An old Chinese proverb says, "The saving man becomes the free man." Through the dialogue with our Chinese financial planner counterparts—part of the Financial Planning Association’s FPA in China trip being chronicled on AdvisorOne.com— we learned that saving and investing is a strong focus of the Chinese people. The way the Chinese people invest is shaped by both their culture and by the nascent state of their financial industry. Not surprisingly, it is different from how we approach saving and investing in the West.
The lack of a social safety net in China has contributed to the Chinese habit of saving as much as possible. The government has reduced support for retirees, which has driven people to pay close attention to the need to save and invest for their retirement. We were told that 15 years ago the people were not worried about retirement. Now, because government support of retirees is diminished, building adequate retirement savings is on the mind of many people, primarily in the cities.
The Chinese one-child policy has changed how the people in the cities save for retirement. In the past, multiple children helped care for retired parents, but under China's one-child policy this has evolved. The burden of caring for retired parents is too great for a single child, so retirees must be prepared to provide for themselves in retirement. However, this is not the case in many rural areas of China.
There are about 750 million people out of China’s total population of 1.3 billion who do not live in the large cities. Many of these people are rural farmers and are exempted from the one-child policy. They live primarily on what they produce themselves, and they need to have larger families to work on the farms. These peasants do not have a pension, and do not have much income to use for saving. Their wealth is held in the land that they own, and their sustenance in retirement is provided by what they produce on their farms, and through the care provided from their multiple children.
(Our Chinese financial planner counterparts tell us that in some rural areas, there are pension plans provided by the government, known as the rural old-age insurance system. While this program is comparatively new, it is developing rapidly, the Chinese planners tell us, with the support of the government.)
The urban workers who are employed by a company will build up what is called a "pension" but which is more like a defined contribution plan. The employees contribute a mandatory 8% of their salary, and their employer contributes 12%. Upon retirement the employee will rely on this pension and other savings and investments to fund retirement expenses. The pension can be passed on to heirs upon the death of employee.
We learned that the urban Chinese people do not conduct financial planning as we know it in the West. The term financial planning is associated with the sale of investment products, not with the process of building a financial plan. Chinese people don't set many goals for their investing, aside from saving for a house.
Chinese investors buy their investments primarily through banks. There aren't many independent investment firms in China. Our Chinese counterparts told us people prefer to use banks because they have trust in the size and the stability of these institutions.
Saving and investing in China is not necessarily shaped by goals developed as part of the financial planning process. The financial planning profession is in its youthful stage in China, and there appears to be an understanding that moving toward a more comprehensive approach to financial planning would be a good thing. It is clear that at this time the focus is on selling investment products, and not on the process of financial planning.
However, the youthfulness of the financial planning profession may be only one of several factors that contribute to a focus on product sales, as opposed to the process of financial planning. [The average age of a CFP certificant in China is 32; see Richard Salmen’s earlier FPA in China blog on the certification process and demographics of Chinese CFPs.]
It is not unusual for Chinese investors to work with advisors at several banks, and not disclose all of their investments to anyone they work with, preferring instead to keep their wealth private. We were told they like to spread their money around
to try to find the best performing investments. Perhaps the biggest impediment to the development of the comprehensive financial planning process in China is the very private nature of the Chinese people. It is not easy to ask the personal questions that are necessary to build a financial plan. (See Susan Kendall’s earlier FPA in China blog on the challenges of building trust in such a private society.)
The financial industry in China is young, and there are a limited number of investment channels available. The average investor has access to time deposit vehicles, individual stocks, a limited number of mutual funds, real estate and high-grade corporate bonds. Chinese investors can invest internationally through a vehicle called a Qualified Domestic Institutional Investor (QDII) fund, a state-sponsored fund that was started in 2007. Wealthy investors have access to a broader array of investments, including private equity.
The Chinese are very focused on finding investments that offer high returns and low risk, perhaps not unlike some of our clients. They also are interested in investing their money in the hot sectors of the moment and we were told they like exciting investments. Today this includes real estate, individual stocks and gold. Not surprisingly, the appeal of the bond market is diminished because rates are so low. Investors might get a rate of 3% to 4% on time deposits. However inflation is running at over 5%, so the appeal of riskier asset classes is magnified.
Chinese investors judge the quality of their advisor by the investment return the advisor's recommendations produced, and consequently advisors try to offer products that will earn high returns. Developing an asset allocation strategy for Chinese investors is difficult in this environment.
Real-estate investment draws the interest of people in the Chinese cities. The property boom is a result of the urbanization of China, the lack of investment channels for investors and the strong desire of investors to profit from surging real estate prices. Many people in the urban areas have purchased real estate as investment properties, and are counting on continued rapid price appreciation to help fund their retirement. The prevalent view of the real estate market is that it will continue to surge higher, even though they are aware of what happened to real estate in the U.S. and other countries over the past several years. There is a striking similarity between the attitude of Chinese toward real estate today, and the prevailing view in the U.S. before housing prices collapsed.
We learned that workers who are employed by corporations are required to contribute 12% of their salary pre-tax to a "housing account." The employer is also required to contribute 12%. When the employee wants to purchase a home the money in this account can be used. The contributions to the housing fund continue even after the employee has purchased a property. If there is money in this account when the employee retires the individual can use it much like a 401(k) in the U.S., though it is not taxed on withdrawal.
Our hosts were gracious and eager to help us understand the Chinese culture, and how their financial system works. The investment channels for most people are limited, and their approach to picking investments is more speculative in nature. The Chinese planners recognize that a transition away from the focus on selling investment products and toward a comprehensive approach to building a financial plan for their clients would be a good development.
We were honored to be able to share our perspectives with our Chinese counterparts and perhaps give them some benefit from our experience as they develop their financial planning industry. Financial planning is evolving rapidly here, and it is clear that the Chinese planners have their sights set on a good path for the profession.