Money

Where are China’s ultra-rich parking their wealth amid a slowing economy?

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1 day ago

September 18, 2024

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Where are China's ultra-rich parking their wealth amid a slowing economy?

Asian businessman drinking in a luxury car.

Weiquan Lin | Moment | Getty Images

China’s ultra-wealthy population — people with a net worth of at least $30 million — is expected to increase by almost 50% in a few years, according to projections in a recent Knight Frank wealth report.

At a time when China’s economy is facing headwinds, and growth has been slowing, where are the Chinese ultra-rich, whose numbers are expected to swell to 144,897 by 2028 from 98,551 in 2023, parking their wealth?

The current investment direction of the wealthy Chinese is a “conservative” one, with their funds flowing into international assets against the backdrop of a stalling Chinese economy dragged by a beleaguered property sector, wealth managers told CNBC.

However, the country’s high-end property market remains a favored asset.

Luxury real estate

“There has been a noticeable increase in transactions within Shanghai’s luxury real estate sector,” said James Macdonald, head of China research at global real estate firm Savills, attributing it to a recent policy easing by the government.

China has relaxed several restrictions on property purchases, which has led to an increase in new high-end property launches in downtown locations, addressing pent-up demand, he added.

In May, the government reduced the number of years people were required to pay tax in Shanghai before they could purchase property to three from five. Down payment ratios for first-time buyers have also been cut to 20% from 30%.

In the current landscape, luxury homes in Shanghai represent valuable assets for preserving wealth and liquidity, particularly for ultra-high-net-worth individuals.

Stephen Pau
CIO at Hefeng Family Office
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Luxury residences, especially in Shanghai, have been a good investment for local high-net-worth individuals and rich families in recent years due to their scarcity, said Sam Xie, CBRE’s head of research in China.

According to data provided by Xie, the transaction volume for newly built residences priced at a minimum $2.75 million per unit grew 38% year on year in the first quarter of 2024. Xie noted that 40% of these buyers were Shanghai’s local residents.

Luxury projects such as the Arbour in Shanghai’s affluent shopping district Xin Tian Di, Greentown’s The Bund Garden and the Shanghai Arch in financial district Lujiazui, sold out immediately on launch, said Knight Frank Head of Asia-Pacific Research Christine Li. That said, China’s luxury real estate market is still primarily concentrated in the core areas of first-tier cities, said Li.

“In the current landscape, luxury homes in Shanghai represent valuable assets for preserving wealth and liquidity, particularly for ultra-high-net-worth individuals,” said Stephen Pau, chief investment officer at Hefeng Family Office.

Other local investment classes, such as the wider property market and China-listed stocks are not as popular among the ultra rich, experts told CNBC.

Overseas assets

“Chinese clients were traditionally overweight real estate and home-market equities,” said Nick Xiao, CEO of Hong Kong-based multi-family office Hywin International.

But these wealthy Chinese investors have come to embrace a growing and more diverse range of asset classes, including currencies, private credit, private equity, U.S. treasuries and developed market equities, Xiao told CNBC.

“To many Chinese clients, U.S. and Japanese equities offer participation in high-growth sectors and secular trends that won’t reverse in the near term,” he said. U.S. treasuries help them lock in historically high yields, and global private equity provides a layer of diversification on top of public market exposure, Xiao added.

Night view of the Lujiazui financial district in downtown Shanghai.

Yongyuan Dai | E+ | Getty Images

Similarly, Pau noted that the flow of money into international assets by wealthy Chinese is reflected in increasing allocations via Qualified Domestic Institutional Investors and Qualified Domestic Limited Partnership. QDII is a scheme that allows financial institutions to invest in securities outside of China. QDLP is a program that allows the local yuan to be converted to foreign currencies for overseas investments.

“This is consistent with the overall trend of investor defensiveness,” said Pau, adding that wealthy Chinese are conservative due to the uncertainties in the domestic economy as well as the wider geopolitical environment.

Pau noted the rich Chinese are shifting toward capital preservation and higher yielding, low-risk products such as U.S. treasuries, especially after having experienced losses in real estate and domestic equities.

Some Chinese clients are struggling to select from the myriad of hedge fund strategies in the international space, due to lack of skills.

Nick Xiao
CEO of Hywin International

“This contrasts with the more diversified investment approach of wealthy individuals in other parts of the world, who are often willing to allocate funds to mutual funds and multi-asset portfolios,” he said.

Compared to their global peers, rich Chinese investors have their wealth scattered across too many banks and brokers, without a consolidated overview to measure performance, Xiao highlighted.

“Some Chinese clients are struggling to select from the myriad of hedge fund strategies in the international space, due to lack of skills,” he said. Others have yet to manage risks with a more comprehensive overview — incorporating macro, geopolitical and sectoral aspects into their investment decisions.

This divergence in investment behavior highlights the distinct mindsets and risk appetites of mainland Chinese investors versus their international counterparts, Pau said.

“The former group [is] more inclined towards capital preservation and stable income generation, while the latter tend to embrace a more balanced, diversified approach to wealth management.”

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