Attending Australia Week in China in April 2016 and hearing from local sovereign wealth and other managers during the financial services dialogue in Shanghai, the financial capital of China, it became clear to me that Australia, with strong financial services capabilities and regulatory frameworks, has a lot to offer China in supporting the substantial growth in the Wealth Management sector.
Evolution of Australia’s financial services sector
Mark Johnson, AO Chairman of the Australian Financial Centre Task Force, and Australian representatives on the APEC Business Advisory Council, shared his experience of reform and development of the Australian financial services market from being restricted and regulated in the 1970’s, to today’s open and competitive market.Australia has developed a full spectrum of institutions, credit, capital markets and insurance to meet the requirements of individuals, the corporate sector and global financial services. With the recent signing of the China-Australia Free Trade Agreement (ChAFTA), the Hon Andrew Robb, AO, MP and outgoing Trade Minister spoke about the success of Australia’s trades of goods, and the expectation for increased trade on the services side.
Australian has around $2.7 trillion funds under management, greater than GDP of ASEAN, but with only around 5% invested overseas. Financial services engagement is required to access foreign capital; however patience will be required to reorient financial services to the Asian region.
Financial connectedness to financial integration
Amy Auster, Australian Centre for Financial Studies, and co-author of “Financial Integration in the Asia Pacific: Fact and Fiction,” discussed collaboration to build a stronger, more inclusive financial system between Australia and China.
Financial services are the largest sector or the Australian economy, and cooperation between multinational companies can tap into the significant growth in wealth in China.
Seizing the opportunity
Australian fund managers have been talking about the opportunity for decades, however, there is not a lot of appeal for Australian assets outside Australia’s very fee constrained market. Australian fund managers are very much focused on the Australian audience, and will need to develop products to appeal to investors outside Australia.
Australia has a strong pension system, expected to grow to $9.5 trillion by 2050 and is considered attractive with highly evolved and regulated markets. With the mandatory provisions for retirement implemented 24 years ago, our enormous ecosystem in the fund management sector and world-class expertise, there is tremendous opportunity to export our capabilities overseas.
Andy Hutchings, APIR Group sites that Australians believe they are in a position to manage their own retirement, as demonstrated through the growth of the self-managed superannuation sector. Australia has created a consumer centred regulatory structure. Unlike the “sales-led” markets in Asia, it’s not about the product, it’s about the client.
Australian consumers are informed, with open lines of communication to government, and understand what they need to do to invest the proceeds of their working lives. The advice and fund management sectors are incredibly fine tuned, with quality products, trust and confidence in the Australian market.
China wealth and asset management
There has been an explosion in asset management in China, with an ever-growing savings pool. There are multiple players in China, from trust companies, to securities companies, insurance and also different asset management licences determining the types of activities.
Savings are starting to be exported, looking for diversified investment strategies, to help re-balance fortunes, and deleverage. China is looking for insurance and wealth management offerings that are trusted and can deliver yield.
The Chinese equity market was very volatile last year according to Mr Xu Tianshu form Aegon-Industrial Fund Management, with 60-80 pc of the investor’s retail direct. In future individuals may give funds to institutions to manage.
George Wang, Chairman of AIMS Financial Group and Deputy Chairman Asia Pacific Stock Exchange (APX) says Chinese investors want to invest in Australia assets, however, there are lots of limits and restrictions on the export of foreign exchange. Australia moving into China will open up new business opportunities, with huge cooperation potential.
Meanwhile, China’s financial markets have been maturing, and with increase scale and sophistication, there is a greater need for diversification in asset classes, across direct and indirect investments. Demand will continue from investors to manage the volatility of income streams. They are looking for trusted insurance and wealth management offerings to deliver yield.
So what does Australia have that China needs, and China have that Australia needs?
Australia’s strong pension system is estimated to be $9.5 trillion by 2050, with mandatory retirement contributions. We have an enormous ecosystem in the funds management sector, with world-class expertise. China welcomes the entry of global competitors, to help shape market dynamics to reduce volatility, through a sounder, transparent market, and positive changes in regulation.
Currently, China’s capital markets are running short of quality assets for investors, who are looking for relatively high yield but safe investment products. There is demand for global asset allocation, with a primary goal of absolute security, and to offset or hedge risk domestically. Whilst real estate is the top choice, particularly the US, also looking for property in other jurisdictions, including Australia. There are tremendous opportunities to provide good quality investment products to the growing middle class.
Ageing of the population
Mr Yu Pingkang, Chief Economist, China Changjiang Pension, said the pension industry in China is at the dawn before the golden year, with the substantial increase in China’s over age 65 population. The backdrop of industry challenges, with economic slowdown impacting on interest rates, there is a need to focus on more investment-based pensions systems, asset allocation, corporate and individual based pensions.
With innovation almost every month, development of non-standard products provides more challenges for investment committees, including how to capture opportunities in economic downturns. Overseas investment and platforms to access infrastructure and other types of investments are needed in China to access a spectrum of investments to help diversify risk.
China’s Capital Markets
Currently the local market consist of only 2% foreign institutions, so needs greater participation to become more liberalised bond equity markets. China is a net exporter of capital, so greater cooperation in Australia in imaginative ways – how can Australia participant, in partnerships. There already significant overseas direct investment (ODI) into Australia, with China numbers two behind the US.
