China grapples with its yield addiction

China is at the beginning of a new era as investors come to terms with lower yields.

With low-risk double-digit returns now a thing of the past, Chinese consumers are beginning to diversify their portfolios and look overseas for investments.

Yu Dong Zheng, CEO of Xuanj, told FundForum Asia that while in 2010 many fixed income products offered guaranteed returns of between 11% and 13%, that time had now gone.

“It is the end of an era and the beginning of a new era,” he said.

“There is a huge opportunity with 100 trillion RMB to be managed, 60% to 70% of which is still in fixed income products.”

He said the end of high yield products in China had led to people being more open to investing abroad, particularly as since 2015, they no longer saw the renminbi as a one-way appreciation bet.

But he cautioned: “People have not developed a rational understanding. They are still looking for yield, but what is dangerous is they look for the yield but they do not look at the risk.”

Greg Van den Bergh, CEO of MiCai, characterised the current situation in China as being similar to the US in the early 1980s.

He said: “People in China still like yield a lot, but they can’t have yield and no risk, so they are getting into risker assets.”

Bella Liang, head of investment advisory at Hang Seng Bank, agreed that Chinese consumers still remained very yield focused.

She said rather than focusing on products, clients would typically tell their advisor what return they wanted and then ask what solutions they had to achieve it.

“Clients don’t worry about the type of product but about the return,” she said.

Investment options

Investors in China have traditionally favoured real estate, which accounted for 70% of household wealth, but Van den Bergh said this preference was beginning to change in favour of financial products.

He said high net worth individuals (HNWI) in China were classified as those who had liquid assets of 1 million RMB, rather than 1 million US dollars as was the case in other markets.

As a result, the number and breadth of products these investors had access to was more attractive than anywhere else in the world.

Liang said these investors typically used a relationship manager for access to products, as they valued the personal touch.

She added that IPO-related investments were particularly popular amongst HNWI.

Van den Bergh said those with less than 1 million RMB to invest still tended to use the traditional channels to buy products, such as banks, or online offerings, including fund supermarkets and robo advisors.

Yu added that institutions were looking for new ways to distribute products to China’s middle class, who account for around 40% of the estimated RMB 100 trillion of money to invest.

“A Chinese merchant bank launched a robo advisor and assets under management reached 2 million RMB in three months,” he said.

Going forward, Van den Bergh expects the market to change so that distribution becomes less product-focused.

But he added that margins, which are already under pressure will go lower, and providers will have to add more value, enhancing the customer experience by offering a more holistic approach.

Looking forward

Yu expects companies with big distribution channels to have an advantage over new entrants in the future, even if they are not traditional financial institutions.

But Van den Bergh thinks firms with access to large amounts of data will have the edge.

He said: “In the start-up space there is a lot of opportunity for product innovation.

“A lot of firms have good data and they can use this to predict better what will happen.”

He said it was possible that firms with a lot of data, such as Alibaba, could produce investment funds that would outperform traditional players because of the access they had to data.

“They have the data. I do not see why they would not leverage on that,” he said.

Liang is expecting significant change in China’s wealth management industry in the next 10 years.

“The property investment cycle is peaking, there is a need to diversify into global markets and awareness of risk is improving. People will look to global assets as a diversification tool,” she said.

She expects more money to be invested overseas as China further liberalises its financial system and internationalises the RMB.

“Now only 5% of wealth is offshore. In five years’ time it is likely to be 10% because of the opening up of the current account. Portfolios will become more internationalised,” she said.

Yu considers the market to still be in a transitional phase and he thinks further product development is needed.

“No-one has created the right product so far, but if they do there is a huge opportunity,” he said.