China HNWIs slow offshore investing amid uncertainty

Chinese high-net-worth (HNW) individuals and life insurers have temporarily become less active overseas amid market volatility, but they are likely to reverse this position and local investment advisers need to raise their game to benefit, AsianInvestor’s 4th China Global Investment Forum in Beijing heard on September 21.

Geopolitical risks such as the war of words between the US and North Korea and the mild performance of US dollar this year have led HNW clients to become less active and confident of investing overseas of late, Zuo Dan, head of offshore markets in private banking at China Minsheng Bank spoke at a panel of the forum.

That has led them to adjust their portfolios based on their individual risk appetites. They are also becoming more discerning about the advice they are receiving, he added. “Clients now have higher requirements on the professionalism of asset allocation suggestions made by wealth managers.”

While the demand for offshore investing has temporarily diminished, it looks to remain a long-term area of growth for Chinese HNWIs, because they have gradually developed international life styles. This includes holding overseas real estate assets or providing overseas education to their children, noted Hou Lin, general manager of wealth management products at CreditEase Wealth Management at the same panel.

“We educated clients about the consistency of global asset allocation, and not to make too many changes just because of FX (foreign currency exchange) changes,” Hou said. “Because you cannot time the market, [investors need] to have a diversified portfolio across different assets and geographies,” she said.

Offshore investing

Other wealth managers at the panel agreed that HNW individuals have struggled to invest more offshore after the authorities ratcheted up their requirements for overseas investing. This has included it denying additional quotas for qualified domestic institutional investor programmes and limiting the amount of renminbi investors can transmit overseas to make payments via UnionPay.

However, the panellists noted that there are various legitimate ways to provide offshore exposure to their clients. Zuo said many clients already have large sums of money overseas, and are interested in overseas insurance and real estate assets.

He added that his bank provides a type of structured product that is sold to onshore clients in renminbi, but linked to an overseas underlying instrument such Hong Kong’s benchmark Hang Seng Stock Index or a mutual fund via an offshore financial institution.

“Such products can help satisfy clients’ need for a specific offshore asset,” he said.

Bruce Kang, managing director at Ping An Trust said at the same panel that his firm started adding renowned overseas hedge funds and private equity funds to its platform via the Qualified Domestic Limited Partnership scheme in 2013.

There are two main ways to solve the problem of foreign investment quota freezing, Kang said. One is to utilise existing QDII mutual funds, which have several hundred million or even billions of renminbi-worth of transactions in the secondary market every day. Secondly, a wealth manager can potentially relieve clients desire to invest overseas by offering them highly diversified onshore asset allocations, he argued.

China’s currently resrictive approach to offshore investing is also likely to loosen in the future, once the country is less concerned about the weakening impact such outflows would have on the renminbi’s value. That is likely to lead to a more open foreign exchange policy, which will lead clients to increase the amoutn of overseas assets in their portfolios to support their international life styles, CreditEase’s Hou said.

“How to make better overseas investment and provide global life solutions for clients will be a long-lasting process,” she added.

Indeed, even institutional investors such as insurance companies are “active” about improving their overseas investment capabilities for the sake of diversification, said Luo Yihong, director of registration center at Insurance Asset Management Association of China, at the same panel.

That said, Luo cautioned that Chinese insurers are “cautious” on foreign investment. The country’s life insurance companies have less than 3% of their allocations in offshore assets on average, well under the maximum 15% they are permitted. About 50% to 60% of the offshore assets they possess are in in the form of deposits, stocks or bonds in Hong Kong, Luo said.

This is also likeliy to change, with Chinese insurance companies set to continue  investing into overseas assets, whether they have “active” and “cautious” investment stances. However, to do so they will need to improve their asset allocation capabilities, he cautioned.

“On this front, we hope to cooperate with leading and professional global asset managers and even intermediaries to ensure the safe investing by Chinese insurers in offshore markets,” he said.