1、FEATURE Chinas investment management opportunity Reforms could create a multitrillion-dollar market for foreign firms Doug Dannemiller THE DELOITTE CENTER FOR FINANCIAL SERVICES 2 KEY FINDINGS The Chinese government is reforming the countrys pension system, capital markets, and investment management

2、 industry as a part of a bigger plan to curb an anticipated retirement savings deficit. Foreign investment managers have the opportunity to play a greater role in the tightly regulated industry, potentially managing a sizeable chunk of the US$30.2 trillion addressable retail financial wealth by 2023

3、.1 Foreign firms looking to enter the market should develop investor segment-specific strategies, alternative data capabilities, and partner with online wealth platforms to achieve success. Chinas investment management opportunity: Reforms could create a multitrillion-dollar market for foreign firms

4、 3 China: Investment managements next big opportunity With the Chinese government set to eliminate restrictions on foreign ownership of fund management firms in 2020, many investment managers worldwide are eagerly eyeing China as their next big growth opportunity.2 The potential market is vast: By 2

5、023, the countrys total addressable retail financial wealth is expected to reach US$30.2 trillion, with US$3.4 trillion in retail assets under management (AUM) in Chinese publicly registered funds.3 But these market size statisticsenticing as they may bedont guarantee success for any particular firm

6、. The future of investment management in China could largely depend on its prospects for economic growth, the reliability of regulatory reforms, and the spread of cultural changes that accompany individual economic prosperity. Invest- ment managers hoping to expand to China should, therefore, consid

7、er a host of marketplace, regula- tory, and cultural complexities as they establish a foothold and pursue market share. This article explores some of these complexities, aiming to arm investment management company leaders with insights to help them plan for what might lie ahead. Chinas retirement sa

8、vings dilemma Chinas recent regulatory reforms to encourage foreign firms to enter the investment management market, while perhaps complex, could be due to pensions. The recent relaxation of policies around foreign ownership of investment managers is part of a broader effort by the government to cur

9、b a looming retirement savings deficit. Forecasts by the Chinese Academy of Social Sciences (CASS) predict a significant retirement savings gap developing in China over the next 30 years.4 In fact, the China pension actuarial report 2019 2050 estimates that the assets of the government- run Basic Pe

10、nsion System for Enterprise Employees could be depleted by 2035, principally due to an unfavorable shift in the ratio of workers to retirees (figure 1).5 Chinas reforms have opened a US$30.2-trillion opportunity for foreign investment managers. To win in this complex market, foreign firms should dev

11、elop segment-specific strategies, alternative data capabilities, and partner with online wealth platforms. Chinas recent regulatory reforms to encourage foreign firms to enter the investment management market could be due to pensions. Chinas investment management opportunity: Reforms could create a

12、multitrillion-dollar market for foreign firms 4 To address this expected shortfall, Chinese authorities appear to be looking to shift more responsibilities for securing retirement income to employers and individuals. The envisioned model is a three-pillar system in which government pensions (the fir

13、st pillar) could be supplemented by enterprise-driven defined contribution savings platforms (the second pillar) and individual retirement accounts (the third pillar) (figure 2). While the current system relies heavily on the first pillar, Chinas recent regulatory changes appear intended to balance

14、the retirement savings load across all three pillars. The Chinese government seems to be taking steps to drive greater utilization of the systems second and third pillars. Chinas regulators have studied the meaningful growth of the United States defined contribution and individual retirement account

15、 (IRA) programs in the hope of replicating its success. The United States established 401(k) defined contribution accounts in 1981;6 by the end of 2018, 401(k) plans held US$6 trillion in assets.7 Similarly, since the launch of IRAs in 1975, IRA AUM in the United States has grown to US$8.8 trillion

16、at the end of 2018.8 The growth of IRAs in the United States may provide a fair idea of the AUM growth potential for individual pension products in China, given the countrys increasing appetite for personal wealth- building and the overall growth in investable assets fueled by economic prosperity. I

17、n particular, just as in the United States of the 1980s, retirement investments in China may be driven by necessity. IRAs in the United States grew at a time when corporations were shuttering defined pension plans at a rapid pace; the anticipated depletion of Chinas government pension fund could pro

