Last year China’s middle class overtook the US to become the largest in the world, with 109 million middle class adults compared with 92 million in the US, according to Credit Suisse’s annual report on the distribution of global wealth (1).
The World Economic Forum has projected that by 2020, the number of China’s upper-middle-class and affluent households will double to 100 million and account for 30% of all urban households (2). This represents a rapidly growing market for investment and retirement savings products.
China has promoted the renminbi (RMB) as an investment currency outside of China through various programs that allow foreign investors to access the Mainland Chinese market. Australia was allocated an RMB Qualified Foreign Institutional Investor quota of RMB50 billion in 2014. This allows our institutions to invest directly in Mainland China securities.
Satisfying China’s growing affluent population
There’s potentially a much larger opportunity for Australian fund managers – creation of wealth management products for China’s growing middle class.
Austrade has noted that Chinese investors currently have a limited range of options, including below-inflation bank accounts or real estate, and that the number of people in China aged over 60 is forecast to grow from 180 million today to 487 million by 2050 (3).
The Federal Budget contained a new initiative that could materially lift the export earnings from Australia’s $2.65 trillion funds management industry. Historically this has been hampered by the prevalence of managed investment schemes (trusts) which aren’t familiar or easily understood beyond our shores.
CIVs – international best practice
Recognising this, the budget allocated $9.8 million to implement a tax and regulatory framework for two new types of collective investment vehicles (CIV) (4).
A corporate CIV will be introduced from 1 July 2017, primarily aimed at retail investors. A limited partnership CIV, particularly suited for wholesale investors like pension funds, will follow a year later.
CIVs are well understood by overseas investors and bring Australia in line with international best practice. They are essential for the funds management industry to make the most of the China Australia Free Trade Agreement which delivers China’s best-ever services commitments, giving Australian service providers a significant leg-up in the largest sector of China’s economy (5).
Australia’s superannuation industry has developed into a world-class retirement savings model. This is relevant in China where the lack of assets, growing affluent population and low returns are resulting in large pools of capital for investment. On average China’s middle income consumers save around 30% of their salary. Developing RMB-denominated investment products using CIVs is a great opportunity to access this huge market.
To discuss how we can help you conduct business in China using the RMB contact our RMB and China Solutions Team on RMBSolutions@cba.com.au