At a Glance
- Trading apps fuel a rise in consumer investing
- Tightened restrictions have resulted in a cash buildup for China's affluent
As world attention shifts to China’s new economy, one shaped by more normal rates of growth, and reliant on domestic consumption as an engine, understanding the Chinese consumer has taken on a new relevance.
In terms of asset management, recent changes include new financial technologies that broaden investment options for China’s rising middle class.
A handful of internet applications and other online platforms are making it easier for investors to trade local equities, as well as lowering barriers to investing abroad – an option that’s long been unavailable to most Chinese.
We spoke with Christopher Fix, Managing Director and Head of Asia Pacific for CME Group, for insight into the changes underway, and how some of these new technologies will affect investor behavior. He was joined by Dennis Wu, CEO of Futu Securities International, to share a perspective from within the industry. This is an edited version of our conversation.
OpenMarkets: In recent times, a number of online apps have appeared in China, which will enable mainland investors to channel funds more easily into the domestic stock market or even into overseas markets. What do you see as some of the drivers that are fueling the growth in demand for these apps?
Chris Fix: There are a number of factors driving change in China at the moment. An enormous amount of liquidity has been created within the Chinese economy in recent years, with M2, the broad measure of money supply, having quadrupled since 2007. On the other hand, the economy is slowing while the government has tightened restrictions on investing in the housing market in an attempt to prevent overheating. Cash has been building up and this means that investors are looking for ways to diversify their assets.
OM: The story in China for the past three quarters has been about capital outflows, the slowing economy and downward pressure on the yuan. Are mainland investors content to keep their money in China? How much is the need to hedge wealth by moving capital out of China driving demand for these trading apps?
Dennis Wu: There is considerable interest among middle class investors in China to access equities and futures in Hong Kong or the U.S. China has been taking on a more outward looking view, and that’s been reflected in policy such as the Qualified Domestic Institutional Investor program, or the Shanghai-Hong Kong Stock Connect. These, along with other platforms mean that mainland investors now account for about 18 percent of Hong Kong stock market turnover. Later this month we should see the launch of the Shenzhen-Hong Kong Stock Connect, so I expect the fund flows to grow at a constant but sustainable rate.
While the Stock Connects enable two-way trade, most of the funds are flowing out of China. One of the drivers is the shortage of investible assets in China. In other words, there’s demand among retail investors for foreign-denominated assets, including equities and futures, in markets that are cheaper. In terms of futures, foreign markets can also be the only place where a suitable product is available. For example, investors looking to manage their forex exposure might want to look to currency futures and other products available in global markets. Nevertheless, Chinese officials are encouraging of a reasonable pace of outbound fund flows because that helps to cushion against a domestic asset bubble, particularly as people are getting concerned about a frothy housing market.
OM: How would a sustained period of a softening yuan drive demand for online trading apps and other online wealth management tools?
Chris Fix: When it comes to online trading apps, the primary user group is the younger, newly affluent group, who are more familiar with the online environment. They have been quick to adopt these platforms because of the limited options to invest their money at home. Earlier generations have been less receptive, but slowly they too are coming around. China has an annual cap of $50,000 on the amount an individual can send abroad through the established banking system in any one year, but the process is lengthy and the $1 million net worth requirement is a high barrier to entry. That’s been a factor encouraging late adopters to take a closer look at some apps. Diversification into assets denominated in foreign currencies other than the yuan is a trend that I expect to continue, and the ongoing internationalisation of the yuan will also drive interest in futures trading, as retail investors make use of products to hedge against risk in the global market.
OM: In terms of platforms for retail investors in China, is the market well served by incumbents, or is there room for new comers to disrupt this industry?
Dennis Wu: Online trading platforms have opened a pathway for China’s middle class to invest abroad. By some estimates, China’s investable assets will grow to around 196 billion yuan by the end of 2020, up from around 110 billion currently. The size of the emerging market hasn’t gone unnoticed, as it seems everybody is talking fintech. In the past year there have been several new stock trading apps introduced, as people can see the scale of the need for financial services. There are online apps for trading across a wide range of asset classes, apparently extending to commodities like iron ore, cotton and even eggs. In general, we are optimistic that the addition of new service providers will help to raise the quality of services, because there is room for improvement. There are vast areas for more sophistication in areas such as market data, news, and the sharing of views and opinions on trends via social media. We feel that the market is able to absorb and benefit from new competitors.
OM: Mainland retail investors were badly hurt in the stock market crash that began in June last year. What’s the mood among investors now towards the stock market? Are they set to re-embrace risk?
Dennis Wu: After any period of major market swings, it’s natural for investors to take some time and reassess. We’ve moved from pessimism to a gradual restoration of confidence in Chinese equities, and we can see in fund flow data that investors are beginning to return to equities, although the mood remains cautious. Investors tend to move on from shocks and focus on new opportunities.
Chris Fix: Important to rebuilding investors’ confidence is the idea that markets are stable and that they have liquidity and daily turnover to help cushion against swings in asset prices. Recently we’ve seen excessive price swings for some commodities traded on China’s domestic exchanges, which some commentators have suggested is speculation driven by huge capital inflows.
In emerging markets there a historical pattern where these things end badly. Mainland investors seeking to diversify their investments while maintaining exposure to commodity futures might be better served in the long term by looking to international markets.
OM: Where do you see China in terms of amending its barriers to enable freer capital flows? Are there any big policy changes on the horizon in terms of freeing capital flows from China to the world?
Chris Fix: Recent trends point to a tightening of capital outflows from China. In October UnionPay, the most popular bank card provider in China, said it would restrict mainlanders from using debit cards to purchase Hong Kong insurance-savings products. UnionPay will still enable mainlanders to use its cards to purchase insurance products for protection against accidents, death and illness. But it’s clear that regulators want to tighten what has been a source of capital outflows, even though it’s more of a soft tightening rather than a clampdown.
At the same time, October saw the addition of the yuan to the IMF’s Special Drawing Rights basket, and China has stepped up efforts to foster start-up hubs in cities like Shenzhen and Hangzhou. The Shanghai free-trade zone also announced that it would allow higher shareholding by foreign investors in Chinese securities and futures firms in the area. More recently fintech has been identified as a core industry for development. China remains committed to a gradual opening of its financial systems as it wants to create strong linkages to global markets.