The explosive growth of China’s high-net-worth individuals has created opportunities for western asset managers—and China’s growing domestic hedge fund industry
WRITTEN BY BRUCE MCGUIRE
China’s economic growth over the last 40 years has been astonishing. The rate may have slowed, but the country continues to mint high-net-worth individuals (HNWIs) at a break neck pace. The number of Chinese with at least RMB ¥10 million (about US $1.5 million) in investable assets increased from approximately 180,000 in 2006 to nearly 1.6 million in 2016, representing a more than eightfold expansion within a decade.
Among HNWIs, the ranks of the richest of the rich—those with at least RMB ¥100 million ($15 million) in investable assets—have grown at an even faster rate. There are now about 116,000 of these ultra-high-net-worth individuals (UHNWIs), compared with 7,000 in 2006.
All in, China’s pool of private wealth has ballooned to RMB ¥165 trillion (about $24 trillion), more than six times its level in 2006.1 China’s ever-expanding pool of private wealth—roughly 40% of which is held in cash and bank deposits—is about twice the size of the country’s GDP and represents one of the fastest- growing accumulations of wealth in modern history.
Collectively, China’s HNWIs have about RMB ¥49 trillion (about $7 trillion) in investable assets, and they have become more open about how, and with whom, they invest that money. Older wealthy individuals in China, who were the first generation to benefit from the government’s embrace of a market-based economy, were inclined to manage their own money, favoring real estate and “hot” growth stock. By contrast, newer HNWIs (who often include the sons and daughters of first-generation company founders) are more willing to seek professional advice.
The explosive growth of China’s HNWIs, combined with their increased willingness to use professional advisors creates tremendous opportunities for banks, wealth managers, and fund managers, including hedge funds. The more established and skilled western asset managers are taking notice and deploying to mainland China for the first time. They are taking advantage of programs such as the Qualified Domestic Limited Partnership program run out of Shanghai, that allows mainland Chinese to invest in foreign hedge funds. Foreign firms are also taking advantage of new rules that allow foreigners to set up wholly foreign owned enterprises in China—the so called WFOE (pronounced Woofee).
Even so, western firms as large as Fidelity and BlackRock struggle with brand awareness, and so the real near-term story is about the domestic Chinese fund industry. I first became aware that China was building a domestic funds management industry in early 2011, when I was contacted by representatives from Shanghai’s FengXian District, one of the 18 districts that make up the city, asking for help in organizing a junket for government and business officials visiting Greenwich, CT, the “hedge fund capital of the world.”
When the delegation arrived, we rolled out the red carpet and introduced them to members of the local hedge fund community, local academics and even dined with the Mayor of Greenwich.
Greenwich is the example that the Chinese want to emulate, proclaimed Mr. Zhang Xiaosong, a member of the Standing Committee and Vice Magistrate of the Shanghai FengXian Committee of the CPC People’s Government of FengXian District.
“Shanghai wants to be an international city and a center for hedge funds,” he told us. “We want to know how to create a good environment to attract the financial industry.” When our guests returned to China, they got to work building a hedge fund enclave of their own.
Two years later, while speaking at a conference in Greenwich, I descended the stage, to be greeted by a Chinese woman who asked, “are you Bruce McGuire, President of the Connecticut Hedge Fund Association?” When I said yes, she informed me that she was a Chinese expat living in Stamford, CT, and that she had been deputized by officials in Beijing to make contact and arrange a similar junket.
When asked if they were familiar with the Shanghai initiative, they replied yes, but that “Beijing Fund Town” would surpass anything being built in Shanghai. In China, as I have learned, they like to organize their business districts by industry type, and in the case of the asset management industry, they call these places “Fund Towns.”
Hedge funds didn’t exist in China six years ago, but with the blessing of the central and provincial governments, the Chinese hedge fund industry is growing rapidly — by my last count, there are no fewer than 15 different fund town initiatives in cities throughout China. The total number of Chinese hedge funds doubled since 2016, and assets under management have more than tripled over the past three years.
