Golden Age under New Regulations - Private Banking in China, Episode II

Updated: Mar 31, 2021

The year 2018 has been considered the most intensive year of China’s wealth management industry due to the introduction of new regulations. The implementation of these new policies has undoubtedly become a milestone in China's wealth management space, and also brought opportunities and challenges to the country's private banking industry.

On April 2018, the People's Bank of China, the China Insurance Regulatory Commission, the China Securities Regulatory Commission and the Safe jointly issued the Guidance on Regulating the Asset Management Business of Financial Institutions (hereinafter referred to as the "New Asset Management Regulations"), followed by a series of administrative measures and regulations on financial institutions. The new asset management rules have brought huge impacts to the market. Financial institutions are required to invest into standardized assets; to break the “rigid redemption”; to design net value-based products instead of periodic products; and to force clients to get exposed to market risks through market valuation and net value fluctuations, etc.

The new capital management regulation brings about the restructuring and reshaping of the entire financial sector and the financial wealth management industry, hence requires financial institutions to re-understand the market.

Amongst these new policies, the so-called "break the rigid redemption" rule is clearly the most disruptive one. Now financial institutions shall not rely on the traditional wealth management model based on "principal and income commitment", meaning they could no longer simply commit a certain return to customers. They shall, however, strengthen education for investors, constantly raise investors' level of financial knowledge and awareness of risks, inform investors of the concept of "sellers fulfill duties, and buyers bear risks themselves," and abstain from rigid repayments.

Most of China’s HNWIs Are Risk-Averse

According to the 2019 China Private Wealth Report published by China Merchants Bank and Bain Capital, the proportion of private bank customers with high risk preference has significantly dropped from around 20% in 2005 to only around 5% in 2019, most of the investors only require low or medium yields on wealth management products. Through the evaluation of investment risks and returns, obviously we can conclude that China’s HNW individuals are more inclined to control risks rather than pursue returns.

It is worth noting that in this complex market environment, risk-averse HNWIs are putting higher bars on the professionalism of wealth management institutions, such as asset selection, portfolio allocation, risk control and customer experience. In terms of investment return expectation, compared with 2017, China’s HNWIs realized that it is increasingly difficult to obtain the same return rate as the past two years, and their expectations of yields hence reduced: the proportion of people inclined to "exceed the return rate of savings" further increased to 30% - highest in the past decade. Meanwhile, the percentage of people favouring 'medium yield' has held steady at about 65%. Many HNWIs say they are comfortable accepting the volatility of individual assets.

Bridge Point of View

The new rules do pose a serious challenge to financial institutions, particularly in the wealth management industry. We have witnessed a radical change in the way institutions communicate with their clients, from demanding just maturity and yield to encouraging clients to allocate their money more wisely. In the meanwhile, the implementation of such regulations also brings a rare and precious opportunity to financial institutions that offer overall planning of clients’ wealth, which creates a relatively untapped space in the hyper-competitive wealth management market.

China’s regulators now have a much deeper understanding of the fast-growing financial instruments. For example, it clearly defined that family trusts are not applicable to new asset management, which reflects the support to the use of trust as a financial tool, in order to promote business transformation and development. This is also the first time that the concept of family trust has been clarified at the regulatory level, which has played a truly positive role in the improvement of many financial instruments used in the space.

All in all, we here at Bridge Point anticipate, after the establishment of new capital management regulations in 2018, only institutions that can fully understand customer needs and have strong investment research and active management capabilities will be able to stand out in the market over the long run.

In the following episodes, we will be introducing various high-value assets to understand the current status of China's wealth market, the investment behavior of high net worth individuals and the psychological activities of the corresponding market, the competition among financial institutions, and ways to optimize performance and strategies for the future. If you are interested in the future trends and insights of China's private wealth market, please subscribe to our monthly newsletter or follow this WeChat public account.