wealth management market with a combined share of more than 80 percent in 2021². Foreign pure play private banks and wealth management arms of universal banks had just around 5-10 percent of the market³, while a new breed of mainly local independent asset managers and digital players is gaining ground by providing increasingly sophisticated offerings, such as virtual advisory and personalized wealth management platforms, for tech-savvy affluents and HNWIs. Some of these players employ more than thousand client advisors operating through an extensive network of local branches.

The inter-generational wealth transfer is approaching

The existing market structure will struggle to meet the emerging needs of China’s fast-growing UHNWI population, particularly the large number of successful entrepreneurs that need to prepare for the transfer of wealth to second-generation successors. This approaching transfer is sparking an increased appetite for holistic wealth planning that incorporates the wide range of expertise that established wealth management banks from Europe and the US have long offered to their Western clients. It includes adjacent services such as tax and estate planning or M&A advice for entrepreneurs contemplating a restructuring or listing of their privately owned companies. Established international private banking brands seem well placed to meet the need for holistic advice and to help mainland Chinese clients address another priority: Diversification.

Diversification across assets and geographies is a key objective

Over the two decades since China joined the World Trade Organization in December 2001, a large number of Chinese entrepreneurs have built major fortunes in both brick-and-mortar and digital businesses. However, their range of options to invest that wealth has, until recently, been relatively limited and as a result, it tends to remain concentrated in domestic assets such as cash, money market instruments, residential real estate, and equity in their own businesses.

Exhibit 3: Typical portfolio asset allocation of Chinese and European (U)HNWIs and Family Offices

There is significant appetite, particularly among the younger generation of clients, to create more conventionally diversified portfolios in terms of both asset classes and geographical exposures. Expertise in areas such as ESG and the ability to provide philanthropic solutions is also likely to carry weight with the younger cohort of clients.

Integrating offshore and onshore capabilities gives international banks a head start

Wealthy mainland Chinese traditionally seeked access to international financial markets via offshore wealth management hubs, for example Hong Kong and Singapore. As regulation starts to open the way for international wealth managers to operate wholly owned mainland subsidiaries, they have the opportunity to transform these existing offshore relationships by integrating them with an onshore booking and servicing capability. Doing so should enable them to offer even more holistic wealth planning services and to service a much greater share of their client’s investable assets. For existing onshore clients, they can offer access to global investment opportunities through their offshore booking centers. This process is likely to herald a period of increasing competition in the mainland wealth management market as international players compete much more directly against the local banking and digital-first players.

In our view, experienced international wealth management players are well positioned to compete successfully against local incumbents in a country where financial market regulation is maturing and becoming more favorable to foreign banks. Yet, whilst they might outperform domestic banks in terms of service offering, gaining trust among UHNWIs and family offices in a market where foreign private banking brands have until recently been mostly absent could be a major challenge for Western players. Only those who manage to solidify their brand and reputation as a trustworthy wealth manager will be able to succeed in the long-run.

Regulatory and macroeconomic challenges remain for international players

Although China’s regulation of financial markets is becoming more favorable for foreign wealth managers, recent regulations covering data security and privacy, as well as the country’s revised anti-espionage law, have caused considerable uncertainty among businesses and their employees. Some aspects of these laws are worded in vague terms, and it can be difficult to determine which types of information fall within their remit. As a result, ensuring that local IT platforms and data management processes are fully compliant can be a challenge for many foreign firms.

At the same time, developments that favor international banks are taking place against a backdrop of evolving geo-economic tensions. These remain a risk and require foreign wealth managers to consider long-term resilience when setting or fine-tuning their onshore strategy and operating model. Some banks may come to the conclusion that they lack the appetite or capabilities to navigate China’s peculiar challenges and decide to stay out of the market completely (see Exhibit 4).

Exhibit 4: Key challenges for international banks in the CN WM market

Bridging the technology gap

Foreign wealth managers targeting the mainland Chinese market also need to consider the maturity of their digital proposition, since Chinese clients are rapidly adopting digital solutions and the large local technology players are reshaping the market with increasingly sophisticated wealth-tech offerings. In a country with a large and growing population of successful technology entrepreneurs, international entrants will need to provide a compelling digital experience and may decide to work with a local fintech partner. Indeed, a partnership of this sort could give them access to advanced digital capabilities that would also enhance their proposition in their home market.

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A land of opportunity

As we set out above, the options available to international private banks in the onshore Chinese market have widened significantly over the past year. In spite of the challenges that have surrounded the market recently, we believe the onshore Chinese market will continue to offer a sizable opportunity to bring generations of expertise in private banking to bear in the world’s fastest growing pool of ultra-high net worth clients. Assuming an economic rebound in the mid-term and no major geo-economic disruption, we expect the domestic asset pool to grow to USD 22tn by 2026. If international banks grow their market share to 12-15 percent, they will have the chance to manage additional assets worth USD ~3tn⁴. The sheer size of the market should encourage bank executives to carefully compare risks and opportunities and make a clear strategic decision on whether and how they want to compete for a piece of the pie.

To get their piece of the pie, international wealth managers can capitalize on their experience in managing diversified portfolios including high risk/return alternative assets or ESG and philanthropic investments. With their holistic approach to advise wealthy clients across their financial and non-financial needs, some are already trusted advisors to Chinese UHNWIs offshore, and the opportunity to integrate this service with an onshore service is compelling. Based on our discussions and analyses we identified a set of key success factors to thrive in the Chinese wealth management market:

Key success factors

1
An in-depth understanding of China’s culture, economy and the country’s financial services and wealth management markets
2
A well-structured approach that strikes a healthy balance between ambition, existing capabilities, business potential, and related risks. This could comprise a HK-based offshore model potentially also using “Connect Schemes”, a low-touch local footprint, for example through a joint venture, or a full-service mainland subsidiary (see Exhibit 5)
3
A stringent approach to build brand recognition and gain trust among the wealthy clientele which will require long-term commitment and robust financials
4
A focused strategy targeting at a relevant and clearly defined target customer segment (sweet spot)
5
A bespoke value proposition built around products and services that specifically address the target group’s domestic and offshore investment needs

6
A client acquisition and relationship model that ensures close proximity to target clients and UHNWI communities (either through own relationship management teams or a strong local partner)
7
A state-of-the art digital/ hybrid wealth management proposition that meets the high expectations of China’s digitally savvy clientele
8
Expert understanding of China’s fast evolving regulatory landscape and its impact on local business as well as the interface between on- and offshore operations
9
A compliant, flexible, and resilient domestic operating model and IT infrastructure, built on deep knowledge of China’s data management, information protection and cybersecurity regulations

By establishing this range of essential capabilities, wealth managers can get in a position to define their own winning strategy to address the vast potential that exists in the Chinese wealth management market, based on a prudent balance of risk and opportunity.

Exhibit 5: Ways-to-play for foreign wealth managers in the Chinese onshore market

Navigating the Chinese wealth management market

The mainland market opens up as financial regulation matures

European Banking Vulnerability Analysis

Yet, the onshore opportunity remains largely untapped by Western wealth managers

The inter-generational wealth transfer is approaching

Diversification across assets and geographies is a key objective

Integrating offshore and onshore capabilities gives international banks a head start

Regulatory and macroeconomic challenges remain for international players

Bridging the technology gap

Navigating through dynamic complexity

A land of opportunity

Key success factors

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