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Luxury Spending in China – Are the wealthy disappearing? Wealth Management Research – KapronAsia

Earlier this week, Burberry announced lower than expected earnings which largely disappointed and somewhat scared markets. Their slowdown is global, but a key challenge was declining luxury spend from Chinese consumers – which is seen by many as a bellwether for the rest of a general industry slowdown. We’ve talked about luxury spending in China in the past, but it’s worth considering the implications of a potential slowdown in the luxury industry and the implications if the slowdown is indeed an indicator of a shift in the habits of China’s wealthy.

The origins of money

If you look at the development of China’s wealthy, it really started in the late 70s with the opening up of China’s economy and then picked up speed again in the 1990s through today as China’s inclusion in the WTO gradually brought the country to become known as the ‘factory of the world’. Although cost and quality questions have arisen again recently, the ability of chinese factories to produce low-cost and medium to high quality products drove incredible revenues and profits for small and medium enterprises and, at the same time, made their owners tremendously wealthy. Due to a somewhat challenged national transport network, many of these factories were by necessity concentrated on or near the east coast of the country in order to decrease the complexity of actually exporting the goods; mainly near the port city of Shenzhen or further up the eastern seaboard near Shanghai or Beijing.

But factory owners weren’t the only ones to benefit. As China’s insatiable appetite for natural resources has increased, companies and individuals have benefited greatly as commodity prices have increased rapidly. Mine owners and processors as well anything energy related has driven another level of wealth that is not just located near the coast, but often much further in-land either to the west in Xinjiang or to the North in Inner Mongolia. Finally, although a civil service job in the west typically means ok pay, but high stability, government officials in China do quite well so many of officials and families of officials are known to be quite well off.

Show me what you got

I don’t want to make any suggestion as to whether it’s right or wrong or the meaning behind it, but the wealthy Chinese, in general, like to show off their wealth. Carrying the right bag, driving the right car or telling time with the right watch is important in both a personal and or a business context. At large dinners, people (typically the men) will fight over who pays for the bill as not paying can often mean a ‘loss of face’ (similar to respect) in the eyes of others.

This need for showing off wealth has driven the growth of the luxury industry in China. What it has also done is created another layer of what you might call ‘wealthy aspirants’, who while not necessarily wealthy themselves, are keen to give the appearance of being wealthy or at least hip to the latest trends. For the extremely wealthy, the sign that you’ve made it is the BMW 7-series or Bentley that you pulled up in, for the rest, it’s an iphone. An iphone is a sign that you’ve made it

The iphone is a great insight into wealth or lack thereof in China: although there are iphone knock-offs out there, most of what you see when you walk around the big cities are real iphones whether bought directly from Apple, a mobile network operator, or off the grey market (HK imports). When you consider that a new iphone in China from Apple costs about US$800, even if you look at the GDP per capita in Shanghai, one of the wealthier parts of China, which is about US$13,000, that still represents about 7% of the average yearly salary for a phone. So some people are spending up to, and in many cases over, a month’s salary to have the latest and greatest from Apple.

Built into relationships

We’ll get into the implications for wealth management shortly, but one last illustration of how important wealth is in China, and again, this is changing slowly, but typically before a Chinese woman will accept a marriage proposal from a man, the man needs to have an apartment for the couple to move into. With housing prices in the major Chinese cities reaching that of London or NY, but with salaries hovering at about 15% or less of London/NYC salaries, this can be a daunting prospect. A son will often need to rely on his parents and potentially even grandparents to be able to afford a place.

So what now

So with that context in mind, what will happen with China’s wealthy? Well, there is a certain segment of wealthy customers that are unaffected by economic downturn. These are simply the ones that have accumulated enough wealth to maintain their lifestyle at the same level regardless of the economic conditions. The wealthy aspirants that we mentioned above however will likely be more negatively affected as they have less disposable income or built-up wealth, so what could we reasonably expect see if that demand for ultra luxury products (think a Hubolt watch or a Bentley) will be unaffected, but the demand for lower luxury products such as handbags and phones will likely drop – already we’re seeing increased indications of the slowdown in hiring, which would put a squeeze on the middle-class market segments.

