Chinese wealth enters a crucial decade

By Elliot Wilson

Nothing about Noah Holdings, a pioneer in the burgeoning world of Chinese wealth management, is run of the mill. Take the name. In an officially secular country, it is rare indeed to find a big firm that so readily wears its religious heart on its sleeve.

Yet Noah is so named because its co-founder and chairwoman, Wang Jingbo, is a devout Christian. Theistic threads run through the seam of the firm. Its asset management arm is called Gopher, after the wood Noah used to build his biblical ark, while a scheme offering estate-planning lessons to elite clients was named Enoch Education, after Noah’s grandfather. When the firm opened a new office in Jersey in August 2016, it was branded the Ark Trust.

In a still-parochial financial sector (for all their size and aspirations, China’s lenders, insurers and asset managers remain intensely domestic), Noah is unusually worldly. It boasts offshore branches in Hong Kong, Silicon Valley and Taipei, as well as in the UK. In 2010, it opted for a primary stock listing not in its home city of Shanghai, or in Hong Kong, but on the New York Stock Exchange, where its shares are up 19% through the first five months of the year.

Its finances also appear strong. Net income rose 16.5% in 2016, to Rmb723 million ($106 million) on revenues of Rmb2.51 billion, with assets under management at Gopher up 28.3% and client numbers rising 27%, to 135,000. That performance has continued into this year, with net revenues up 17.5% year on year in the first three months, to Rmb713.2 million. Total AuM has expanded at a compound rate of 97.5% in the five years to the end of 2016.

Noah group president Kenny Lam says the secret to its success lies in a mix of humility and hard work, a reverence for the discreet, old-school rules of wealth management and an ability to think outside the box.

“You will never see us advertising,” he says over afternoon tea in Shanghai. “We consciously don’t want to be seen in airports or on billboards. Private wealth is based on trust and referral. We rely on word of mouth to sell ourselves.”

This isn’t strictly true. Lam is, after all, here discussing the firm’s future with a member of the Fourth Estate, doing a little quiet promotional work in the process. But Noah’s ability to shrink into the background is apparent to anyone who visits its main offices in Yangpu, a nondescript Shanghai suburb far from the skyscrapers and hullabaloo of Pudong. The low-slung building is drab, even down-at-heel, with dingy glass elevators that trundle wearily between floors filled with workers peering into screens. 

It’s all a far cry from the swank and luxury so beloved of the grand wealth managers of Zurich, Singapore and London. 

“We prefer to spend our money on making money for our clients,” says Lam, with a subtle nod to the economy décor. And he’s quick to snuff out any suggestion that the group’s ambitions are low-rent. “Our aim is to be a cross between UBS and Julius Baer,” he says. “We are not trying to be the largest wealth management provider in China. Our aim is to focus on the highest end of the market, gaining wallet share from UHNWs [ultra high net worth individuals], rather than adding scale for the sake of it.”

To meet Noah and to speak to Lam and his colleagues is to peek under the bonnet of a highly unusual industry. A three-decade-long economic miracle has transformed the finances of a country once in thrall to the equality of poverty. Personal wealth, once abjured, is now lauded and pursued with vigour.

By the end of 2016, China was home to just over 1 million dollar millionaires, according to Capgemini. Only Germany, Japan and the US have more. The accumulated wealth of the nation’s estimated 12,000 UHNWs swelled by $175 billion in 2016, to $1.7 trillion. Boston Consulting Group and Fuzhou-based Industrial Bank tip the number of HNW families in China to hit 3.9 million by 2020, up from 2.4 million at the end of 2016. Lam puts the net wealth of the average Noah client at $30 million.

Yet only now is a proper onshore industry beginning to emerge, capable of handling the vast wealth of a fast-emerging superpower. Modern China’s first generation of entrepreneurs came of age in the 1980s and 1990s. Casting around for financial advice, they found none – foreign specialists were largely excluded from the market, while local players either did not exist, or were still learning the ropes – so they put their cash to work in stocks and property. 

