Asia private banking 2014: Meeting China's high-net-worth demands

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By:
Rob Hartley
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As China’s wealthy become more investment-savvy, domestic banks will have to expand or look for new partners

The remarkable rise in China’s wealth has captured the world’s attention. China should become the planet’s richest nation some time in the near future, firmly marking out the 21st century as its own. And as the country’s wealth and prosperity have risen, so have the individual fortunes of some of its more industrious citizens. Newly-minted millionaires and billionaires grow in number every year and are demanding an increasingly sophisticated approach to the management of their wealth.

The ever-increasing wealth of Chinese customers means domestic banks are under heavy pressure to provide the services required by globally-minded businessmen and their families. As the tastes of the Chinese elite change, and they venture further and more often outside China, the demands they place on those managing their wealth also change. Chinese private banks are acutely aware of this as they strive to keep track of their lucrative clients’ preferences.

Liu Jianjun, executive vice president of China Merchants Bank (CMB), tells Euromoney that the demands of high-end domestic clients for the allocation of assets globally have increased with the internationalization of the renminbi and globalized capital. He also highlights figures showing that in 2012, the overseas component of the total assets of high-net-worth individuals (HNWIs) increased to 20% from 10% two years earlier.

“As a commercial bank based in mainland China, China Merchants Bank is expanding its global private banking service to match the increasing client demand,” he says. “From the very beginning, we focused on the global asset allocation demands of high-end domestic clients. Compared with the global market leaders, local banks will need time to develop and build up competitiveness in the private banking arena.

“In the meantime, we will mostly focus on areas where we have an established familiarity. CMB has experienced continuous and rapid growth in its private banking business over the past seven years, building a stronger brand name, competitive advantages in the market and becoming a leader in the domestic private banking industry.”

He adds that the biggest challenge in allocating assets globally is how to introduce overseas products to local high-end clients and help them to understand the risks and returns.

The exact figures are always going to be tough to record in China due to sensitivities about publicizing fortunes, but Boston Consulting Group says millionaire households in China rose from 1.5 million in 2012 to 2.4 million in 2013. On a global scale, the US is still well out in front, but this figure puts China ahead of Japan, which now lags in third place. It would be a safe bet to assume the figure will keep rising, creating more demand for private banking services from Chinese clients. It is not just local wealth managers that covet a role in meeting this demand.

Foreign partnerships

The need for a global outlook has sparked various tie-ups with foreign firms, providing a convenient route for Chinese firms to expand their wealth management services without having to grow organically. Thomas Meier, member of the executive board and region head Asia-Pacific at Bank Julius Baer, says his company has been in strategic collaboration with Bank of China since mid-2012. And Meier thinks it is very likely that there will be more partnerships between Chinese and foreign banks in the private banking sphere.

meier
“The number of Chinese high-net-worth clients continues to grow, their needs become more sophisticated, and the fluidity between onshore and offshore markets increases”

Thomas Meier, Julius Baer

“The number of Chinese high-net-worth clients continues to grow, their needs become more sophisticated, and the fluidity between onshore and offshore markets increases,” he says. “Therefore, we expect that more partnerships between Chinese and foreign institutions in the private banking space would be forged.”

The benefits to Chinese firms of teaming up with international private banking firms are numerous, according to Meier. “Chinese HNW clients are increasingly globalizing their business, investments and residence, while the inter-generational transfer of family wealth is also happening. To offer advisory and solutions in these areas, Chinese banks can benefit significantly from the expertise and global network of leading international private banks.”

And, on the flip side, foreign banks stand to reap a series of benefits from their associations with Chinese firms, whatever form those associations take. “For the international private banks, China is definitely one of the key growth markets,” adds Meier. “The Chinese banks have a vast onshore HNW client base as well as onshore RMB product capabilities, which are of great interest to international private banks and could be accessed via a strategic partnership.

