Chinese private banking is a work in progress
China’s wealthy are growing rapidly in number. But the private banking industry’s capacity to cater for them is still limited, not least because of the restricted range of products on offer and the need to educate clients. In this discussion private banking experts consider prospects for wealth management development in this dynamic economy.
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Euromoney The number of high-net-worth individuals is rising by around 100,000 a year in China, with total individual investable assets hitting Rmb62 trillion ($9.8 trillion) by the end of 2011, figures show. This suggests that private banking services are growing in demand and quality in China. But what is the reality on the ground?
WJ, China Merchants Bank Over the past year, China Merchants Bank issued two private wealth reports on China. We estimated that the number of people with more than Rmb10 million in personal assets in China had topped the 600,000 mark by the end of 2011. Therefore, we see great potential in the private wealth management market. Five years ago, we set up a private banking team to service these high-end clients. Now almost all commercial banks, trust companies and brokerages are offering special wealth services to these clients. Yet for all of that, China Merchants Bank is still effectively trying to provide a better service for more clients. We have to establish close relations with the clients and gain their trust. Our research shows a very fast-changing industry. When we did our first private banking report a few years ago, clients had basic simple demands such as the requirement that we create more wealth for them. But in recent years, and in recent reports, these same clients are asking about more complex issues: risk controls, inheritance and security. This is a reflection that we have gradually gained their trust, but there’s still is a long way for us to go.
Euromoney What is holding back the private banking industry from achieving its potential at the moment? Is it that private banking services are so new in China, or that customers don’t yet fully understand what it is that private banks can offer?
JB, KPMG I don’t think there is any specific hurdle blocking the development of private banking. The key driver for private banking is more on the demand side of the equation. Many HNWIs are in the market for wealth generation products as they seek to grow their wealth further. This is very different from other parts of the world where wealth preservation is a key desire. This also means that the private banks are in competition with independent financial advisory companies (IFAs), securities companies and trust companies, whose product development capabilities are superior to those of the banks.
HWQ, CICC We are still at a critical stage in the development of private banking in China, and this is reflected in the fact that laws governing the industry are not fully complete. Trust laws are still largely absent, while inheritance laws – notably concerning how wealth and property are transferred when someone dies – are still patchy. If we cannot really reform quickly, that will pose a difficulty or handicap to the development of private banking in China. So the need to encourage everyone – from investment banks to fund managers and from trust companies to commercial lenders – to open dialogue with regulators to promote the industry is vital. Finally, we need to educate our clients, as most wealthy individuals still prefer to handle their own fortunes by themselves rather than entrust their money to a third party. In part, this is because of the process of economic development in China, as most first-generation HNWIs are self-starters, having made their fortunes from nothing with their own hands – and that is why they are more than capable of making financial decisions themselves.
But if we look at the Hurun Rich List for 2011, one of the salient facts was that around 60% of second-generation members of wealthy families don’t want to inherit their parents’ businesses. This means that parents have to transfer or entrust their assets to professional advisers, or continue to run the business themselves. In such cases, we need to educate our clients as well as regulators, in order to create rules that help cultivate the industry and help clients to trust professionals to manage their wealth.
ZHL, Agricultural Bank of China Among China’s merchant banks, we haven’t really formed a complete private banking value chain. Unlike traditional credit business, we know how to develop and promote the model. However, at regional or sub-branch level, each manager has a different view on how private banking can contribute to the overall business. It’s hard to explain the process of how we extract revenue from the client, and how that revenue gets added to the whole value chain. That is a critical point for our transformation – our ability to determine how to create an entire value chain incorporating private banking is vitally important. Risk management is another topic at which we are seriously looking from every level; risk management will really affect how we promote or create new products. Externally, there are two more issues at which to look. Some clients, particularly those who have built their fortunes from scratch, often make investment decisions themselves. These clients want to shift the management of their money to banks now. Many banks, however, still have really limited functionality when it comes to wealth management, thus clients in general aren’t satisfied. Also, we face ever-stricter regulations, and this reduces or crimps innovation. Furthermore, because product pricing and the range of services we can offer are heavily regulated, we also lack an extensive range of products to offer clients. We’d like to be able to offer more choices and more options to clients, and we need to consider how to overcome this kind of barrier in order to promote the business of private banking.