In time, a mutant strain of the industry began to emerge. Trust companies, seeing the market’s unexplored potential, began to roll out high-yielding wealth management products (WMPs) that promised chunky returns. Banks then got in on the act, raising capital from customers and channelling it into a dizzying array of packaged and repackaged debt securities, money market instruments and non-standard credit assets.

Some spelled out the risk of investing in exotic grey-market assets and instruments; others did not. Many investors assumed they were buying products implicitly backed by the state. Others understood the risks – but didn’t care so long as the products delivered outsized returns. Many still do. 

In April, PY Standard, a Chengdu-based research firm, put the average annualized return offered by mainland WMPs at 4.3%. Compare that with the benchmark mainland one-year deposit rate, which returns just 1.5%.

Yet all too often, Chinese-style WMPs bear only a passing resemblance to the classical ideal of an old and venerable industry. UBS analyst Jason Bedford describes the country’s Rmb76 trillion wealth management market as “a manifestation of the controlled nature” of a financial sector that, hamstrung by onerous restrictions, for years failed to keep pace with the wider economy, or to provide citizens with enough investable assets.

“Much of [China’s] so-called wealth management is just deposit rate competition or balance-sheet arbitrage by banks shifting loans into their investment books for capital gain,” he adds. “This has led to confusion in China as to what wealth management really is.”

It has also hampered innovation and creativity. “Europe’s wealth-planning industry works on version 3.0,” notes Noah’s Lam. “In China, we are working with version 1.0, though we are moving toward version 1.5.”

It was into this distorted and misshapen world that Noah Holdings was born. The year was 2005, and Wang Jingbo, then at Xiangcai Securities, a mainland brokerage part-owned by Dutch lender ABN Amro, wanted to buy out the firm’s private banking division. A deal was agreed, and Wang and a colleague from Xiangcai, Zhe Yin, who now runs Gopher Asset Management, raised Rmb3 million. They leased an office in Shanghai, filled it with second-hand furniture and got to work.

Over time, they raided ABN Amro for talent, bringing in Shang Chuang as chief financial officer, Harry Tsai as chief operating officer, and Frances Chang as chief marketing officer. 

Lam joined after 16 years at McKinsey, but even he had a link to the firm, having first convinced the global consultancy to take on Noah as a client. 

In 2007, the wealth manager secured an injection of capital from Menlo Park-based Sequoia Capital, which remains the firm’s second-largest shareholder, with a 14% stake. The two co-founders, Wang and Zhe, own 25% and 6% of Noah’s equity respectively.

From the outset, the founders were determined to blaze their own trail. They were starting from scratch, building a firm and an industry as they went. 

“There wasn’t much competition at all in the early days. The market just wasn’t there,” notes Chang, who gave up her job as chairman of Xiangcai to join the stripling company.

Most of the competition that did exist, Noah’s management team saw, lavished attention on the big mainland cities – Beijing, Shanghai and Shenzhen – at the expense of everywhere else. But entrepreneurs in those places tended either to put their wealth in the hands of traditional banks or to manage their own finances. Thus in southern China, many would approach innovative and client-responsive lenders like China Merchants Bank.

Unable to compete in the big municipalities, Noah turned to the multitude of second- and third-tier Chinese cities, many of which were, notes Lam, “bursting with new high net-worth business owners who hadn’t yet been exposed to sophisticated investment platforms”. 

It targeted the likes of Xuzhou – a city of 8.6 million in Jiangsu province that is, in Lam’s words, “heavy on entrepreneurs” – and Chengdu, a powerhouse municipality in western China all but forgotten by mainstream banks.

Their model was always the same. In each city, they would hire relationship managers – Noah had 1,251 of them at the end of March – and train them hard. Then they would wander out in search of customers. 

“We do the same thing wherever we go,” Lam says. “We walk into a new place, find the top 50 business owners, and ask how we can help them. I’d say between 80% and 85% of our clients are self-made entrepreneurs from second- or third-tier cities.”

