According to McKinsey, the Asian wealth market will most likely at the very least double by the year 2025, overtaking the United States with its $30 trillion+ value. With entrepreneurship becoming more widely-spread and an ever-increasing class of high net worth individuals emerging, it should come as no surprise that China is poised to grab a very significant chunk of this pie.
With a four-figure number of mutual funds, a three-figure number of ETFs and assets under management expected to double by 2022 and exceed $2 trillion according to KPMG, opportunities abound in China in light of many variables contributing to the inevitable rise of asset management solutions, variables mostly revolving around the low penetration of financial services in China compared to Western nations.
How likely are Chinese investors to pay for asset management services? Certainly more likely with each year that passes, as they become increasingly sophisticated and move away from simply keeping cash under the proverbial mattress or investing as if real estate is the only asset class out there. However, there are challenges which stem from this lack of sophistication when it comes to both investors and the asset management services market itself.
To minimize systemic risk, China has vowed to clean its shadow banking system and, indeed, the over 600 hundred mutual fund liquidations of 2018 (with more mutual funds closing in 2018 than in the past 12 years combined) make it clear the authorities are not interested in simply being passive observers. As such, as there are ample opportunities in the asset management space and that is unlikely to change, consolidation is to be expected rather than the “free-for-all” Wild West status quo some expected to dominate.
This attitude, while making quite a few fund managers uneasy, is ultimately in the best interest of stability as far as asset management in China is concerned. For Chinese investors to become increasingly willing to hand over capital to asset management, a lot of legislative as well as industry-specific clarity is required. In the absence of a sustainable framework that is meant to cultivate trust in the system, Chinese investors will understandably manifest quite a bit of reluctance.
Leaving facts and figures aside, it isn’t hard to understand why convincing let’s say a “real estate only” investor to allocate capital toward “numbers on a screen” (financial products) that aren’t the least bit tangible can be a Herculean task and if the investor in question knows that questionable business practices abound in the industry, it becomes even less likely for the endeavor of someone pitching asset management services to be successful.
This does not mean Chinese investors are stubbornly choosing to remain stuck in their own ways, not at all. From domain names to cryptocurrencies, there are a wide range of new asset classes that have been dominated by Chinese capital in recent years. The same way, if the value proposition makes sense, high net worth individuals from China and the Chinese middle class alike are more than willing to entertain investment opportunities with an attractive risk/reward ratio.
As such, we need to understand that Rome (in our case Beijing) wasn’t built in a day and while there are bound to be growing pains involved (lack of legislative clarity in some cases, for example), the winners will be generously rewarded. At the end of the day, even the goal of securing a very small slice of this seemingly perpetually growing pie is enough to entire various players to enter the market with creative offers and as Chinese investors realize how lucrative having at least a little bit of exposure to this growing industry can be, more and more of them will indeed become willing to pay for asset management services with a proven track record and enticing reward potential.