C hina's private wealth market has made substantial gains in its short history. In just over a decade the high net worth group has grown fivefold, propelled by rapid economic growth. It has endured wide swings in the stock market, major shifts in investment trends and policies aimed at deleveraging and economic restructuring. Some high net worth families have already passed on their personal and corporate wealth to the next generation, and this has brought changes in investment philosophy and behavior. This has spawned a wide variety of wealth management companies eager to establish their brand and demonstrate their competitive advantage in this field. 

 

China's economic development has contributed to private prosperity and that has driven the development of the private wealth market, which expanded from 26 trillion yuan in 2006 to 165 trillion yuan in 2016, or a compounded annual growth rate of 20%. Growth has been seen in capital market products, real estate investments and bank financial products, with interest in domestic and overseas investments.

 

There has been a continuing expansion of investment products and a growing awareness of the need for diversification. In 2009, the assets of high net worth individuals were concentrated in savings and cash, stocks and real estate, accounting for about 70% of the group's total investable assets. 

 

In 2013, trust products became an investment favorite, accounting for 15% of the high net worth's total investable assets. That percentage later declined as a result of some high profile defaults coupled with the emergence of other competing products. They increased their allocation in the expanding portfolio of investment products (such as alternative assets represented by private equity funds). Looking back over the past two years, due to the sharp fluctuations in the capital market, the high net worth group gradually grew wary of riskier assets. This led to an upturn in allocations for fixed income products sold by banks and a decline in stock market investments. In 2017, bank financial products accounted for about 25% of the total investable assets of this group, nearly doubling the level of 2015.

 

The size of the high net worth group tripled from 180,000 in 2006 to 1.58 million in 2016. This is equivalent to the increase of nearly 400 high net worth individuals -- those with assets of more than 10 million yuan -- per day. The per capita investable assets of the high net worth group rose from about 29 million yuan in 2006 to 31 million yuan in 2016.

 

Over this period the economy shifted from low-cost manufacturing to higher technology and design. Meanwhile, the capital market has become more standardized, and that has led to increased channels for the creation of wealth.

 

Additionally, the geographic distribution of the wealth has widened considerably.

 

First-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen are still important hubs for the accumulation of private wealth. But the large number of opportunities for wealth creation in recent years have no longer been limited to these major cities.

 

In the initial years of high wealth creation from 2006 to 2008, the high net worth group benefited from the pioneering economic reforms put in place starting in the late 1970s. First-tier cities and the southeastern coastal areas took the lead, benefiting from the rapid growth of the capital and real estate markets, forming the first concentrations of wealth.

 

From 2008 to 2012, the Bohai Bay area developed rapidly, propelled by further growth in Beijing but expanding to Tianjin and other key cities in the region. At the same time, there were plans to spur growth in the central and southwest regions of the country. During this stage, the annual growth rate in this high net worth group exceeded 25%, and the central and western regions showed some of the highest growth.

 

From 2012 to 2014, the "Belt and Road"development initiative and the Yangtze River regional economic development program brought about new opportunities for economic growth and ultimately wealth creation. Preferential policies such as tax incentives were rolled out and capital investment flowed to the central and western regions. The high net worth group rapidly expanded to Xinjiang, Shaanxi, Guangxi and other previously less developed areas.

 

From 2014 to 2016, first-tier cities and the southeastern coastal areas actively responded to the government’s call for greater public entrepreneurship and innovation. High-tech areas were developed and traditional industries were upgraded. At the same time, investment in real estate and capital market products saw strong growth. In turn this further expanded the size of the high net worth group.

 

There also have been substantial changes in the investment outlook of these high net worth investors. According to industry research conducted between 2009 and 2011, "creating more wealth" or "more rapid creation of wealth" were the top goals for the high net worth group in China. Since 2013, this was replaced by "wealth protection and inheritance," "quality of life" and "children's education." Family governance forced the high net worth group to begin fully considering the inheritance of material wealth as well as family business considerations and spiritual satisfaction. 

 

The high net worth group has also been exploring more institutionalized ways to standardize family decisions. More and more second-generation entrepreneurs have emerged to assume control of family businesses. Many of the first generation of entrepreneurs who have not yet reached retirement age have been putting plans in place to pass on control of the family business to their children.

 

Business investment income remains the key source of wealth for these high net worth individuals, but the nation's structural adjustment is increasingly affecting these businesses. As the central government pursues policies of industrial upgrading and spurring innovation, these high net worth individuals are increasingly turning to investments high-tech sector rather than traditional manufacturing. 

 

At the same time, the importance of financial investment income is increasing. There has been a restoration of confidence in the stock market and there have been fresh rounds of initial public offerings. High net worth individuals have returned to the equities market after a period of high risk aversion. But alternative investments, such as venture capital and private equity offerings, have also attracted some of the funds of high net worth individuals. Generally speaking, the investment behavior of this high net worth group is more rational than in the recent past. 

 

Importance of Branding

 

When the domestic private wealth market was in its early stages, Chinese banks held the leading market position, benefiting from brand recognition, the advantage of a widespread network and better products and services. Foreign banks have also actively competed for business in the wealth management market in China.

 

With the intensified competition, institutions have gone through the process of transition from large-scale development to "intensive cultivation" of the market. The differentiated competition pattern is becoming clearer. After ten years of market experience, Chinese-funded private banks have expanded their business