Perhaps the most extraordinary facet of China’s burgeoning wealth management industry is not how lawless it can be – regulators at times seem genuinely unable to rein in the industry’s excesses, or to properly supervise the myriad companies that create, package and roll out WMPs. Rather, it is the way the best and most influential providers of high-end wealth planning seem to stray into the industry by accident.

Take Ning Tang, the 42-year-old founder and chief executive of Beijing-based CreditEase. Boyish and engaging, Ning started his working life in Bangladesh working with Grameen Bank, before pursuing a more staid career as a debt capital markets banker with DLJ in New York. In 2000, he returned to Beijing, heading up M&A at a Nasdaq-listed software firm and dabbling as an angel investor in his spare time.

It was here that he noticed a specific hardship facing young engineers short on cash but desperate to pursue a career in IT. 

“No bank would lend to them as they had no assets, so I did,” he says. Ning ended up personally lending “about Rmb100,000 to more than 100 students. And that’s how the peer-to-peer lending model took off here. We invented the P2P model in China without knowing it was already in operation in the UK and the US.”

It’s all but impossible to verify this statement, but new industries have to start somewhere, and it’s hard to find any of China’s now estimated 3,000 P2P lenders that pre-date CreditEase, which Ning founded in 2006. Since then, his firm has helped millions of people source unsecured capital from investors via its online marketplace.

In December 2015, he renamed his P2P division Yirendai, spinning it out and listing it on the Nasdaq. The firm is profitable, reporting net income of Rmb351 million in the first quarter of 2017, a year-on-year rise of 166%. 

The industry Ning claims to have spawned continues to grow exponentially, despite an intense crackdown on excess online financing. Outstanding P2P loans hit Rmb920 billion at the end of March 2017, according to lending platform Wangdaizhijia.

But Ning was just getting started. CreditEase, which remains Yirendai’s biggest shareholder, has refocused its attention on two utterly contrasting facets of the financial world. On the one hand, it has modified the P2P model to help out the country’s army of small firms. Its Inclusive Finance division helps small and medium-sized enterprises and micro-sized companies – everyone from tech start-ups to turnip farmers – to tap capital from their own business angels. 

“We enabled around $15 billion in loans in 2016,” Ning reckons.

Then there’s wealth management. CreditEase first elbowed its way into this market in 2012, with the aim of extending high-end services to the super-wealthy. And its business has blossomed. The main group is unlisted and does not break out its figures in full. But Ning says its wealth-management division has over 2,000 relationship managers serving more than 200,000 high net-worth individuals and mass affluents, from offices in 40 tier-one and tier-two cities. 

“We provide a full suite of services, including asset allocation, succession planning, tax advisory and philanthropy,” he says.

The company owns offices catering to China’s wealthy and worldly diaspora, in Singapore, Hong Kong, London, Tel Aviv and New York. CreditEase’s analytics team scours terabytes of openly available financial data, emerging with enough to provide, Ning claims, “excellent advice to our mass-affluent clients, who receive our asset allocation services via their mobile phones.” He describes the firm as a “fintech company that is engaged in inclusive finance and wealth management.”

It says a lot about the wonderful absurdity of China’s financial industry that two of the country’s leading wealth management providers should have entered the world this way. One sprung out of a Sino-Dutch brokerage by founders short on cash but long on zeal; the other, the brainchild of an investment banker who decided to help out a few hard-up students and wound up dispensing financial advice to billionaires.

It is an industry that is just setting out on a very long road. Both Ning and Lam, in separate interviews, compared wealth management in China today with the state of the US market in the mid 1970s. 

“We are like America, before Merrill Lynch started to dominate,” says Lam. “That led to 10 years of rapid growth [in the US] and in my view, the next 10 years here will be key. China will wind up with two or three dominant wealth managers, and we hope to be one of them.”

