By Richard Sims
In November 2014, China's stock market became the second largest market in the world - surpassing Japan for the second time since 2011. Furthermore, China became the world's top-performing market in 2014.
In the months leading up to 2015, the Shanghai Composite (SHCOMP) was touting a 33% increase in 2014. Since overtaking Japan's market in November, China continued its rally to end the year up 54%.
The last time China became the second largest stock market in the world was in 2011 - when an earthquake hit Japan and sent the Nikkei tumbling 3.2%.
Some of the primary factors contributing to China's success are domestic, but others are a result of policies in Japan taking longer to impact the market than usual.
Although China is up 3x as much as Japan's TOPIX, much of the latter's losses come from the weaker yen. Japan's Abenomics policies have worked well for devaluing the currency, but progress in the equity market was sluggish for the first half of 2014. China began aggressive action in 2014, cutting interest rates; and officials in Beijing expect looser economic policies in the pipeline to further increase the momentum.
As China's growth has been slowing in recent months, lower interest rates have had a strong impact on asset purchases. Another boost to China was the re-opening of the market to IPOs in January. The additional market capitalization seemed to kick-start demand.
One of the lesser known changes in China's market economy was the creation of the Shanghai Hong-Kong Connect, intended to open up trade between Hong Kong and mainland China, and provide international investors access to over 500 additional companies.
After ending 2013 as the worst performing market, 2014 was a genuine mark of success for China's economy both in terms of capitalization and performance.
HNWIs React to Changes in China's Economy
HNWIs in China have responded well to the strong market. In October 2014, the BoC and Julius Baer released a report on wealth trends in Asia in the wake of this bullishness. According to the report, the main factors driving Asia's economic boom are:
- Increasingly integrated regional economies
- Internationalization of the RMB
The report also concludes that "HNWIs in China have a positive stance on risky assets" and prefer to use private banks for financial services. Just how these beliefs are playing out in HNWI spending is the subject of the rest of the report.
The research surveyed HNWI clients from the BoC and asked them how they viewed China's economic progress, their opinions of private banking and educating the next generation. BoC's client base is unique - comprising of mostly entrepreneurs; and they offer a specialized view on the macroeconomic aspects of China's economic conditions.
Those surveyed are confident that China will not experience a hard landing from their recent bullishness as they believe policies will persist and sustain the growth. BoC clients feel that China's monetary policy has created an opportunity for the RMB to attain reserve currency status in the near future according to the BoC's proprietary Cross-Border RMB Index (CRI).
HNWIs aren't really changing their investment preferences that much: still preferring structured products with capital protection. Despite their commitment to "sure things," the report suggests that foreign exchange-linked products and overseas equities are expected to gain popularity in 2015 which will only increase the visibility of the RMB in international economies.
Specifically, private banking clients will focus their investments on overseas financials (44%) and property (40%). Although 87% of these investors will keep money in BoC structured products, to many investors, the US and Canada are still the preferred investment destination at 61%, followed by Hong Kong at 34%. The remaining top four destinations for investments are Australia (21%), continental Europe (15%), the UK (11%) and Singapore (11%).
When choosing long-term investments, not much has changed. Real estate remains the most preferred at 53%. Gold (35%) beats equities (14%), but there is a lot of room for that to change if global markets continue to the upside.
A fascinating trend in HNWI lifestyles in China is reported through the China Lifestyle Index (created for this report). The Index surveys the costs of luxury goods and services relevant to HNWIs in China. Included items are:
- business registration fees
- dental implants
- first class domestic air travel
- golf club memberships
- hospital visits
- hotel suites
- luxury property
- wedding banquets
Luxury property has become increasingly affordable, but threatens GDP if the property market slows.
Education More Important Than Wealth?
HNWIs in China are also investing more on their children's education. In fact, tuition inflation is outpacing many of the items listed in the China Lifestyle Index. Education, in fact, is leading consumption in China.
HNWI parents in Asia are spending up to 16.6% of their monthly income on their children's educations - with the oldest child receiving the "lion's share." Parents and grandparents are viewing education as a long-term investment. 98% of parents in Beijing and Shanghai expect their children will get advanced degrees.
Where those degrees will be taken is a little less consistent. The majority of HNWI parents in Singapore prefer their children are educated at local universities. Meanwhile, 66% of HNWI parents in China want their children to be educated either in the UK or the US.
HNWI parents in Asia seem to share the expectation that their children will surpass their own income levels. Of those surveyed, the lowest expectations are in Hong Kong (59%) and Singapore (72%). The highest expectations for their children's income came from China (88%) and India (91%).
Passing on wealth is a growing concern in Asia as China is producing HNWIs faster than any other country in the world. However, 39% of parents in Mumbai believe bequeathing "skills" is the most important commodity to pass on.
The number of HNWIs in China stands at 1.4 million. Julius Baer reports that their aggregate wealth is estimated at $8.7 trillion. Stefan Hofer at Julius Baer Group Ltd believes that despite China's slowing economic growth rate, the size of China's economy and an increasingly stable RMB will lead to an increase in the number of HNWIs in China.
Looking Forward
While China scrambles to implement policies that will support the recent strength in their market, reforms are already in place to propel growth. China runs the risk - as does any economy, of falling hard from such bullishness; but they are on track to maintain the growth with the support of economic policy, new HNWIs and a generation of parents making education their top investment.