Implications for the wealth management industry

read full article at KapronAsia WealthManagement

Source: KapronAsia, 12.09.2012

Filed under: Asia, China, Wealth Management, , , , ,

China QFII quota increase April 2012

International asset managers are preparing to apply for the expanded quotas for China’s qualified foreign institutional investor (QFII) scheme and its renminbi-denominated equivalent (RQFII), but the opening will benefit only some.

Last week the China Securities Regulatory Commission (CSRC) said it would increase the total quota for the QFII scheme to $80 billion from $30 billion. At the same time, it released a second batch of RQFII quotas of Rmb50 billion ($7.92 billion), which will be used for A-share exchange-traded funds (ETFs) listed in Hong Kong.

“Even though the additional $50 billion QFII quota and Rmb50 billion under RQFII are not significant amounts for the A-share market, they still have a positive impact,” says Shenzhen-based Da Cheng Fund Management.

Unlike the first batch of RQFII quotas (Rmb20 billion released last December), which were shared by 21 Hong Kong subsidiaries of Chinese fund managers and securities firms, the second batch will only be granted to a few experienced managers.

“We have been preparing for this product for many months and we are confident we will be one of the managers to get the RQFII ETF quota,” says Michelle Chua, regional head of business development at Harvest Global Investors, the international arm of Beijing-based Harvest Fund Management.

The existing A-share ETFs offered in Hong Kong are mostly synthetic (swaps-based) products, but RQFII will broaden the range of physically backed products.

The new ETFs will directly invest in A-shares, explains Chua, so that “there will be no counterparty risk, no p-note [participation note] cost and no foreign exchange difference, as the ETF currency denomination [in renminbi] is the same as [that of] the underlying investments”.

Harvest FMC and Huatai Pinebridge were the two managers that jointly launched the CSI 300 ETF, the first cross-market ETF tracking stocks listed on both the Shanghai and Shenzhen exchanges.

The CSRC will take the RQFII pilot scheme to the next level by expanding its scale, allowing more types of financial institutions to participate and more flexibility in terms of asset allocation.

For the QFII scheme, the previous ceiling was lifted from $10 billion to $30 billion in 2007 after the China-US Strategic Economic Dialogue took place. The increase of $50 billion this time is hailed by local media as “unprecedented”.

Since the QFII scheme commenced in 2003, the CSRC has granted licences to 158 foreign financial institutions from 23 countries and regions. They include 82 asset managers, 11 insurance firms, 23 commercial banks, 13 securities companies and 29 other institutions, such as sovereign wealth funds, pension funds and endowment funds.

The CSRC says 129 out of the 158 qualifiers have obtained a total of $24.5 billion in QFII quotas. As of March 23, 74.5% of the assets in the QFII accounts were invested in the domestic stock market, 13.7% in bonds and 9.6 % in bank deposits. The total holding of QFIIs counts for 1.09% of the market capitalisation of domestic A-shares.

Z-Ben Advisors views the latest changes as “unambiguous signals of China’s intent to attract more offshore investors and a sign that market investments will play a key role in the government’s plan to internationalise the Rmb”.

The Shanghai-based consultancy suggests that, in the short term, asset managers in the QFII application queue should expect accelerated approvals.

Regulators have already upped the pace of approvals since the end of last year. In March, the State Administration of Foreign Exchange granted a record $2.11 billion of quotas to 15 companies, compared with a total quota of $1.87 billion handed out during 2011.

“The QFII programme enhances our experience of monitoring cross-border securities investment and capital flows,” the CSRC says. “The QFIIs, mainly overseas long-term value investors, have diversified the domestic investor structure, upgraded the quality of listed companies and promoted the international recognition of domestic capital markets.”

Source: Asian Investor, 10.04.2012

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