Chinese appetite for structured products rises

A report on the Chinese wealth-management industry finds guaranteed funds are likely to be the biggest driver in 2009 for a business that has already risen to $350 billion in size, and is on track to double to $700 billion over the next five years.

Celent says by the end of 2007, individual financial assets in China had risen to $3 trillion, double the $1.5 trillion recorded in 2000, and on track to hit $5 trillion by 2014, thanks to high savings, steady GDP growth, and greying demographics. That 2007 figure includes 415,000 millionaires and over 6,000 ultra high-net-worth individuals with personal assets in excess of $30 million.

Although the majority of personal financial assets is invested in equities and real estate, Celent says last year many people lost their appetite for mutual funds, notably equities, due to market turmoil. At the same time, banks in China have become adept at quickly launching bank products to meet a rising demand for capital-protected or low-risk investments.

In the first half of 2008, guaranteed products experienced poor sales due to inflation, says Celent, but the economic crisis in the second half of 2008 diverted a large amount of investment to guaranteed products.

Such products have been around since 2003 and have at times played a dominant role as the favourite destination of onshore private wealth, taking as much as 64% of all investment product sales in 2006. That figure declined to 46% in 2007 as more investors shifted to mutual funds and stocks, including through QDII schemes for international exposures, to ride the bull market.

But last year, more money flowed to banks' wealth-management desks as capital preservation and renminbi denominations became more important. Within mutual funds, Celent expects fixed-income products to gain in 2009 at the expense of equity and balanced funds.

By June 2008, 53 banks' wealth-management product sales reached $133.8 billion, which had already equalled total sales in 2007, so the trend suggests these will continue to rise as dominant distribution channels in China.

Celent notes that ICBC has the biggest wealth-management business, thanks to good performance both in terms of investment returns as well as breadth of product. It says China Merchants is the most transparent and has the best product range, but has underperformed in its securities investments and QDII products. Standard Chartered Bank has improved its service and its wealth-management products perform well, and Celent says it is the best foreign provider.

In China, however, where branding is all-important, the most famous providers are ICBC, China Merchants and Citi. Bank of China and HSBC also have well-known brands.