“On a broader note, as RMB gradually becomes an international currency supported by the rise of offshore RMB centres and cross-participation mechanisms, such as QDII, R/QFII and the HK-Shanghai Stock Connect, strengthen the convergence of onshore and offshore markets, Chinese banks and international private banks are motivated to work together to offer clients a total value proposition that reflects the globalized needs of Chinese clients.”

Initiating a partnership of some kind with a Chinese private banking operation does appear to be a successful route into the country for some, but it is more questionable whether any foreign private banks have had success attempting to do business in the country on their own. According to one Hong Kong-based private banker, who asked to remain anonymous, foreign private banks struggle to turn a profit in China.

“There are several reasons for that,” he says. “One is that China is a heavily regulated private banking market. Also, since the sensitive issue of trust products came to light, a bank in China can only sell its clients balance sheet products, deposits, loans, structured deposits. It can’t sell securities, it can’t sell funds. It can’t do what makes the essential part of a private bank’s business. You will have to go to a securities house for the bonds and stock, you have to go to a funds house for the funds. And since it is not the culture of private banking clients in China, particularly, to pay just for advice, it’s very unlikely that you would be able to [create] a viable model. This is why private banks that are present in China are there mostly for prestige reasons and very, very high-level strategic reasons.”

The banker insists that this inability to make profits in the Chinese private banking industry remains the main barrier to entry for any foreign company looking to do business there. “When you can’t expect to make any real money, it is a huge barrier to entry.”

Barriers to entry in terms of regulation, he adds, include the restriction on the range of products that can be sold in China. “Second would be price control, although those laws have been somewhat relaxed on how much you can earn during a project, or charge on a loan, but there is a strong control over what one does and what one can’t.”

Competition

Outside China, there is a different picture altogether. The large, globally established private banks are more dominant in the traditional Asian offshore centres and beyond. The established brand names have cultivated their reputations for years and have a deep understanding of the business.

“Foreign banks dominate the market,” the banker continues. “The Chinese banks are all investing quite heavily in private banking. But they are not competitors yet, in the broadest sense of private banking. I think they are moving upwards, starting with their retail branches and moving up to premium banking, sort of affluent wealth management.

“The thing with private banking is that it’s an industry where you need to invest for a very, very long time, before you get the right relationships, before you get the right offering, therefore before you are able to attract the kind of bankers that will bring the right kind of clients, unless you are able to channel the clients from your corporate banks. Chinese private banks haven’t yet acquired the breadth of product offering and the credibility in terms of advice that a full-scale private bank requires.”

But will this change? Can we expect Chinese private banks eventually to branch out of their home market and use their acquired knowledge and relationships to challenge the most established private banks on their own turf? These are questions that don’t seem to worry the big players, in the short term at least.

“If you have a long timeframe, I think so, undoubtedly,” adds the banker “A number of big banking conglomerates have developed private banking activities, so there is no reason why the Chinese banks wouldn’t achieve that. The question is what sort of timeframe we are looking at. When you look at who is truly established as an important international private bank, you take the top 10 say in the world, these are all banks that have taken a long time to establish themselves. Newcomers are very rare in that industry. I think we are talking quite a long timeframe.”

The growth of China and the increasing wealth of its citizens are set to continue on the remarkable upward trajectory of recent times, which can only accelerate the need for private banking services. However, it is far from clear who will take the spoils in this high stakes game to manage the wealth of some of the globe’s newest millionaires and billionaires.

Domestic Chinese private banking is developing at a strong pace, but remains a difficult market to penetrate for foreign players. In the meantime, this gap is increasingly being bridged through cooperation and partnerships between Chinese and foreign private banking institutions. And while rich Chinese still have the option to employ the services of globally established wealth managers outside their home country, the possibility that they could one day be offered a universal range of services from a globally established domestic Chinese player cannot be discounted.

In the meantime, the battle to manage wealth in China is set to continue, with plenty still to play for. And only those that can offer the newly wealthy exactly what they want at the right price are likely to prosper in the future.