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The maturing investment management landscape in China
As growth opportunities blossom, strategies for reform also take root.
The past informs the future
My recent trip to Beijing, Shanghai, and Shenzhen afforded the opportunity to make some first-hand observations. During this trip, I had the opportunity to meet with several investment management industry leaders from both the regulatory and the investment management perspectives. One of the common themes from most of the people I met along the way was an acknowledgement that, in recent decades, progress often accompanied reform and opening of markets. This historical perspective informed their long-term view of change. The Chinese industry leaders also carried a strong desire to carefully study other markets as part of their decision process to determine which reforms were best suited to China. However, reform can take time to implement, because the Chinese government engineers change.
Trends lay the foundation of reform themes
With this managed outcome approach to change, the goals of reform are critical for both the Chinese people and for firms looking to participate in the Chinese investment management community. I observed three notable themes emerge during this trip:
- Development of the retirement savings programs available to Chinese people.
- A drive to increase efficiency and professionalism in market operations.
- An appetite for a shift away from bank lending to capital markets-based financing for businesses.
These themes are empowered by two trends. The first trend is the recent decade of Chinese annual GDP growth in the 6 to 10 percent range.1 The second is a shift among the Chinese people to an investment culture from a savings one.2 Together these trends and themes translate into growing interest for global investment management firms to pursue opportunities in China.
A race to curtail China’s retirement savings gap
Funding retirement is a daunting problem for people around the globe. This problem is present in countries with large mature economies and in developing countries alike. China is reported by the World Economic Forum (WEF) to have a current retirement savings gap of $11 trillion. This figure is tied with Japan and second in deficit only to the United States with $28 trillion.3 Perhaps, driving the reform in China is the increasing retirement savings gap, which is expanding at 7 percent annually. This rate is the second highest among the eight countries listed in the WEF report, behind only India. At this rate, China will have a retirement gap of an estimated $119 trillion by 2050, second only to the $137 trillion gap in the United States.4 There is no doubt Chinese government officials are aware of these projections. The current reforms to allow majority foreign ownership of investment management firms are likely to be a reaction to these long-term trends. These reforms also fit with China’s long-term perspective and with a managed change approach.
The changes under consideration are the development of a three-pillar approach to retirement: government pension, corporate sponsored defined contribution, and individual retirement accounts. Currently, the only pillar effectively in place is the government pension pillar. The defined contribution pillar has limited utilization, since these plans lack tax advantages for participants, which the asset management regulators in China recognize. The third pillar is an individual retirement account, which was launched last year and is still under some development. It was not that long ago, in 1978, when defined contribution retirement saving started in the United States. The defined contribution savings level in the United States now stands at $6 trillion as of year-end 2018 according to the US Federal Reserve.5 Will the Chinese defined contribution retirement savings grow in a similar pattern?
Chinese securities markets up their game
In order for this retirement savings market to grow effectively, the securities markets themselves also need to mature. There was a consistent opinion among professional investment managers that rumor played too great a role in securities trading and valuation compared to Western markets. Western markets, in contrast to Chinese ones, are considered to be driven by data, analytics, and professionalism. The planned increase in market-based financing will also contribute to the maturity of the financial markets. As part of this plan, regulators are piloting a streamlined registration-based system for Initial Public Offerings (IPOs) in Chinese markets.6 With a potential increase in IPOs, institutional investors would have access to invest in a broader range of industries and companies. As firms work to differentiate themselves to raise capital, they may offer greater transparency of corporate operations.
An invitation for partnership
The investment management landscape in China is maturing before our eyes. This engineered change to increased market-based financing and increased retirement saving offers the opportunity to benefit from the best aspects of the Western markets. Can China use lessons from the history of Western markets coupled with new technologies to build an investment ecosystem that meets its goals? Western investment management firms are welcomed to participate, and, in fact, are part of the plan.
What do you think?
What are your thoughts on the Chinese investment management industry’s prospects? Is China about to experience another period of growth, ushered in by goal-oriented reforms?
Join the conversation on Twitter: @DeloitteFinSvcs.
1 “World Economic Outlook Database,” International Monetary Fund, April 2019.
2 Owen Walker, “Global investors lick lips as China opens to asset firms,” Financial Times, January 13, 2018.
3 “We’ll Live to 100 – How Can We Afford It?,” World Economic Forum, May 2017.
4 “We’ll Live to 100 – How Can We Afford It?,” World Economic Forum, May 2017.
5 “Financial Accounts of the United States,” Federal Reserve, March 7, 2019.
6 Kevin Yao “China securities regulator says IPO reform could be expanded,” Reuters, March 29, 2019.
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.