Article published in EJ Insight on 15 March 2023

China's decision to loosen its Covid restrictions and reopen its economy may create short term uncertainty and disruption, but is likely to be a positive move over the medium and longer term for many sectors, including its investment industry.

The country's asset and wealth management sector came into existence just over two decades ago and has seen substantial growth over the last few years. The World Economic Forum and Oliver Wyman estimate that the industry reached approximately $16 trillion in assets under management (AUM) by the end of 2019, a tenfold increase over the previous decade. Other figures suggest that it is now the world's fourth largest investment market after the US, Luxembourg, and Ireland. It is also the second largest onshore market, next only to the US. Compared with 2020, the industry's AUM has grown by 15.25%, the fastest in 16 years.

Moving Beyond the Pandemic

However, the industry has not yet reached its potential, say market participants. While the pandemic put the sector under pressure, the loosening of the reins caused volatility, particularly in the country's $4.1 trillion market for wealth management products, with some managers having to freeze withdrawals or sell down their holdings as investors made significant redemptions.

Industry commentators believe that the country's practice of deposit-based asset allocation, totalling approximately $28 trillion, is going to prove increasingly problematic as China seeks to develop a more mature and institutional investment landscape.

China has been working hard to move beyond the pandemic, adding depth and maturity to its asset and wealth management industry, for example with the introduction of its Foreign Investment Law in 2020 and through a variety of business friendly structural reforms set up to attract foreign players to the market. The merger of the Qualifying Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes to create the new 'R/QFII' initiative simplifies processes and procedures, and broadens investment scope, covering a variety of new asset classes, including hedging instruments, for example.

Additionally, the country is creating new economic clusters, for example through its development of the Greater Bay Area, which aims to bring together Hong Kong and Macao with nine cities in Guangdong to become an economic region, and to level up opportunities for the financial services industry. As part of the initiative, the launch of Wealth Management Connect allows residents in the region to invest in each other's wealth management products, and is anticipated to benefit both investors and financial institutions in the region.

Find out more about Lombard Odier's commitment to clients in Asia.

Moreover, the rise of alternatives and private asset classes, and the growth of new financial innovations both also look likely to boost the industry.

New Asset Classes

Private markets have grown substantially in the country. The private equity market in China is now the third largest in the world. In the five years until 2020, the total private equity fund asset size quadrupled to $2.5 trillion, with the number of registered private funds surpassing 100,000. Additionally, PWC anticipates that private credit and special situations will play a greater role in financing as China cracks down on unregulated lending. Hedge funds also gained momentum. The funds and capital raised by hedge fund managers grew by over 70% over two years. As of end 2021, there were over 70,000 hedge funds in China amounting to over approximately $ 900 billion. As the country moves past its pandemic restrictions, alternative markets are expected to continue to post growth going forwards, not just in China, but across the region.

What are the next generation of high net worth individuals looking for? Read more.

The Rise of Fintechs

The development of the investment landscape will also be bolstered by the rising number of fintech providers operating in the country. The adoption of fintech platforms in China as a means of fund distribution has been quite prevalent, for example. China's central bank, The People's Bank of China (PBOC) released its Fintech Development Plan for 2022-2025, which aims to drive the digital transformation of finance over the next few years, and is the second development plan released by the PBOC. While the bank's first fintech development plan highlighted the need to build 'pillars and beams' for the fintech sector, the new plan is focused on 'building momentum'. The adoption rate for consumer fintech in China reached 87% in 2019, meaning that 87% of China's digitally active population uses at least one fintech service in their daily life. This adoption rate is expected to continue to grow.

Discover more about Lombard Odier's technological expertise.

Looking Ahead

China's post pandemic economic landscape may be volatile in the short term, but its decision to open its economy will only bolster its asset and wealth management industry. While growth has been substantial, the industry is still nascent in many respects, and new regulation to open up investment opportunities, the growth of new asset classes and increased innovation will all support further development and growth in the sector.