Euromoney What do private banks not offer in China that they should? And how far are institutions from being ‘real’ private banks in China?
KJ, China Citic Bank We are seeing the private banking industry rapidly become more professional. However, the all-round private banker doesn’t exist in China yet: currently, you’re more like a product manager wedded to a relationship manager. We have relationship managers who win the clients, and then we get investment advisers to design the products, then we add into that experts on taxes and securities to round out the product. So currently private bankers aren’t really holistic private bankers. We still need to improve our capabilities there.
JB, KPMG KPMG prepared a report recently called Performance through focus: Seizing the global private banking opportunity. A large part of what the report focused on was comparing private banking between Asia and Europe via interviews with numerous private banking institutions in Singapore, Hong Kong, Austria, Switzerland and Luxembourg. One of the key findings was that private banking clients in Asia demand more comprehensive cross-selling of other banking services, and this is certainly true in China. Thus a key competitive differentiator for a private bank is to be also able to provide M&A advisory, corporate finance services, investment banking services, etc. By the same token this puts pure private banks at something of a disadvantage. It was recently announced in the news that Swiss private bank Julius Baer and Macquarie, the Australian investment bank, had set up a partnership for Asia to cross-sell services.
Euromoney What products do mainland Chinese HNWI clients really want? Do you feel that mainland clients are more demanding than clients from other countries?
ZHL, Agricultural Bank of China Clients often seek high returns on low-risk financial products, and this places overly high expectation on banks. Banks shouldn’t be seen as being money-making machines, but instead as asset-allocation institutions. Currently we rely on some trust products to create structured returns for clients. For the primary and secondary market, we rely on trust products to control risks. For overseas investments, the client may have less understanding of the overseas investment market. Thus only a few of them will opt for projects financed in, say, Canada or Australia. When it comes to private banking, we want clients to diversify their portfolios and to focus not just on returns from a single product but on returns from a comprehensive set of investment products. The concept of asset allocation is very important, and, increasingly, our clients are warming to that idea. Our private banking clients also expect us, not just to increase the value of their assets, but also to get to know them personally. They expect us to establish a rapport with them, as these are first-generation entrepreneurs and corporate executives whose business life usually crosses paths with their social life. Therefore we should start to consider offering non-financial services for private banking clients so as to improve their lives. In this way, private banks in China are increasingly paying attention to cultural issues, healthcare, and the education of our client’s children.
LXD, Research Center of Chinese Banking Let’s talk about practical issues rather than theory. We should nurture private banking clients; nurture their loyalty. Banks should be forward-looking, with a far-seeing vision. The real estate sector is developing very fast, and people are increasingly buying gold as a long-term retainer of value – each of these are classic ways to manage and increase your wealth. But taking a long-term view, we need to educate clients; we need to show them that if you are going to enjoy high returns, you should also bear high risks. Clients cannot just pile the pressure on banks, they also need to be able to bear or tolerate some of the risks themselves.
WJ, China Merchants Bank Investment products have undergone big changes in recent years. When private banking started in China, most clients wanted basic financial products: real estate, equities and basic deposit services. In recent years their demands have become more diversified, which includes private equity and trust products. These popular products were demanded by clients due to higher returns and greater equity security. Over time, their investments have become more diversified to hedge funds. Last year the mainland stock markets didn’t perform well, so these clients began to recognize the importance of hedging their investments. Clients increasingly demand a package of solutions. Banks should ultimately offer a single platform providing a one-stop-shop for customers that issues investment advice, financing for individuals and their businesses, and advice on tax issues, cultural issues, legal issues and guidance on how to improve their quality of life. In China, we don’t have inheritance laws or capital gains tax, but when it comes to the migration of capital to other countries, we might find a need for such laws. A lot of customers demand advice on this subject. Also, in the past, clients tended to focus on basic products, but increasingly they are demanding non-conventional products. Over the past year, for instance, private equity services have become more fashionable, but we still insist on assets allocation, instead of product pushing. This is where education is so important, for both the banking provider and the client. Increasingly, non-financial services will get mixed into the portfolio, including investments in wine or fine art. Then there comes the issue that most HNWIs really care about: the education of their kids. For wealthy individuals emigrating to other countries, education is at the forefront of their thinking. Even though higher education is improving rapidly on the mainland, most wealthy Chinese still want to send their children overseas to study: this trend isn’t going to change soon. There is huge potential demand here for private banking, in terms of providing this type of value-added service to clients.
