Across The Border

Affluent Chinese investors lack concrete wealth management plans

Study finds that China’s increasingly affluent middle-class lack comprehensive wealth management plans and have conceded that it may be impossible to reach financial goals

PUBLISHED : Wednesday, 21 June, 2017, 4:15pm
UPDATED : Wednesday, 21 June, 2017, 10:00pm

For many mainland equity investors, to invest in stocks is to speculate.

Typically, the small retail investors would chase market rallies and bet with less than 100,000 yuan (US$14,700) in the hope of striking gold overnight. More often than not, they wake up only to find themselves burnt in one of the mainland markets’ frequent roller-coaster rides engineered by powerful institutions.

So goes the stereotyped scenario: the upper deck is always stacked against the unwitting little guys.

Common knowledge? Think again.

A new finding shows that only a small portion of well-to-do Chinese people understand the basics of wealth management, despite feeling confident in their current financial status.

According to a survey of 2,600 mainlanders whose annual income ranges from 125,000 yuan to 1 million yuan, only eight per cent of the so-called emerging affluent class in China have comprehensive financial plans that take goals, timelines, risk and financial investment products into consideration.

The survey, jointly conducted by the Shanghai Advanced Institute of Finance (SAIF) and Charles Schwab, a leading financial services provider based in San Francisco, US, found that most of China’s wealthy wage-earners, or 59 per cent of the respondents, conceded that it was impossible to achieve their goals.

“The middle class appears to be fully aware of the risks in playing stocks, which could potentially leave them to carry the empty bag,” said Qian Jun, a professor of finance with the SAIF. “But they have access to only limited investment products and are financially underserved.”

Boston Consulting Group forecasts that China will have 280 million people that fall into the category of the emerging affluent class by 2020.

During the stock market rout in mid-2015 when a total US$5 trillion capitalisation was wiped out as the benchmark index plunged 43.3 per cent, thousands of middle class investors on the mainland were believed to have fallen victim to the roller-coaster ride and suffered huge losses.

“As we shun volatile stocks, property emerges to be the only option for long-term investment,” said Davis Zhang, a mid-level manager with a European auto battery firm in Shanghai.

“I have no clue about what target I should set for managing my personal wealth,” he added.

Major cities like Shanghai now limit home purchases by local residents to put a lid on soaring housing prices.

Beijing also stepped up policing capital outflows since the second half of last year, making it difficult for wealthy mainlanders to invest abroad.

I have no clue about what target I should set for managing my personal wealth
David Zhang, Shanghai resident

Anecdotal evidence showed that most of the white-collar clerks, despite feeling positive about their current financial standing, would refrain from buying A-shares that are battered by fears of further investment losses.

The survey said that 60 per cent of the affluent investors aged between 35 and 44 identified financing their children’s education as a top investment priority.

“The behaviour and expectations of China’s emerging affluent are rapidly changing,” said Lisa Hunt, Charles Schwab’s executive vice president of international services and special business development.

“Most of them haven’t identified the time and resources needed to achieve their long-term goals.”

Aside from property and stocks, wealth management products (WPMs) issued by banks are one of the most commonly used investment tools for the wealthy mainlanders.

The WMPs, an important part of the country’s shadow banking system, normally offers annualised interest rate of over 4 per cent, more than double the benchmark one-year deposit rate guided by the central bank.

Low-yield mutual funds focusing on bonds or money market funds are other alternatives to stock and property investments.

Most of them haven’t identified the time and resources needed to achieve their long-term goals
Lisa Hunt, Charles Schwab

SAIF professor Wu Fei said that the survey result suggested that financial service providers could play a key role in helping Chinese investors improve financial literacy and adopt more balanced long-term strategies.

Wendy Liu, head of equity research with Nomura, said that the long-term outlook for the A-share market would turn out to be bullish amid a fresh sign of an overall improvement in corporate governance among mainland-listed firms.

“As rich investors increasingly demand higher cash dividends, full information disclosure, delisting of underachieving firms and recruiting of talented managers, corporate governance will improve gradually,” she said.

“The Chinese rich are no longer unseasoned investors and the regulator is on a right track to do their jobs so as to protect investors.”

On the A-share market, initial public offerings (IPOs) proved to be easy sales since the establishment of the Shanghai Stock Exchange in 1990.

Instead of assessing profitability and sustainability of the IPO issuers, investors believed IPO shares are sure bets as nearly all of the newly-listed stocks would jump on the first trading day.

“The new trend is that they are increasingly stressing the importance of corporate governance too,” said Liu. “The regulator’s tightened oversight and supervision on listed companies ticked all the right boxes.”