The Chinese High Net Worth (HNW) market is growing rapidly and is fiercely competitive. As the population ages, generational wealth is expected to grow at a similar pace.
Equities, property, and alternative investments dominate the Chinese HNW asset portfolio. The average Chinese HNW investor offshores a significant portion of wealth.
As investors seek assistance in choppy markets, the growth of wealth management globally is projected to outpace that of asset management by two percent annually through 2030. While asset management is primarily used to leverage an individual’s investments to maximize returns and build wealth, wealth management goes beyond asset management and assesses an individual’s entire financial situation to create long-term protections and ensure the longevity of wealth. The Chinese market, whether on-shore or off-shore in major regional booking centers in Hong Kong and Singapore, arguably presents the most significant growth opportunity for global wealth managers in the foreseeable future.
But how do wealth managers balance increasingly rigorous Know Your Customer (KYC) demands with the reality that Chinese HNW prospects may simply take their net-new money elsewhere if they feel let down by a protracted onboarding process? Let’s closely examine the Chinese HNW market, the risks for financial institutions, and how those risks can be avoided through effective due diligence.
The Chinese HNW Landscape
Iain Johnston, who leads IntegrityRisk’s Investigation and Due Diligence practice across the Asia Pacific, Andy Van Vleck, IntegrityRisk’s Vice President for West Coast Region Business Development, and Duncan Nott, who leads our EMEA operations in London, share their thoughts on the Chinese HNW market.
Considerable wealth continues to be created in China
Our experts have pointed out Ju-Hon Kwek’s assessment as a partner at McKinsey & Company, saying, “The Chinese market is probably the only trillion-dollar-plus market where there is the prospect of double-digit organic growth. It is likely that China will account for about a third of organic growth globally over the next three years.” Economists project that annual foreign direct investment alone in China will remain in the $200-250 billion range through 2026, noting that this annual figure is not cumulative and is expected to be the primary driver of wealth creation in China.
Despite the widely reported crackdown by Beijing on industries such as Education and Technology, new wealth continues to be created in China. The Economist quotes Bloomberg figures revealing a record $58bn in initial public offerings in mainland China so far in 2022, while another 1,000 firms wait in the wings; according to Bloomberg, public offerings have contributed to China’s ten richest individuals accumulating a net $167bn in wealth since the start of 2020.
While the US remains the richest country in terms of household wealth, the biggest increases will come from China and India, where people are accumulating wealth at unprecedented rates. By 2025, China’s household wealth will equal the US’s for 2017, says Credit Suisse.
Concentrated wealth in real estate and banks
Fewer investment opportunities are available to mainland Chinese investors, and, as a result, wealth in China is concentrated in real estate and bank deposits. Goldman Sachs, for example, estimated that 60 percent of all household assets in China in 2020 was allocated to property, with a further 24 percent in cash and deposits, which have only increased since then, despite the recent crackdown on property developers in China.
Regulatory relaxation for foreign ownership
Chinese regulators recently opened the financial sector even further to foreign financial institutions. Accordingly, this extension allows foreign financial institutions to own 100 percent of local operations while prioritizing developing China’s wealth management industry.
Consider examples from high-profile financial institutions.
- Goldman Sachs Asset Management: As reported by the Financial Times in October 2021, Goldman Sachs has funded an ambitious growth strategy in China, including doubling its workforce to 600 and expanding its wealth and asset management businesses.
- HSBC: As of August 2021, HSBC planned to invest $3.5 billion to grow its Asia wealth operations over the following five years, including hiring 5,000 wealth managers, with China accounting for more than half of hires.
- UBS: The world’s largest private wealth manager had approximately 850 Asia-focused high-net-worth managers as of July 2022.
- Citi: The banking giant has begun enacting plans to raise $150 billion of new assets from wealthy clients and hire 2,300 wealth managers in Asia by 2025, many of them in China.
HNW KYC — So, What Are the Challenges?
According to Johnston and Nott, foreign banks deemed to have facilitated (or been negligent in catching) illegal activity carried out by a private banking client under Chinese laws will face punishment. This includes bribery, money laundering, and exceeding expatriation quotas. Amid an ever-changing regulatory and geopolitical landscape, ensuring that legal and regulatory standards are met is challenging, to say the least — even more so when the clock is ticking to onboard the HNW client.
For typical private banking clients, it generally takes 6-8 months to confirm a prospective client’s source of wealth, and even high-priority clients — with $10-$15 million to deposit and hundreds of millions in assets — need to wait 3-4 months.
Fearful of losing clients, many major financial institutions are resorting to relaxing their source of wealth corroboration threshold to half of the wealth for “low-risk” new customers, with a goal to verify the remaining half within 12 months. Low-risk customers are mostly those identified as being in better-regulated jurisdictions, such as Singapore and Hong Kong. These decisions, however, have reportedly led to concerns within certain institutions that some sources of wealth will not be properly vetted, and investors will be put at major risk.
