Alternatives to enhance retirement preparedness in Greater China

Manulife Asset Management analyses asset classes that could help meet the retirement preparedness challenges facing savers in Greater China


Traditional models of retirement planning in Asia have arguably been rendered obsolete by the rapid greying of regional populations, changing family support systems and the impact of the global financial crisis. While the population of over 65 year olds in the region is set to triple over the next 40 years, historically low interest rates are currently challenging retirement preparedness for many.

Varying degrees of retirement preparedness

Manulife Asset Management’s Aging Asia research series has analysed the financial and economic factors influencing retirement preparedness in Asia. The report entitled Funding the golden years highlights varying degrees of retirement preparedness across the region, finding that Greater China has generally positive conditions. Hong Kong and Taiwan are deemed to be facing “most favourable conditions” and China “favourable conditions”.

Michael Dommermuth, President, International Asset Management with Manulife Asset Management, explains: “A key factor determining a country or territory’s level of retirement preparedness is its existing and future wealth. In Greater China, Hong Kong and Taiwan benefit from relatively high financial wealth to GDP ratios of 3.0x and 4.7x1, respectively, while China is helped by forecast average GDP growth of about 6% per annum through 20502 and generally high savings rates.”

That being said, rapidly aging populations and falling support ratios still challenge retirement preparedness in Greater China – China’s elderly support ratio is forecast to fall from 7.4 in 2011 to 1.8 in 2050, Hong Kong’s from 4.5 to 1.3 and Taiwan’s from 5.4 to 1.13.

Similarly, while family support for the elderly has traditionally been a core element of retirement preparedness, it is now in decline due to shifting cultural norms and changes to household demographics. For example, the percentage of elderly Taiwanese living with their adult children declined from 70% to 60% during 1986-20054 and our analysis suggests that this trend is likely to continue or even accelerate as the aging process progresses.

Thus, it is imperative that individuals in the region shoulder some responsibility for retirement preparedness.

As one of the few asset management companies globally with on-the-ground presence in China, Hong Kong and Taiwan, Manulife Asset Management believes that it can help investors in the region face these challenges. The firm has more than 75 equity, fixed income and asset allocation professionals located across Greater China, including in its Hong Kong regional hub, and more than 125 across a total of 10 markets in Asia.

Bona Fide Real Returns are alarming

Although individuals in Greater China are generally well positioned to enhance their retirement preparedness, Mr. Dommermuth points out: “Households in Greater China, like those in neighbouring countries and territories, often handicap their potential returns by allocating significant portions of their financial wealth to bank deposits.

“It seems most investors are unaware of how cash holdings can compromise retirement preparedness. Despite historically low interest rates, cash deposits currently account for about 75% of financial wealth in China, 60% in Hong Kong and 40% in Taiwan5.”

Manulife Asset Management’s report entitled The Asian cash drag introduces its proprietary “Bona Fide Real Return” measure, which adjusts nominal bank deposit rates to account for inflation, income tax and credit risk.

Over the past 10 years, Bona Fide Real Returns in Greater China have ranged from 0.2% per annum in Hong Kong to -0.7% in Taiwan and 0.8% in China6. According to Mr. Dommermuth: “shifting a portion of the financial wealth held in bank accounts to more productive investment vehicles could greatly enhance retirement preparedness.”

With a dizzying array of investment products available across Greater China, Shirley Lam, Head of North Asia Investments and Affiliate Relationship Management with Manulife Asset Management, points out: “there is no ‘one-size-fits-all’ investment solution as each market is unique. With this in mind, we have developed income-generating solutions to meet the specific needs of investors in China, Hong Kong and Taiwan.”

Solutions to supplement household income

China onshore bonds: Historically, Chinese investors have had limited access to international capital markets and few alternatives to bank deposits or local equities. However, China’s onshore bond market (CNY bond market) has grown rapidly in the past few years and is now worth about US$4.1 trillion and represents an attractive investment option.

According to Ms. Lam: “Earlier this year, Manulife TEDA Fund Management Co. Ltd.7, our asset management joint venture in Beijing, launched two closed-end CNY bond funds with dividend distribution features. The funds, which attracted about US$1.2 billion during their IPOs, take advantage of the CNY bond market’s attractive average yield of 4.0%8 to support potential pay-outs and long-term capital gains.”

Dynamic asset allocation: Investors in Taiwan tend to be receptive to multiple asset classes from international markets.

Manulife Asset Management offers a dynamic asset allocation investment strategy in Taiwan which is particularly well suited to enhancing retirement preparedness. The strategy takes advantage of market opportunities across diverse global asset classes to capture upside potential while mitigating downside risk. The strategy aims to provide a steady income stream and the potential for long-term capital appreciation.

This strategy is based on the expertise of the firm’s Portfolio Solutions Group, a global team of asset allocation specialists managing over US$100 billion of assets9. The group recently expanded into Asia, providing direct support in the Asian time zone.

Asia Pacific equity income: Manulife Asset Management launched an Asia Pacific equity income strategy this year and began offering a related retail product with a monthly distribution option in Hong Kong in late August.

Ms. Lam explained: “Hong Kong is an open market that allows investors to access various global asset classes. We consider dividend-paying equities an attractive alternative for local investors looking to supplement other income sources or save for retirement as dividends can meaningfully boost total returns over the long term.

“Manulife Asset Management can offer investment strategies of this scope as our Asian network facilitates real-time market information sharing across the region.”

Ms. Lam concluded: “We expect deposit rates to remain low for the foreseeable future, and believe that investors in Greater China and across Asia are paying an unacceptably high opportunity cost for holding cash in bank accounts. We are firm believers that global investment markets offer many opportunities to more efficiently mobilise these assets, potentially delivering returns in excess of bank deposit rates or even generating a recurring income stream.”  

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1 Manulife Asset Management based on flow of funds and household balance sheet data. 2011 (Taiwan 2010).
2 IHS Global Insight, Manulife Asset Management.          
3 UN population projections.
4 Tung, An Chi and Lai, Mun Sim. Living Arrangements and Support for the Elderly in Taiwan. 2011.
5 Manulife Asset Management based on flow of funds and household balance sheet data. 2011 (Taiwan 2010).
6 1 January 2003 to 31 December 2012. Manulife Asset Management based on bank, government and ratings data.
7 Manulife TEDA Fund Management Co. Ltd. is a joint venture between Manulife Financial and Northern International Trust, part of Tianjin TEDA Investment Holding Company Co. Ltd. (TEDA).
8 HSBC China Onshore Government Bond Index. Bloomberg, 22 October 2013.
9 Manulife Asset Management, as of end June 2013.
The views expressed herein are those of Manulife Asset Management, the asset management division of Manulife Financial, and its affiliates and are subject to change based on market and other conditions.