18、mpt similar actions among Chinese individual investors. China seems well placed to serve these investors in terms of fund choice. When the second and third retirement pillars were developed in the United States, the countrys mutual funds numbered about 700, many of them offered by well-respected bra

19、nds.9 In China, however, there are 5,983 publicly registered funds currently, and many of Chinas largest investment managers have already partnered with Western firms.10 If China can replicate the United States AUM growth in defined contribution and IRAs, investment managers in China could have an N

20、ote: All dollar amounts are in US dollars. Source: Chinese Academy of Social Sciences, April 2019. Deloitte Insights | 201920272035 $618.8 billion $1,015.8 billion $0 billion 2024 4.9% 0% 4.4% FIGURE 1 Chinas government-managed basic pension system for enterprise employees could run dry by 2035 Accu

21、mulated balance of basic pension system for national enterprise employees, 20192035 Accumulated balance Percentage of GDP Chinas investment management opportunity: Reforms could create a multitrillion-dollar market for foreign firms 5 enormous opportunity to gather retirement assets. However, while

22、China already has some of the building blocks in place to accomplish this, encouraging people to invest and enhancing capital market efficiency will likely be a complex task. The government is working to help capital markets mature For Chinas retirement savings market to grow effectively, its capita

23、l markets likely need to mature. Recognizing this, the Chinese government is taking several actions to enhance capital market maturity. Allowing non-Chinese firms to participate in the countrys investment management activities could be one important step. Non-Chinese firms have recently been allowed

24、 to own majority stakes in investment managers with publicly registered funds, and by 2020, the Chinese ownership requirement could drop completely.11 One hoped- for benefit of this move could be to put the market on a more secure, data-based footing. An opinion held by some professional investment

25、managers in China is that rumors play too great a role in securities trading and valuation compared with Western markets, which tend to be more typically driven by data, analytics, and professionalism.12 Another step toward enhancing the financial markets maturity is the governments plan to increase

26、 market-based financing. This plan has two main prongs. As the first prong, regulators are piloting a streamlined registration-based system for initial public offerings (IPOs) in Chinese markets.13 With a potential increase in IPOs, investors would Note: AUM for Pillar 01 is as of December 2018; ent

27、erprise annuities AUM is as of Q2 2019 and does not include occupational annuities; AUM for Pillar 03 is as of September 2019. All dollar amounts are in US dollars. Source: Ministry of Human Resources and Social Security, Deloitte Center for Financial Services analysis; Chinese Academy of Social Sci

28、ences, April 2019. AUM: US$697.8 billion AUM: US$235.2 billion AUM: US$2.2 billion 01 02 03 Basic pension system for employees, basic pension system for rural and nonworking urban residents Enterprise annuities Personal savings pension (includes pension fund-of-funds) FIGURE 2 Chinas three-pillar pe

29、nsion system seeks to distribute responsibility for retirement income across government, employers, and individuals Allowing non-Chinese firms to participate in the countrys investment management activities could be one important step. Chinas investment management opportunity: Reforms could create a

30、 multitrillion-dollar market for foreign firms 6 have access to investments in a broader range of industries and companies. As firms work to differentiate themselves in order to raise capital, they may offer greater transparency into corporate operations, which can also reduce rumor-driven investing

31、. The second prong restricts the offering of investment products with guaranteed returns by Chinese banks.14 This could push investors to use market-based products to build their investment portfolios, helping shift investment risk to the investor instead of the banking system. The drive to encourag

32、e market-based products highlights a significant change regarding risk, reward, and responsibility that appears to be taking place in China. Market-based products are managed and represent a shift of risk and revenue from the banking sector to the investment management sector. In the initial stages

33、of this shift, most Chinese investors are opting for more money market and bond funds than equity funds.15 In fact, the current investor preference for fixed income and money market funds has recently stifled profitable growth for many investment management firms in China, as these products generate

34、 lower management fees. (A few firms, however, have seen notable success, usually driven by scale and efficiency.) As Chinese investors and markets mature, they may potentially allocate a greater share of their investments to equity funds. Additional opportunities exist for China to encourage indivi