Euromoney What is it that the first generation of high-net-worth clients want, and what do next-generation family members seek from their private banking providers?
HWQ, CICC The second generation isn’t powerful yet in most cases, as most first-generation clients in China are still only around 40 or 50 years old. But many in the second generation do understand finance. Many are studying finance, at home or overseas, and shadowing their parents at their place of business: executing decisions, or assisting them in managing their wealth. So in some if not all cases, they have an even better understanding of professional financial services than their parents, hence they are more appreciative of private banking.
KJ, China Citic Bank I’d agree that a lot of second-generation members are more knowledgeable on financial matters than their parents. They may not be inclined to take over the family business, but many have been educated overseas, with many taking MBAs and finance degrees, so they understand innovative financial products and the importance of having a diversified investment portfolio. These second-generation members are thus more likely to be willing to try out private banking services, as they implicitly trust what professionals can do for them. They are willing to take on more financial risk, and they recognize that risk often dovetails with both preserving and enhancing the family’s fortune.
Euromoney Where do HNWIs reside in the main part these days in China? I assume many live on the east coast, but many entrepreneurs have also made their fortunes in natural resources, particularly in inland provinces in the northwest of China.
KJ, China Citic Bank Surveys have shown that two-thirds of HNWIs are spread across six provinces: Beijing, Shanghai, Guangdong, Zhejiang, Jiangsu and Fujian. That sits in line with the economic situation in China and with government policies. But the economy, and the spread of HNWIs, is more diversified than that. I have a client and a friend who is one of China’s coal barons. He has a lot of basic coal resources and his business is expanding, so he is diversifying his own investment portfolio into real estate, a market that has always delivered strong returns. This client is very special – he has daughters but no sons, so he’s thinking about ways to transfer assets to his daughters that would not see them leached away by future sons-in-law. That for him is a very special issue, and it’s a complex issue to solve. We are providing him with a range of potential products: ways to pass over his wealth only to his daughters and to no one else. Currently, our services and products cannot satisfy his needs. Yet as the market develops here, we are building trust products tailored to his specific needs that will solve this problem.
HWQ, CICC The coastal regions of southern and eastern China are developing faster than inland cities, and that is driving demand for private banking services in those regions. Then there are resource-oriented provinces such as Shanxi, Shaanxi and Inner Mongolia, where the private sector is developing very fast, and where wealth is accumulating rapidly. This is the kind of inland region that would have a high demand for private banking.
LXD, Research Center of Chinese Banking I feel we should discuss here the curious case of China’s coal barons. These are really special cases. These people really know how to create wealth and how to preserve it. They are very sensitive to information, they have earned a lot of money, and a lot of opportunity has opened up before them as a result. So wealth managers need to be careful when asking what sort of private banking services they would demand. In many cases, coal barons from [the inland northwestern province of] Shanxi and other coal regions are likely to want to buy real estate in Beijing and other major cities. And then they aren’t going to buy just one apartment, but the whole floor or the whole building. These guys are really good at creating, managing and increasing their wealth.
HWQ, CICC Coal barons have a very clear work objective. They want to maintain the value of their assets, see them appreciate. Many of them are far more educated than in the past: some hold bachelor and even masters degrees, so they understand complex financial instruments. Some want to make the leap from the coal industry to the finance industry as they want to build for the future and they recognize that coal is a finite resource.
Euromoney In terms of the banks here today, what would you say your brand is when it comes to private banking? What is your expertise – and what can you offer clients in terms of wealth management that other banks cannot?
