Wealth management in China is becoming increasingly regulated

The Chinese government continues efforts to control and standardize the country’s large banking wealth management sector, with the goal of reducing financial risks for investors and keeping their money in China. The banking regulator has given small banks a deadline of 2026 to stop selling wealth management products unless they create a separate wealth subsidiary to handle those transactions.

The 2018 regulation required banks to establish a wealth management subsidiary, but regulators did not provide a timeline for achieving compliance. By standardizing Chinese banks’ wealth management activities, regulators hope to attract more domestic investment.

The wealth management market in China is significant and growing. According to a 2023 PwC study, there are 2.62 million individuals living in China with assets worth over 10 million remnibi, or about 1.5 million US dollars. China’s gross domestic savings as a percentage of GDP are 45%, compared with 26% in the EU and 18% in the US. The Chinese government aims to ensure that these savings remain in the country.

However, there is one caveat: many wealthy people are leaving China. According to the Henley Private Wealth Migration Report, an outflow of 128,000 millionaires is expected from China in 2024. The report identified concerns over the economic trajectory and geopolitical tensions as the main drivers of this exodus.

Stabilization of investment opportunities

Keeping wealth management funds in the country is a key goal of the Chinese government, especially now that the real estate market has become riskier for investors. “Many developers lost profitability but avoided bankruptcy, thanks in part to rules that allow lenders to delay the recognition of bad loans, which helped cushion the spillover effects on property prices and bank balance sheets,” the IMF noted in its February 2024 report. China’s real estate sector: managing the medium-term economic slowdown.

Wealth management decisions can be viewed in the context of mitigating the risks associated with domestic investments.

“China’s move toward greater separation of banks and wealth management makes sense in terms of mitigating systemic risk,” said Greg O’Gara, principal analyst in Wealth Management at Javelin Strategy & Research. “Separating these companies would enable greater regulatory oversight and reduce the potential for risky financial products to be widely distributed among institutions and retail investors.

“The economic pressure to address the loopholes in the banking system that we have seen in real estate has inevitably turned attention to the wealth management sector,” he said. “This is a likely catalyst for greater unrest in China’s financial sector and increases the need for greater regulatory scrutiny.”