To partially address the time it takes to conduct onboarding diligence, many financial institutions are re-engineering processes to identify and remove internal choke points and duplications. They are also investing heavily in technology, particularly artificial intelligence, to automate the manual processes previously done by employees. But when it comes to complex source of wealth enquiries in challenging jurisdictions like China, automation and machine learning can only go so far.
Bring in the Experts in HNW Due Diligence
To bridge the gap and shorten onboarding times, financial institutions should increasingly turn to external experts to assist in more expeditiously obtaining the necessary confidence in source of wealth for the HNW candidate. This option, when necessary, can allow the financial institution to beat the competition and more safely and quickly onboard the HNW candidate – and thereby justify the additional effort and steps taken to win the new business. What is needed in these situations is a combination of unique database research, best in class access to public information coupled with in-country presence built upon years of networking in China, and the ability to quickly and efficiently tap these networks to resolve issues relating to source of wealth.
We understand that no matter the scope of work, the fundamental focus should be on identifying subjects and their overall assets, including inheritances, properties, shareholdings, salary proceeds, bonuses, investments, dividends, and stock transactions, among others. Our reports can also incorporate scrutiny of a subject’s professional history, to include research specifically into past and current business affiliations and partners.
Global due diligence firms like IntegrityRisk have decades of experience operating in these challenging environments, cultivating localized information sources to penetrate the opacity and often ring-fence risk to meet these competing demands. Thorough due diligence within the Chinese HNW market covers all the bases, including investigating Politically Exposed Persons (PEPs), sources of wealth, and any links to sanctioned entities.
When it comes to complex source of wealth enquires in challenging jurisdictions like China, investment in automation and machine learning can only go so far. Specialized tools that can provide an exhaustive view of a subject’s source of wealth background are becoming more and more valuable. IntegrityRisk’s WealthCheck is well-equipped to handle the verification and/or identification of pertinent background details surrounding HNW individuals in China to help identify source of wealth red flags.
To learn more about the Chinese HNW market from experts like Iain Johnston, Andy Van Vleck, and Duncan Nott, or to learn more about how WealthCheck can benefit your organization, contact the team at IntegrityRisk today.
Iain Johnston, APAC Region Head
Iain is an experienced investigator who brings thirty years of law enforcement and corporate sector experience in financial crime, anti-bribery and corruption, and fraud risk management matters within the Asia-Pacific region. Prior to joining IntegrityRisk, Iain served for nine years as the Regional Director of Financial Crimes at Prudential Corporation Asia, specializing in fraud investigations, fraud prevention, anti-bribery and corruption, and business resiliency, and was the Asia lead for the whistleblowing program.
Iain was the APAC Head of Global Security and Investigations at JPMorgan Chase from 2003 to 2011. From 1990 to 2003, he served with the Royal Hong Kong Police, where he specialized in the investigation and interdiction of international fraud syndicates, conducting investigations throughout the US, Europe, and Asia-Pacific. Reach out to Iain at ijohnston@integrityriskintl.com.
Duncan Nott, EMEA Region Head
Duncan has been helping multinational organizations manage risk for three decades. He came to IntegrityRisk from UBS AG, where he served as Global Head of Security. During his 14-year tenure with the Swiss bank, Duncan managed multiple high-profile Enhanced Due Diligence (EDD) projects across the capital markets, private wealth, and supply chain arenas, as well as led numerous complex and sensitive corporate investigations and major operational risk events.
Duncan previously served as the Head of Global Security at the World Bank Group in Washington, DC. During his seven-year tenure, he developed and managed the international executive employment screening program and represented the Institution at the United Nations High Level Committee on Management focusing on operational risk and crisis management challenges in post conflict and developing economies in Eastern Europe, Africa, and the Middle East. Following his transition from government service, Duncan began his corporate career with British Telecom PLC, managing an international risk portfolio across the Middle East, Africa, and Asia-Pacific regions. Reach out to Duncan at dnott@integrityriskintl.com.
Andy Van Vleck, CFA, Vice President, Business Development, US West Coast
Andy joined IntegrityRisk following his return to the US after five years of public service posted to Berlin and Istanbul with the State Department.
He brought to the diplomatic mission more than two decades of experience in the private sector, focused on cross-border business and investment from the US, Europe, and the Middle East into Asia. As an analyst for leading European and American financial institutions, he advised the world’s largest institutional investors, guiding debt and equity financing to companies in myriad industries throughout Asia-Pacific. His experience in the region includes publishing research on public companies operating in the PRC as a China-focused investment analyst, advising the family office of an ultra-high-net-worth Hong Kong resident, and contributing primary research to a book on Foreign Direct Investment in China.
Andy also helped launch, manage, and raise funds globally for a multi-billion-dollar investment manager, backed with seed capital from the California Public Employees Retirement System (CalPERS). He is also a Chartered Financial Analyst (CFA). Reach out to Andy at avanvleck@integrityriskintl.com.