Driven by the desire to explore business opportunities overseas, China’s securities firms are transforming themselves into wealth management powerhouses, marking a new chapter in the industry's evolution.
The securities firms in China are under the pressure to reform. The revenue coming from the brokerage part of their businesses dropped from the normal 30-40% to 28% in 2023, according to the Securities Association of China (SAC). Securities firms are shifting to focus on asset and wealth management business.
The bulk of the wealth management business of securities firms is largely based on product distribution. Securities firms in China leverage their licences, advanced platforms, and broad network to act as intermediaries and make money.
Therefore, distribution is a crucial area of focus in the early stages of securities firms’ wealth management transformation. According to the latest data from the SAC, securities firms generated a net income of 14.21 billion yuan (US$1.98 billion) from distributing financial products last year. This accounted for a significant 12.6% of the net income of the brokerage business.
By the end of 2023, assets under management (AUM) in terms of products distributed by securities firms reached 2.89 trillion yuan, up by 5.27% compared with the previous year. According to the SAC, both their AUM and market share in distributing mutual funds increased significantly.
But these are not enough. Leading securities firms have also been actively enhancing their product design and asset allocation capabilities. The asset management business of securities houses has picked up in 2023, given a comparatively better-performing market. New asset management guidelines, as well as recent reforms in the mutual fund industry's fee structures, have increased the need for securities firms to boost their asset management and wealth management businesses.
In April 2023, regulators rolled out the so-called New Nine Rules, which underscored the need to promote the high-quality development of securities firms and enhance their wealth management capabilities.
A key element of this transformation is the expansion into overseas markets. In 2023, major players such as China International Capital Corporation (CICC), Huatai Securities, and CITIC Securities ramped up their international business operations, and reported revenue growth ranging from 10% to 30%. This growth was attributed to a strategic shift to a client-driven business as firms focused on asset management and investment type of businesses and worked towards integrating their onshore and offshore operations.
Hong Kong and Singapore
Hong Kong, due to its cultural and geographical proximity, as well as mature capital markets, has long been a strategic hub for Chinese securities firms' international expansion. In 2023, the Chinese special administrative region saw its wealth management market grow 2.1% from the previous year to HK$31 trillion (US$3.98 trillion), with approximately two-thirds of the assets coming from investors outside of Hong Kong.
So far, 14 Chinese securities firms are listed on both the A-share and H-share markets, and over 30 have established subsidiaries in Hong Kong.
However, a number of Chinese securities firms have retreated from the market. Haitong International, for example, delisted from the Hong Kong Stock Exchange, while others, such as Southwest Securities, have sold significant stakes in their Hong Kong subsidiaries.
Many Chinese securities firms have also been reducing their headcounts over the years due to poor market performance. While market conditions remain stressful, they also find it hard to attract relevant talent.
That being the case, many Chinese securities firms are expanding to other overseas markets, such as Southeast Asia, where they are setting up overseas offices and subsidiaries.
The region is becoming an increasingly important destination for Chinese companies' overseas investments, particularly in sectors like electric vehicles and battery technology. This trend has generated substantial demand for cross-border financing, mergers and acquisitions, asset management, and wealth management.
Singapore, in particular, has become a focus area for expansion of the wealth management business. Several Chinese securities firms have already established wealth management platforms in the city-state, while others are actively working to enter the market.
Meanwhile, Singapore has made significant strides in attracting private wealth and high-net-worth (HNW) clients. Chinese securities firms have seen the opportunities and quickly built up services targeting these high-end customers.
Quality of service
Leveraging their financial product research capabilities, the securities firms provide specialized asset allocation services, a critical component of their wealth management offerings.
In interviews with HNW clients, The Asset finds that while they previously preferred to be served by private banks, many – especially those of Chinese background – are beginning to recognize the unique investment perspectives and strong trading expertise that Chinese securities firms can offer.
The quality of service that these securities firms provide has improved in recent years. Compared to private banks, they have been able to foster closer and more personalized relationships with their clients.
Based on interviews with Chinese securities firms, the evolution of their wealth management business can be divided into three distinct phases. The first phase is characterized by aggressive distribution capabilities and sales strategies, and the second phase focuses on enhancing customer service and engagement.
The third phase, where most major Chinese securities firm are in, focuses on product innovation and differentiation.
In this 3.0 era of wealth management, the greatest challenge lies in improving asset allocation capabilities. Securities firms are increasingly focused on enhancing their ability to navigate complex market environments and provide clients with strategies that go beyond simply distributing high-return products provided by other asset managers.
Product distribution might still work when market conditions are favourable. But given the current market volatility, the emphasis is now on enhancing in-house product R&D capabilities, and ensuring clients' assets are preserved.
Chinese securities firms that demonstrate these capabilities are well-positioned to take advantage of the opportunities in overseas markets and reap the rewards of their wealth management transformation.
