China’s stated policy aim is to become a ‘moderately prosperous’ society by 2035. The wording may sound modest to Western ears. The intent is not. Borrowed from the Confucian term xiaokang, it denotes a society that is an ‘egalitarian eutopia’. Such a state would see poverty eradicated and higher wages for all.
Given its large rural population, fully eliminating poverty will be hard to achieve. However, the country is making strides on wages. In 1980, gross national income US$220. This hit $4,340 in 2010 and $11,880 in 20211. According to Reuters, total household wealth in China reached $85.1 trillion in 2021, up 15.1% from 2020.
We are also seeing rapid increases at the top end of the wealth scale. The number of Chinese millionaires looks set to double from 6.2 million in 2021 to 12.2 million in 20262.
As disposable incomes continue to grow, so will the need for a range of financial services. These include everything from consumer banking and software to wealth management and insurance. For investors, this creates opportunities to tap into these long-term structural growth stories.
How does this look in practice?
Take retail bank China Merchants Bank (CMB). Its growth comes from strong demand for good-quality retail loans (mortgages/consumer finance). The bank is well capitalised to support this level of activity, while stringent risk management measures mean it has a quality loan book. Unlike some other banks, it’s less exposed to struggling small- and medium-sized enterprises. Its real estate business is negligible.
True, it recently suffered regulatory problems of its own with the removal of its President Tian. Since he left the bank, he’s been charged with abuse of power and insider trading. However, the bank was quick to act and has installed a near-30-year CMB veteran and ex-Chief Financial Officer Wang Lain as its new head. He’s already steadied the ship and CMB’s long-term growth story remains on course.
Speaking of governance, many investors still worry about China’s environmental, social and governance (ESG) standards. However, while the country still has some way to go, the situation has improved over the last decade. This includes the financial sector. A good example is investment bank China International Capital Corporation (CICC). MSCI recently increased the bank’s ESG rating from BBB to A. CICC is leading its rivals in almost all ESG criteria, notably strong climate change risk mitigation, governance and data security practices. In 2021, Forbes dubbed it one of ‘China’s Best Employers’. We believe it’s intuitions like CICC that will help the country improve its ESG standing in the eyes of the world. They will also be vital in making China a more prosperous nation.
You can’t beat good customer service. One company that prides itself on its client relationships is pan-Asian insurance firm AIA. It offers life, critical illness, savings, and medical insurance services to affluent and high-net-worth individuals. Its agents are among the best in the business, boasting industry-leading expertise and prized educational backgrounds. A highly experienced and stable management team guides the sales agents and directs policy. In our view, all these factors should continue to attract clients and drive AIA’s superior margins.
As disposable incomes continue to grow, so will the need for a range of financial services.
What’s the long-term outlook?
The last few years have been challenging for many in the financial sector, with Covid-19 lockdowns hitting activity. Problems in the property sector have also afflicted many bank balance sheets. Recently, the government introduced regulation that will allow more direct control over financial policy and bank regulation. One of his aims is to clean up perceived risky lending practices and correct “excess financial exuberance”. It’s unclear what the new regulations will entail. However, like tech sector interventions last year, any measures will likely be targeted. After all, policymakers won’t want to disrupt the vital role banks and other financial institutions play in the economy.
All that said, we’ve been investing in China for over 30 years. Regulation changes aren’t new to us. Our job as investors is to understand the environment in which our invested companies operate and how this affects their long-term prospects. Through that lens, we believe China’s financial services industry will continue to offer numerous investment opportunities despite short-term headwinds.
- Reuters September 2022
- Macrotrends, 2022