Ning echoes this view. “The key period will be the next 10 years, until 2026,” he says. “You’ll see thousands of young wealth management firms emerge. Some will fail but others will thrive. After that point, the identities of the big players will be determined and settled. I believe we will maintain our leadership position by doing three things better than anyone else: going global; investing in technology; and maintaining our track record in the credit space.” 

To that end, leading players are leaving nothing to chance, opening new branches and rolling out new services as fast as possible. Noah’s Lam points to the firm’s first family office, which opened in early 2016 in Shanghai. 

“Of our 150,000 clients, around 500 of them are proper UHNWs who stand to benefit from a full-service family office,” he says. “They need everything: financial planning for the next generation, insurance, education, global estate planning. Seventy of our clients have already handed us $10 million apiece to manage on a discretionary basis.”

Noah recently opened a new office in Hong Kong, stocking it with private banking talent hired out of Morgan Stanley, with the express aim of serving China’s growing foreign diaspora.

The Shanghai firm is also set to roll out an aggressive new global expansion programme. 

“We are planning to open branches in Vancouver and either Sydney or Melbourne, later this year, to serve our clientele in Canada and Australia,” Lam says. “Our mainland clients are going global – more of the profit they generate is being made outside China, and we need to follow them.”

Both firms are also pouring tens of millions of dollars into education, in an attempt to boost the financial literacy of their clients as well as their own workers. 

“Clients trust us implicitly – the data tell me that,” says Lam. “Our average per-transaction size is $1.5 million, with the typical client buying three or four wealth management products a year.” Lam says Noah sold around $17 billion-worth of wealth-management products in 2016, of which around $1.5 billion were based offshore and denominated in US dollars.

“This increasingly global focus also means our employees need to be great at what they do,” he adds. “So we give them the best education possible. In 2016, we took our best 130 relationship managers to Stanford University, where they received a two-week crash course in private equity. The year before that, it was a fortnight of asset management training in Zurich. And in 2014, we visited my Alma mater, Wharton School in Pennsylvania, to get a comprehensive education in family office planning. This year, we’ll be returning to Silicon Valley.”

Another, and perhaps far bigger, challenge for wealth managers is the tricky issue of how to educate their clients about financial matters. Some are, of course, amenable to advice. But CreditEase’s Ning says many wealthy Chinese are “very short-sighted, lacking a long-term investment mentality. They are not used to intelligent asset allocation and they don’t trust professionals to manage their money. We are trying to change this mindset, but it is a profound process.”

And a necessary one. Many of China’s wealthiest individuals built their fortunes on a mix of timing, skill, connections and stubborn hard work. But the world is changing – and they are being forced to adapt. 

“Many of our clients don’t understand the new economy, or how to invest in it,” Ning says. “They struggle to know how to put their wealth to work. They’re in their 50s or 60s, and are deeply concerned about estate and succession planning. They didn’t have to worry about this stuff 10 years ago, now they badly need help.”

This attitude is changing, though. First-generation patriarchs are handing over the corporate reins to their offspring, many of whom, having grown up around money at home and abroad, are happy to throw in their lot with the professionals. For Noah’s Lam, the turning point was the mainland stock market crash of 2015: “That’s when many of our clients realized the industry was about far more than just increasing returns – it was also about preserving wealth and allowing it to mature.”

Perhaps the biggest long-term challenge is the widely held perception that the onshore industry is awash with exotic wealth management products that promise high returns but bear excess risk. Regulators seek to make providers play by the rules and to control the proliferation of new products, but to limited success. These seat-of-the-pants products are, sighs Lam, “a stain on the market. Many players do not do things the right way, and we all need that to change.”

In the long term of course, it is in the best interests of incumbents to avoid breaking rules and cutting corners, an approach that may generate short-term profit but which does little for trust or brand recognition. 

Plus, it’s the right thing to do. For anyone who decides to walk and work in the shadows, it’s worth remembering the New Testament words of Saint Peter, who reminds his audience that when the rains started to fall, only the “disobedient” were barred from Noah’s ark. And look what happened to them.