China’s eastern superpower cities of Beijing and Shanghai may be where most of today’s high net worth (HNW) wealth is concentrated, but new research suggests lesser-known centres like Hangzhou, Wuhan and Chongqing could be ultra HNW hotspots by 2015.
China’s rapidly expanding onshore wealth market is well documented, as are its prospects for future growth, but new research has attempted to shed light on some of the lesser known hot spots for Chinese high net worth individuals (CHNWIs).
WealthInsight, a new data-backed research provider, has come up with a set of predictions of what China’s HNW landscape will look like in 2015 – which has thrown up some interesting conclusions about the key second tier cities for growth and how non-Chinese foreign banks can gain a foothold.
WealthInsight’s 158-page report, The Future of HNWIs to 2015: Opportunities for Wealth Sector Professionals, looked at a forecast period stretching back to 2007 and forward to 2015. It says HNWI numbers are expected to grow at a CAGR of 13.5% during the forecast period.
Despite some concerns for China’s economic outlook, China will continue to be fertile ground for the creation of HNWIs, with more than 845,000 Chinese joining the ranks of HNWIs between 2011 and 2015 – almost 10 per day – and the total increasing by 66% to reach 2,125,000 by 2015 (see chart).
During 2011–2015 billionaires will again lead the way, recording tremendous growth in wealth and volumes.
By 2015, WealthInsight forecasts that billionaires will record truly phenomenal growth, increasing their wealth by over 600% and their volumes by over 450%. All other bands will have strong growth of between 100% and 180%.
WealthInsight’s senior analyst, Stephen Gross, who spent three years in China and was one of the report’s authors, says traditionally much of this wealth accumulation has happened on or close to the Eastern coast of China, among the large Tier 1 cities like Beijing, Guangzhou, Shanghai and Shenzhen – China’s most prosperous and developed regions and cities.
One the key conclusions of WealthInsight’s research is that Tier II and Tier III cities including Hangzhou, Wuhan, Chongqing, Chengdu and Fuzhou provide latent and significant untapped potential for wealth managers and private banks (see chart).
“The story of the past few years has been the Tier 1 cities, but we really think that the story is moving more towards the West and to the Tier II and III cities,” says Gross.
WealthInsight has created a rating system to give a sense of which of these Tier II and III cities has the greatest potential.
The rating is based on a number of city-specific criteria including: the market penetration of the wealth sector, growth across industries over the coverage period, the number of UHNWIs, the cultural and political circumstances, and the environment for and towards UHNWIs.
Hangzhou came out on top for a number of reasons, says Gross. Hangzhou is easily accessible from Shanghai – just 45 minutes by high-speed rail – and though not included on many international indices, Hangzhou has an excellent quality of life for a Chinese city.
Hangzhou is regarded by many Chinese as having the highest quality of life of any Chinese city. Many HNWIs and UHNWIs have moved from other parts of China, especially from Shanghai, to Hangzhou over recent years. This trend is forecast to continue over the forecast period, and may even accelerate, the report says.
This is not to say that Hangzhou is not on bank radars. Major global banks such as HSBC, Citibank and Standard Chartered, as well as big Asian banks such as the Bank of East Asia, Hang Seng Bank and Nanyang Commercial Bank, all have a presence in Hangzhou, says WealthInsight’s report.
These established players offer some form of wealth management and private banking services for HNWIs and UHNWIs however, most have geared their businesses in Hangzhou primarily for the mass affluent segment ($100,000 to $1m), where they face significant competition from Chinese banks, the study says.
“There remain significant opportunities for wealth managers and private bankers to set up compelling and focused white-glove operations catering specifically for the needs of HNWIs and UHNWIs in Hangzhou,” the report suggests.
Gross also tips Chengdu and Chongqing, which make up the Chengdu-Chongqing Economic Zone (CCEZ), as two strong growth nodes for foreign and Chinese wealth managers.
Locals ‘first-mover advantage’
WealthInsight’s study underlined the relative underdevelopment of China’s wealth industry, albeit at the same time as China’s big four banks establish more sophisticated private banking services.
The study acknowledges that big banks such as Industrial and Commercial Bank of China, Bank of China, Agricultural Bank of China and China Construction Bank, have first-mover advantage as they already have relationships and offices established in many of these HNW hotspots.
They also already have existing relationships with clients through their business banking.
“The race is on and those banks are out in front. Now are they as fast or as fleet of foot as some of the big global banks? Probably not – but they do have on-the-ground advantage and they do have a head start,” says Gross.
Still, opportunities exist for foreign players to provide the kind of sophisticated advice and high-grade investment research, which has yet to develop within the big local banking groups.
Another significant trend that could play into foreign bank’s hands is the desire of Chinese HNW to increasingly move their investment offshore (see Going Global). Chinese HNWIs currently hold 16% of their total assets abroad, the report estimates – with about 70% allocated to the Asia-Pacific region. Within the next three years, Chinese HNWIs will increase their foreign holdings to 21% by 2015, when foreign asset holdings are forecast to reach $1.2trn.
WealthInsight’s research suggests over 50,000 Chinese HNWIs are looking to move abroad each year. Much of the buoyancy in Hong Kong’s property market is due to demand from Chinese HNWIs, who buy luxury homes in Hong Kong to gain Hong Kong citizenship.
The desire for China’s HNWIs to move abroad reflects various issues within the country: first and foremost, China’s HNWIs are concerned that the government may use the rich as a scapegoat and crack down on them in future if social unrest grows, WealthInsight says.
The research confirms findings in Bain & Co’s 2011 research that emigration is a key concern for China’s HNWIs.
All these factors suggest that although non-Chinese private banks have found gaining a foothold in the onshore market difficult, there remain significant opportunities. Getting to grips with China’s Tier II and III cities could hold the key to this success.