35、dual investing for retirement. For example, while the authorities have approved the launch of individual retirement products, the government has not developed incentives to participate in these accounts. Tax deferral provisions, similar to those in US retirement accounts, could likely be a next move

36、. An ongoing cultural shift toward an investing mindset is likely to further accelerate the adoption of IRAs. Even Chinas mass retail segment appears to be developing an investing mindset, as the countrys fast-growing economy facilitates the generation of financial wealth in the largest segment of t

37、he population.16 Sizing the market: Investment funds future in China Asset growth in China has the potential to be even more dynamic than was the case in the United States, given seemingly strong government support, continuing economic growth, and the countrys large population. But how much growth c

38、an be expected? To find out, we built a model to estimate Chinas future retail financial wealth. For the purposes of the model, Chinese investors were divided into four segments based on the wealth they possess: mass retail, cream of mass retail, mass affluent, and high net worth individuals (HNWI).

39、 Of these, the last two segments were deemed similar to Western market segments. Figure 3 shows the models forecasts under four different assumptions for real GDP growth, which is the major driver of these asset growth forecasts. The “base” scenario assumes that Chinas GDP will grow by an average of

40、 5 percent annually over the next five years, as our models point to this growth METHODOLOGY This report is based on insights gleaned from on-the-ground discussions with two regulatory bodies and senior executives of a dozen investment management firms in China. We supplemented these insights with a

41、 quantitative model that forecasts retail financial wealth using GDP as the explanatory variable. Each investor segments assets in public funds are assumed to be proportional to the financial wealth they hold. The bottom 20 percent of the population is assumed to own no financial wealth. Chinas inve

42、stment management opportunity: Reforms could create a multitrillion-dollar market for foreign firms 7 Source: Credit Suisse Global Wealth Data book, IMF WEO April 2019 Update, AMAC, DCFS analysis. 2002120222023 2002120222023 2002120222023 2002120222023 $1,

43、895 $2,675 $2,974 $3,281 $3,593 $3,907 $1,895 $2,425 $2,665 $2,906 $3,147 $3,383 $1,895 $2,181 $2,368 $2,552 $2,731 $2,902 $1,895 $2,046 $1,435 $1,538 $1,640 $1,742 FIGURE 3 Public funds AUM is likely to see double-digit growth from 2018 to 2023 in the base case, driven by HNWI and mass affl uent in

44、vestors Public funds AUM: Retail (US$ billions) Mass retail Cream of mass retail Mass affl uent HNWI 6% AVERAGE REAL GDP GROWTH (BULL CASE) CAGR: 15.6% 5% AVERAGE REAL GDP GROWTH (BASE CASE) CAGR: 12.3% 4% AVERAGE REAL GDP GROWTH (BEAR CASE) CAGR: 8.9% 0% REAL GDP GROWTH (EXTREME BEAR CASE) CAGR: (1

45、.7)% Chinas investment management opportunity: Reforms could create a multitrillion-dollar market for foreign firms 8 rate as the most likely. (We recognize that Chinas GDP has grown at an annual average of 6.9 percent over the past five years. However, as economies get larger, it is typically harde

46、r for them to maintain growth levels as high as China has recently experienced.) This base case estimates that retail AUM in Chinese public funds could nearly double to US$3.4 trillion by the end of 2023. Under different GDP growth assumptions, the models forecasts change accordingly. In our extreme

47、 “bear” case of zero percent GDP growth, the forecast predicts that public fund AUM will decrease slightly, standing at US$1.7 trillion in 2023. On the other hand, if Chinas GDP averages 6 percent growth through 2023, public fund AUM is expected to grow to US$3.9 trillion. We also modeled asset grow

48、th among the four Chinese retail investor segments. Our analysis suggests that each segment will experience healthy asset growth between now and 2023. The highest absolute growth is expected in the mass affluent segment, which could become the largest segment by financial wealth by 2023 (figure 4).

49、The private fund market is a bit different. Since China has a qualified investor rule, the retail market for private funds comprises HNWI investors alone. This market is even more fragmented than the public funds market, with Note: All dollar amounts are in US dollars. Source: Credit Suisse Global Wealth Data book, IMF WEO April 2019 Update, AMAC, DCFS anal