Since those first junkets, I have received many Chinese delegations from cities such as Hangzhou, Nanjing, Shenzhen and Shanghai, all attempting to create a fund industry enclave — the “Greenwich of China.” As CTHFA President in Greenwich, CT, “fund town #1”, I have become a mini-celebrity in Chinese fund industry circles. I have spoken at Chinese fund industry conferences, been profiled in China Daily Newspaper, and even made an appearance in China Central TV. In Hangzhou, a video of me touring the local fund town is on display, and a picture of me speaking to the local Chinese press graces the fund town’s web site. Hangzhou is an interesting case.
A city of 9 million, it is approximately one hour south of Shanghai by high speed rail. It is the capital city of Zhejiang Province, a very wealthy and business-friendly southern province that is home to a vibrant tech industry anchored by Chinese tech giant Alibaba. As a sign of its growing clout Hangzhou, was selected as the site of China’s first and only G20 Summit back in 2016.
With 9 million residents, Hangzhou is large by U.S. standards, but its planners have made livability a priority. The beautiful “West Lake” district is the pride of the city and a destination for vacationers from all over southern China. The gated Yuhuang Shannan community—on the same site where emperors in the Song dynasty prayed for good harvests centuries ago—takes city planning to the next level; it is quiet and green, exuding the feeling of a laid-back, high-end oasis.
Like Greenwich, Yuhuang Shannan, has become popular with the Chinese hedge fund crowd. So popular, in fact, that local authorities turned the entire village—until recently a hub for the design industry—into an exclusive enclave for China’s aspiring masters of the universe. More than 1,000 hedge funds and private equity funds, overseeing a combined RMB ¥580 billion (US $84 billion), have registered in the village since its official rebranding in May 2015 as, straightforwardly enough, Yuhuang Shannan Fund Town (YSFT). Unlike Greenwich, tax subsidies amounting to 30% of a typical firm’s tax bill add to the town’s appeal, and YSFT now boasts one of China’s largest hedge fund clusters.
Realizing that they are in competition with other Chinese fund towns, Hangzhou has been the most persistent in cultivating good ties with Greenwich, CT. So much so that in 2018, we worked to forge a sister-city relationship which gives them significant street cred back in China.
Not too long ago, the thought of a hedge fund village in Hangzhou, or anywhere else in China, would have struck most observers as absurd. Hedge funds weren’t officially sanctioned in until 2012. Before then, authorities tended to focus their development plans on the country’s vast middle and lower classes. Havens for elite money managers, haven’t traditionally been a priority for the ruling Communist Party.
Today however, the concept isn’t so outlandish. The Chinese hedge fund industry is booming, thanks to support from securities regulators and the gradual liberalization of local equity and bond markets.
For YSFT, and the 15 smaller fund towns scattered across the country, long-term success may ultimately depend on what kind of China emerges over the next few years. If President Xi Jinping’s government follows through on pledges to give markets and service industries a central role in the $11 trillion economy, the hedge fund boom may have a lot further to run.
If, however, policymakers backtrack or the country proves pessimists right by tipping into a financial crisis, the tranquility in China’s Greenwich-like communities is unlikely to last. It is also important to realize the big difference between the Chinese and western regulatory environments. As an example, in 2015 after China suffered dramatic declines in its stock markets, regulators passed a law making it a criminal offense to be an “unfriendly short seller”.
For economic planners keen to reduce the nation’s reliance on infrastructure spending and heavy manufacturing, there’s a lot to like about hedge funds. They’re non-polluting, creating high-skilled jobs, and adding more choice to a domestic investment landscape dominated by bubble-prone property and equity markets.
Investor inflows fueled a 55% jump in industry assets, while the number of registered funds has risen to a record 27,015, according to the Asset Management Association of China.
I believe that the bilateral relationship between the US and China, and the integration of Chinese markets into global capital markets represents the central issue of our times. Great fortunes will be made and lost, and I for one am thankful to have a ringside seat, and to be living in interesting times!
Bruce McGuire is Managing Partner of Global Alpha Research, LLC and Co-Founder of the Greenwich Economic Forum.