KJ, China Citic Bank In terms of both services and products, various banks are developing their brands and consolidating their internal resources. At China Citic Bank Private Banking, we have a strong parent group, Citic Group, and a strong platform to support our wealth management services. And where needed, we can blend our services together to provide private banking solutions. Our Citic Trust company is number one in China, and our Citic Securities company is also one of the best-recognized companies in the country. We have Citic insurance, private equity, fund management, asset management. We also have cross-border capabilities thanks to our international platform, notably through our joint cooperation with [Spanish lender] BBVA. This allows us to expand our presence through Europe and to the Latin American market, and to learn from BBVA’s excellent pension scheme programmes. And in terms of product design and global reach, we also have our Citic Bank International (CBI) operations in Hong Kong, as well as in important cities such as New York and Singapore. Currently, our private banking businesses are also spreading to our overseas presences, so our global reach is also one of our key strengths. Finally, we are very strong in business and corporate banking, and accounts on the corporate banking side can also provide us with potential private banking clients. The international and investment divisions of Citic Group also enjoy a strong reputation worldwide and across mainland China.
WJ, China Merchants Bank In establishing a private banking operation, our purpose is clear. We want to offer optimized, differentiated services to upscale clients. We have invested time and money in nurturing an expert private banking team at our headquarters. We require our product managers and account managers to provide investment advice to our clients. And we also have a committee established to collate and predict the direction of the markets and to suggest asset allocations and guidance every quarter. Account managers will then draw up tailor-made products and services and adjust them according to customers’ needs. In a few years’ time, we will have more clients asking for these tailor-made solutions. It takes time to build up the specialized team and improve the service level.
ZHL, Agricultural Bank of China We have a lot of homogenous or conversion products in China, but we also have a wealth of differentiated services tailored to specific customer segments. Every bank offers a broad selection of products, and that’s because different banks have different customer bases. At Agricultural Bank of China we focus more on private entrepreneurs and private business owners. After decades of economic development in China, they left the country for the city and built up their fortunes along the way. They have grown with us and we are growing with them. Even though we have a strong relationship with our clients, the challenge here is whether we will be able to grow with them for ever. You have to innovate and transform, improve your service functions, promote asset management and build up specialized teams for private banking to become a specialized institution. Our customer resources include 390 million individual retail banking accounts, thus serving them well also requires constant innovation on our part.
HWQ, CICC CICC is a bit different from commercial banks, as we are primarily a brokerage and the best investment bank in China. We aim very high and, given that we have completed IPOs for the best and biggest mainland firms over the years, we have access to the best and highest-quality HNWIs. We have invested heavily in researching and understanding the market, spending a lot of time and effort in learning who our clients are, what they want, what services we should aim to provide them with. Every key account has its own client manager, meaning that our wealth management programme is managed by the best experts that we have.
Euromoney Increasing numbers of wealthy mainland Chinese are seeking to move their personal assets overseas. How much potential is there for private banks in China in terms of offering clients help in exporting their wealth?
HWQ, CICC HNWIs in China have a long history of investing their fortunes overseas. One reason is asset allocation. Another is the education of their children, which is supported by the judicious acquisition of real estate. For example, many have sons and daughters who go to UK or US universities, meaning that they buy apartments for them overseas. Others buy property in Hong Kong, where the demand from mainland clients is particularly large. When the renminbi becomes fully freely convertible, the amount that Chinese HNWIs invest overseas will surge.
KJ, China Citic Bank Our clients at CNCB Private Banking are conservative people. Their first need is to be allowed to travel and live overseas; then comes the need to educate their children at foreign schools or colleges. Then comes the need to transfer assets overseas, and after that the need to gain access to foreign currency, then the requirement to invest in that currency and, if required, to convert their Chinese investments into that currency. That ability helps them preserve and appreciate the value of their assets. So we provide the ability for them to carry out these wealth management services in Hong Kong and elsewhere. If our onshore private banking customers have overseas wealth-management demands, based on risk controls and regulatory approval, we could help them to open accounts in our subsidiaries in CBI Hong Kong or our other overseas presences, as well as advise on choice of investments, portfolios and asset allocation. The account opening process will be completed via our certifier accounting opening service and our customers have no need to travel to Hong Kong or abroad.