Danny Armstrong, China Head, National Australia Bank and Chair of Austcham Shanghai’s, Financial Services Industry committee, says foreign banks face significant constraints, with a largely closed capital market. The Austcham 2016 White Paper on the Financial Services Industry’s key findings includes:
- Advocacy for more principals based system of regulation to encourage innovation and completion onshore
- Timely access to global financial market information
- A genuine desire to bring the benefit of onshore experience to contribution meaningfully to China’s market reform places.
More information and a copy of the report can be accessed here.
Current Investment Initiatives
- Asia Region Funds Passport – aims to facilitate cross-border distribution of managed fund products across the Asia region. It allows collective investment products offered in one Passport economy to be sold to investors in another economy. Currently, funds are manufactured, distributed and administered within each jurisdiction, with no transferability across borders.
- Mutual Recognition of Funds (MRF) – will allow fund managers registered in Hong Kong to offer investment fund products to mainland residents and vice versa.
- Shanghai-Hong Kong Stock Connect – is a cross-boundary investment channel that connects the Shanghai Stock Exchange and the Hong Kong Stock Exchange. Under the program, investors in each market are able to trade shares on the other market using their local brokers and clearing houses.
Mindset of the Chinese investor
Chinese investors are used to investing in primary assets such as real estate and cash. They need the education to consider secondary assets such as managed investment schemes, to transition from direct asset investment to portfolio investment. Risk-adjusted return vs systematic risk, global asset allocation, different benchmarks for each market, are not part of the Chinese investors mindset.
With Australia’s compulsory superannuation, government guidelines ensure there is not too much volatility and risk for members. Asset consults are very risk adverse, with stability at the cost of huge short-term growth. These capabilities will be of great benefit to the Chinese asset management industry and joint ventures with Australian asset consultants are expected.
Australia can contribute so much to the journey China is on. Need to reach out to people, with consumer awareness and education to build confidence and trust, Beyond wealthier, this will mean Chinese investors will feel empowered as systems start to mature.
Patrick D’Arcy, Reserve Bank of Australia Economist based in Beijing, said Australian skills in capital markets to be leveraged for reform in China’s markets. Australia has the ability market and creates products. Australian investors have a natural risk aversion and we are well known for our strong regulatory framework. Now is the dawn of the golden age. Australia has multimillion dollar market opening up to them.
What are the opportunities for Australia?
Tapping into the growing wealth in China
According to Mr Jiang Wei of Zong Ti Trust, there are currently 2 million HNW families, which are expected to reach 3.5 million by 2020. They are a local asset management company with assets under management of RMB 250 billion from individual investors, and some comprise and hold all kinds of financial licences.
He said clients, many of whom are entrepreneurs, have a strong interest in allocating wealth overseas, but they don’t know how to access. They don’t necessarily want real estate but don’t know another way. They fly in and open accounts by themselves.
Wealthy Chinese would like a professional one-stop turnkey wealth management, and Australian organisations to bundle together as one product to enable them to make choices across Australian funds, commodities, agriculture, rather than single asses like mining or real-estate. They are looking for professionals to play a guiding role in helping hem make the right decisions, with a more efficient process for investors in dealing with financial institutions as well as other services like private schools.
Setting up Joint Venture arrangements
AMP, which has had a presence in China since 1997, has recently taken a stake in China Life, the biggest insurance and pension fund in the world. The key to the deal was establishing as a joint venture. Henry Wang, AMP Capital Investors Advisory, Beijing noted the future for the funds management industry is very promising.
Chinese HNW would like to purchase overseas products and Australia is seen as a reliable market. The investment environment is different, so Chinese investors are cautious with investment decisions, and need to partner to avoid market risk.
Meanwhile, Australian investors have been negative toward Chinese products and enterprises, with a lack of confidence in risk control measures. Through collaboration, both sides can develop product structures to make investors comfortable.
How is your business positioning for the future?
The major drivers for economic growth in the word are right in our backyard, in the same time zone. The demand for financial services is expected to increase in the future. We need to approach the opportunity in coordinated and strategic way, with a balanced, two-way flow of financial services across the jurisdictions:
- Exporting our services – retirement structures, asset allocation and risk management strategies
- Exporting our people – more interchange of senior executives. Although as many returning expats have found, experience in this part of the world is not always valued back in Australia.
The ChAFTA Financial Services working group is looking at policy and regulatory issues, understanding credit, risk management, and more sophisticated operation for global real estate and infrastructure expertise. There are many One Belt One Road (OBOR) major projects we could participate in and add enormous value.
We need to position ourselves, get to know the people, culture and why they think what they think. If we don’t get on the front foot with our financial services capabilities, the weight of capital may overwhelm Australia’s financial sector.
However if we can embrace the different perspectives and build mutual respect and trust, we will get a better outcome and everything will fall into place between individuals, companies and our countries.
Financial services at the forefront of discussion with our Asian neighbours and is high on the Australian government’s agenda to help drive a mature financial sector. What is good for China is good for the world and good for Australia.
Exporting Australia’s financial services capabilities compiled by Stacey Martin, Expat Advisors Community, from insights as delegate, Financial Services stream, Australia Week in China, 2016.
You can view the 8-minute video with highlights of Australia Week in China across 10 cities and 8 business streams here.
Prime Minister Malcolm Turnbull delivered the keynote address at the AWIC gala lunch in Shanghai – you can read the transcript here.