Although the Asian HNW community recovered quickly from the financial crisis, anecdotal evidence suggests that their tolerance for risk was altered. Private bankers in China are now getting regular phone callsfrom their clients asking for advice on asset allocation, liquidity, and risk management, in order to get a suitable risk-reward profile.
"My clients ask more about risk, not just return," since the financial crisis, said a private banker with HNW clients from mainland China. He asked that his identity be withheld to protect his clients' privacy.
"Two years ago, I couldn't sell a portfolio with a low risk profile and returns capped at 10%. Investors were looking for 20% to 30% returns." After the Chinese stock markets crashed in 2007-2008, investors realized that "stock prices can go down."
Knowledge and risk.
Private bankers provide valuable advice for PRC clients who would like to diversify their holdings away from the Chinese stock market, but they still have a hard time convincing mainland Chinese that there are better options available. "A lot of our clients are manufacturers. They just know equities," noted the banker. "Generally speaking, they have little experience investing in hedge funds or fixed income. "
And its this fear of the unknown rather than fear of volatility that may be the biggest trend. The Shenzhen and Shanghai exchanges have yet to regain lofty valuations seen in late 2007, and perhaps as a result, investors have piled back into the stock markets. Mainland Chinese HNW investors allocated an average of 42% of assets to equities in 2009, up from 29% in 2007. In absolute terms, that represents an absolute increase of roughly 45% to over US$4.0 trillion at the end of 2009 from US$2.8 trillion at the end of 2007.
But since the crisis, many have been more reluctant to invest in more sophisticated products. For example, the structured products that grew so quickly in popularity in the years before the crisis are dropping out of favor. The average mainland Chinese HNW investor reduced alternative investments to 5% of assets at the end of 2009 from 10% at the end of 2007.
Even traditionally popular asset classes such as real estate have taken a hit. The typical Chinese HNW investor had less than a third of his or her net worth in real estate, which represented 27% of the average HNW portfolio in 2009. That was in-line with 26% for the Asia-Pacific region. Given the run-up in prices, real estate is viewed as a potentia lrisk by many mainland investors.
By contrast, investors in Hong Kong also experienced a sharp recovery in the stock market in 2009. In contrast to mainland China, they rebalanced away from equities, reducing their average portfolio allocation to 23% in 2009 from 38% in 2007. Relative to their peers in China, Hong Kong investors tended to place a greater emphasis on fixed income and cash products. That is, in part atleast, because Hong Kong investors have access to a wider array of investment options.
"Chinese traditionally just buy stocks. Offshore banking provides access to a much greater number of products, such as fixed income, currency trading, and structured products," noted the same banker. "They look to their bank to educate and advise them on other asset classes."
Take Heart Offshore.
Although advisory and risk management services may have taken a center stage following the financia lcrisis, banks that are able to provide superior liquidity and international access have also seen a positive response from customers.
HSBC spokesperson Gareth Hewett notes that his firm is able to better compete with local banks because the bank has a wider reach through its global branch network. "In Asia, thereis an emerging, affluent population that tends to be white collar, aspirational, and cosmopolitan. They also tend to be frequent travelers. "Hewett noted that the company's customers value the ability to open and ink bank accounts in many countries. Customers with assets exceeding a minimum threshold may move funds between countries without paying wire transfer charges.
Although the Asian HNW community has begun to look beyond the region for banking services, Hong Kong and Singapore are still the primary offshore banking centers for mainland Chinese customers.
PRC investors tend to view Hong Kong and Singapore as largely interchangeable in terms of the sophistication and accessibility of banking services. However, privacy concerns may cause some clients to lean toward Singapore. "Because Hong Kong is after all still a part of China, Hong Kong could be arguably perceived as less private and confidential than Singapore,"says one banker.
In the wake of the financial crisis, mainland China HNW banking customers value good advice and easy access to liquidity. Offshore banks have rushed to meet increased demand for risk management.
