Chinese robo advice could be opportunity for European fintech firms

By Moriah Costa on 10th March 2017

P2P/Marketplace LendingRobo-Advice

Wealth management in China is expanding rapidly as  private wealth in the mainland grows.

Chinese robo advice could be opportunity for European fintech firms

Financial technology is everywhere in China. As the country’s economy continues to grow and its middle-class has more money to spend, the Chinese are turning to technology like automated wealth advice to meet their needs.  

It’s a move that could completely disrupt China’s state-controlled banks when it comes to services such as wealth management and it provides an opportunity for European fintech companies to tap into China’s growing private wealth.

“Chinese investors distrust traditional financial advisors, seeing them as ‘salespeople’ rather than real advisors working in the best interest of their client,” Denis Suslov, an analyst at research firm Kapronasia in Shanghai, said. “Impartial robo-advisors might be the right solution for the problem.”

Robo advice is the use of automated technology to provide financial and investment services. Users can choose portfolios based on various factors, like their appetite for risk, and can manage investments from their smartphone. Many platforms use exchange-traded funds, or ETFs, to invest in various assets like bonds and stocks.

The automated financial service has been a viable alternative investment in the West for years with companies like Betterment and Acorns in the U.S. and Moneyfarm and Nutmeg in the UK. The sector is expected to grow substantially in the next few years. Consulting firm A.T. Kearney expects robo advisers to manage around $2 trillion in the U.S. alone by 2020.

In China the wealth management sector, which includes traditional investment by humans as well as robo-advice, is rapidly expanding. The outstanding value of wealth management products expanded by 56 per cent year-over-year to $3.5 trillion in 2015, according to a research report from consulting firms DBS and EY.

A growing middle class means more opportunities for fintech

The advance of online retail and digital sectors make China poised to become the next leader in robo advice. Tech giants Alibaba and Tencent are finding ways to include their products into the daily lives of the Chinese, according to the report by DBS and EY. The implementation of a Social Credit System, which will assign a credit score to every citizen and business based on their financial and social behaviour, will only increase the potential of fintech products.

“With their access to massive social and analytical data around customers’ credit worthiness and purchasing trends, these fintech firms have opportunities to build out advanced finance platforms to support elevated expectations from increasingly demanding investors,” the report said.

The last few decades of rapid growth in China has meant a growing middle class with more money to spend. There are nearly 200 million people in China’s middle class and that number is expected to reach 300 million in five years, Suslov said.

Low-cost investment apps are one way for tech companies to tap into the private wealth of China, which is expected to be $30 trillion by 2020, he said.

In 2016 around 20 digital wealth management firms entered the market, although they have yet to gain a lot of traction, Suslov said. His firm expects the industry to have around $600 billion assets under management by 2020, generating approximately $1.5 billion in fees for robo advisors.

Some of the biggest players in the sector include CreditEase, which launched a robo advice product called ToumiRA to provide low-cost access to foreign markets for Chinese investors. Its online consumer marketplace, Yirendi, is listed on the New York Stock Exchange.

Last year the firm partnered with U.S.-based DriveWealth to provide access to American equities. The partnership means the Chinese can diversify their portfolio with U.S. stocks.

Foreign investment is not easy in China

But while there is a lot of opportunity for fintech in China, if foreign firms want in, they’ll have to partner with already existing Chinese companies, Suslov said. The one party state tends to keep a tight control over outside influences.

A law passed in December 2016 limits outbound investment by the Chinese. The ruling from the State Administration of Foreign Exchange (SAFE) of China places restrictions on individual purchases of foreign currency.

But while foreign companies face difficulties tapping into the Chinese market, their expertise and technology makes them best-positioned to enter China by offering robot assisted global portfolio allocation, Suslov said.

According to the report from DBS and EY, the sector will need to partner with global fintech companies if it wants to reshape wealth management in China. Although it’s challenging for outside companies to enter the Chinese market, the consulting firms think the government’s commitment to fostering growth in mobile, internet, e-commerce and cloud computing, is a good sign.

The “Internet Plus” initiative launched in March 2015 maps out development targets and support measures for emerging industries like robo advice, including help for local companies to gain traction in international markets, financial funding, tax relief and investor support.

In order to reach its objects, China will “have to open up some of these sectors to tap foreign expertise and know-how.”

“The financial services market of China is too big, too valuable and has too much untapped potential for international players to ignore,” the report said said.

But not everyone is convinced emerging technologies are the best economic future for China. Although China wants to become a consumer driven economy, it does not have the means to do so, said Hong Bo, a professor of economics at SOAS in London.

Two-thirds of China’s economy is manufacturing, she said.  If the mainland wants to become a consumer economy, it will need to pass the industrialization stage that countries in the West like the U.S. and Europe had in the early 1900s. China has not reached that stage yet, she said.

“The advantage of Chinese economy has been in the manufacturing sector...I do not think that China has already passed the industrialization stage,” Bo said.

China will need to focus on advancing its manufacturing, become industrialized and then it will naturally become a consumer-driven economy, she said. 

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