Tuesday, November 4, 2008

China's rich, silver lining on turbulent global wealth market

November 01, 2008 / Xinhua

As recession is hitting, global wealth measured as household financial assets is expected to shrink 14 percent from last year's 109 trillion U.S. dollars to 97 trillion U.S. dollars this year, reversing a six-year-long upward trend.

Emerging markets and China in particular are likely to represent the strongest potential for continued growth in wealth, according to the latest Global Wealth Report 2008 of the Boston Consulting Group (BCG).

North America -- epicenter of the financial crisis -- and Europe would remain the wealthiest regions but the size of their aggregate wealth, about two-thirds of the world's total in 2007, was expected to continue dipping in the next five years.

However, the sustained expansion of the Asia-Pacific region (excluding Japan), was projected to grow eight percent a year on average, the fastest among all emerging markets - which also include Middle East, Africa and Latin America - would largely offset the declines in the wealthiest regions and help the global wealth market to secure an average rise of one percent every year to 2012.

"Given further declines in the financial markets and the economy, the full impact on global wealth may not have yet been fully observed," Tjun Tang, partner and managing director of the Boston Consulting Group, told Xinhua.

He explained that the recovery of wealth would mainly rely on three factors: economic growth -- the first and foremost driver of wealth creation, investment performance, typically driven by equities, and savings rates which were quite good structurally.

With its 391,000 wealthy households (defined as owning at least one-million-USD-worth financial assets ) possessing 1.4 trillion U.S. dollars in total last year, China has ranked fifth in the world in terms of millionaires, ahead of many developed countries and only behind the U.S., Japan, United Kingdom and Germany.

Meager as it may be if compared to the richest US market which boasts of 4.884 million wealthy households with aggregate financial assets of 17.1 trillion U.S. dollars, the wealth market of China was expected to maintain a solid growth momentum in the long term.

"The US and European economies are likely to enter more recession conditions in the immediate term, whereas the Chinese economy will slow but continue to grow. Many economists are projecting roughly 8-9 percent GDP growth in 2009 and wealth creation relies heavily on GDP growth," said Tang.

As the Chinese households tend to stash away larger proportion of cash than other developed markets, wealth in China would hold up relatively better than wealth in the US while stock markets were tumbling down.

Given that the wealth business onshore in China has been much less penetrated by the sub-prime debts than in other developed markets, the study covering 62 markets representing more than 98 percent of global GDP concluded that there was still growth to pursue for wealth managers in the Chinese market.

SHORT-TERM SHADOW

China however is not completely immune to the unprecedented financial crisis. The 2008 China Rich List released Thursday by Forbes Chinese Edition revealed that the richest Chinese have suffered wealth loss unanimously this year.

Most of the losses, approximately 526.8 billion yuan (about 77.24 billion U.S. dollars) or down 20 percent from last year, came from the real estate, steel and export industries which seemed to have born the first brunt of the financial crisis.

As a result of the declining external demand coupled with the rising Yuan, a raft of small export-oriented factories in southern Guangdong Province have been closed down.

Liquidity crunch also caused some foreign companies to axe their investments in China while lingering fear over slowdown has eroded consumer confidence on home turf and already reduced the sales of big-ticket items such as automobiles.

To steer the economy that has recorded double-digit growth for years from recession, China's central bank has started to loosen credit in the last few months while the Ministry of Finance pumped heavy investment into the construction of infrastructure facilities such as railways.

Zhang Hanya, a researcher with the National Development and Reform Commission, said the recent adjustments would ease the credit crunch of many enterprises and would be conducive to sustaining consumption growth.

He held that the confidence of the Chinese economy was not only rooted in the huge fiscal revenues the country has accumulated over the past five years but also in the government's improving abilities to exercise macro-economic control.

PROFILE OF CHINA'S RICH

Different from those in the United States and Europe, the wealthy in China comprise of primarily entrepreneurs who have made their money from rapidly growing industries over the past two decades, said the BCG report.

These established entrepreneurs tend to hold significant levels of cash to provide security and at the same time are highly speculative and have a high tolerance for risk, potentially a characteristic inherited from their entrepreneurial backgrounds.

"In 2007 riskier instruments were very popular in China," said Tjun Tang. As the financial crisis intensifies however, he expected that in short term investors would be much more risk averse, with greater cash components to their portfolios, seek simpler and less complex products and look for more transparent investments where they could understand how money was made.

On regular outlook, he said, the regulators would continue to move in the direction of opening and developing the nascent financial market and try to draw insights on how to better manage and regulate it.

Currently, many international banks have used traditional offshore private banking centers, where regulatory constraints are significantly easier, to serve Chinese wealth held outside of China.

As the Chinese government allowed foreign banks to be locally incorporated and to provide local currency retail business and wealth management services to local Chinese individual, the game has recently changed.

As the world economy and markets are waiting for recession, Tjun Tang identified that globally, the private banking industry was facing reduced transaction volume and revenues among another challenges, "Many client have stopped investing and moved into cash," he said.

"China's wealth management is immature but offers very substantial potential, from both the underlying growth in the financial assets of Chinese households and the rapidly increasing penetration of private banking services into this market," said the report.

(1 U.S. dollar=6.82 RMB yuan)