ZHL, Agricultural Bank of China A lot of people are more willing to invest in the capital markets than in the real economy in China because investors in the real economy might take more risks than those in capital markets. The investment environment of foreign real economy markets is much better than that of China: for example, mining investment in Canada and Australia. As such, many clients, if they could, would prefer to place their earnings in foreign markets.
JB, KPMG I would say that trust companies more so than any other institution have been the major driver of financial innovation in China’s financial services sector. They also have access to the widest range of asset classes of any other wealth management institution in the country. Although there will likely always be a desire among HNWIs to place some of their wealth overseas, the development of a thriving alternative assets market tailored to the demands of Chinese HNWIs will clearly minimize that outflow.
Euromoney Is it difficult sometimes to get a total and unencumbered picture of the full range of assets held by your clients?
LXD, Research Center of Chinese Banking Not so long ago, if you were at the top of your industry, particularly during the reform and opening-up period [from the late 1970s], many people would have had lots of questions and doubts about how you made your fortune, how you earned your first bucket of gold. These days, the situation is better. Wealthy individuals are more relaxed about revealing how they made their money and how much money they have. New clients are often wary of revealing how much they are worth, but as you get to know them more, they begin to open up and communicate with you about their assets, telling you how much they have, where their assets are, and in what form they are held. When you are their friend, when the trust level has built up, they confide in you – but you need to have patience.
KJ, China Citic Bank Clients are always very demanding. In wealth management, they always want to know the level of risk they face, what returns we can promise them, so it takes time to build trust with clients, as it does everywhere around the world. In most countries, you will find that clients spread their wealth across not one but two or three banks, with their assets diversified across multiple portfolios.
Euromoney How far is the private banking industry in China away from catching up with the west? How developed is the market in China right now, and how much farther does it have to go?
HWQ, CICC If we assume that private banking has been around in most western countries a century, that means we are theoretically 95 years behind, given that private banking in China is really only about five years old. But in reality, even though the industry is so young here still, we aren’t so far behind. We are learning fast. Just as China’s economy has boomed over the past two decades, so we believe the gap between China and advanced markets will shorten when it comes to wealth management. I believe it will only take another 10 or 15 years to catch up with the west, assuming we have free convertibility of the renminbi, better laws and regulations in place, and a full, working legal system.
WJ, China Merchants Bank If investment transactions are processed through banks, there will be sources that you can track down and verify, but if everything is done by cash – and currently, a lot of transactions are made in cash in China – it’s hard, and even impossible to record when and how investments have been made. Also, sometimes, clients are unwilling or unable to provide the sources of their incomes. Regulators demand that banks report all of our transactions on behalf of clients, yet as we have seen, this isn’t always possible. Sometimes, it’s a mission impossible for banks to stick to every single market regulation.
KJ, China Citic Bank Internally, we have a lot of things to learn from foreign banks in terms of institution-building. Before we talk more about our organizational structure, we need to focus on supporting business development. Advanced private banks overseas have independent operations; they are independent legal entities staffed by professionals who know how to consolidate and allocate resources. This institutional guarantee is very important. Another thing is the service model. We talk a lot inside the bank about investor/client education. When it comes to embracing the concept of asset allocation by clients, there is an education gap between Chinese and foreign clients. While foreign clients might have been with a private bank for generations, for Chinese clients this is all new. So there is a process of education, and when it comes to segmenting clients, there is still a long way to go. Currently, we categorize clients based on the amount of money they have rather than their specific characteristics or needs, and this service model needs to be improved. Also, a divided operation that separates private and commercial banking cannot meet the demands of some mixed-operation services. You need to follow certain criteria in taxation and insurance to be a private banker. So on the one hand, the challenge is one of personal knowledge growth; on the other, there is the issue of platform development, and the gap between Chinese and foreign clients. We need to build up our internal capacity and learn from foreign private banks.
Euromoney What are you doing to educate clients on assembling the right portfolio of investments for them?
WJ, China Merchants Bank Clients are being gradually educated. Our professional investment advisers will explain to our clients the investment risks, and they learn how the products were designed and get to understand how the products perform. Of course, with high returns, there will be higher risks, and the question then becomes how much risk the client will tolerate. At the beginning, when private banking was still a novel concept, clients might ask for returns of 5% or 20%, or even 80%, with no risk. It takes time to educate clients, to explain that you can’t find a risk-free product offering sky-high yields. These days, it’s rare to find clients who demand risk-free annual returns of 50%, as most of them now understand the cold, hard reality of investing.
ZHL, Agricultural Bank of China In China, building a portfolio is still a messy concept. Sometimes people seek only short-term profit instead of focusing on building long-term portfolios. Even the banks do not have a consensus on what sort of services to offer. We primarily sell short-term products – we don’t always look to build a balanced portfolio of clients’ assets, and that is not real asset allocation.
HWQ, CICC Many clients are investing in short-term fixed-income products. It’s because we don’t have other products to offer them, rather than because the client demands these products. We would like to offer a much broader range of financial instruments, from high-yield debt to funds and foreign-listed stocks, but regulations limit our ability to do that. Most clients are desperate for better products to come to market.
Euromoney How quickly are trust companies evolving in China? And what can they offer that private banks currently cannot?
HWQ, CICC Trust companies in China are developing step by step. No Chinese financial institution, not a single one, can provide a full range of banking services. So more than ever, trust companies play a key role as a financing tool, helping build and offer financial services that commercial banks and brokerages cannot offer.
JB, KPMG I completely agree with that. There are a lot of trust companies in the west, but they are completely different from trust companies in China, which are institutions that really are unique to China. While I am hesitant to make a comparison with any western financial institutions, if pressed I would say that they most resemble hedge funds with lending capabilities.
ZHL, Agricultural Bank of China In China, we can deal with this kind of trust company. But 90% of the heads of trust companies in China think in a short-term way. They lack enough innovation on trust products in personal wealth management.
Euromoney Where is private banking heading in China? What issues face the budding industry – from tax and regulatory issues to inheritance rulings? And what services do clients increasingly demand from private banks?
HWQ, CICC Most clients should choose a mixture of long-term and short-term debt investment products to balance out risk differentials. They also need to consider how economic cycles pan out domestically and in foreign markets. If we take all of this into consideration, we can really make good progress with private banking in China. An entrepreneur can’t look after their burgeoning fortune alone. It takes teams of professionals to do that. And we have big decisions to make in this country such as how inheritance tax will work; how to create a viable, working trust system; and how to allow families to see their wealth get preserved, then to watch as it grows.
WJ, China Merchants Bank Inheritance is already becoming a hot topic in private banking. Some recent examples spring to mind. One of our clients, a successful entrepreneur, has an autistic child. So even though he is very rich, he is seeking to both protect his wealth and to guarantee a good life for his child. We don’t have trust products right now, but when we do, we can create some special insurance products to help our clients to do both of these things. Another example is one of our clients who bought a lot of real estate. He wanted to avoid paying any tax in the future, so he transferred the property to his children’s names. But unfortunately a son went to Macau a few years later, lost a lot of money – around Rmb75 million. Our client had to go through the process of selling all his real estate to settle these gambling debts and ended up with nothing left. These are issues that you can’t always plan for, but which we need to always discuss with our clients.
ZHL, Agricultural Bank of China At Agricultural Bank of China, of our private banking clients, only around 5% want to invest in equities; the rest aren’t interested in the stock market. About 15% want to buy funds, while 30% are keen to plough their earnings into wealth management products. And the proportion of assets invested in real estate is a little high. It is evidence that each of our clients have very different needs.
WJ, China Merchants Bank Private banking clearly has some great advantages, both for the bank and for the client. It allows us to build a platform from which we can set up profiles of all of our clients, creating portfolios tailored to each client. We can then design the perfect portfolio, combining the various trust companies, brokerages, insurance firms and pension companies we cooperate with. For banks, the important thing is to manage the relationship we have with our clients. If you can become part of the client’s family, gaining their trust and moving in their circles, they will start telling you their past investment experience and what they expect from their financial partner. This will help you provide them better advice and pull together a portfolio that best suits their needs.