For­eign banks re­tool­ing prod­ucts for the new Chi­nese rich

Some off­shore in­sti­tu­tions are strug­gling to find the best way to gen­er­ate prof­its from China’s wealth man­age­ment sec­tor, Xie Yu re­ports from Shang­hai

China Daily (Canada) - - BUSINESS -

The swelling wealth in China is at­tract­ing for­eign fi­nan­cial in­sti­tu­tions in a prover­bial gold rush, but ex­perts sug­gest it’s wise to look be­fore leap­ing.

The term “pri­vate bank­ing” was brought to China by for­eign banks in about 2006. Seven years later, the mar­ket has grown sig­nif­i­cantly, but for­eign in­sti­tu­tions still strug­gle to find the best way to gen­er­ate prof­its here, ac­cord­ing to Jimmy Le­ung, head of bank­ing and cap­i­tal mar­kets at PwC China.

“Based on their ac­count books, al­most no for­eign branch is mak­ing money in the China mar­ket in the pri­vate bank­ing seg­ment,” he said.

Each year, dozens of re­ports come in from many dif­fer­ent con­sul­tan­cies, all claim­ing that China’s wealth has bro­ken a new record and that op­por­tu­ni­ties for wealth man­age­ment abound.

Ac­cord­ing to a re­port is­sued by McKin­sey & Co in late Novem­ber, by 2015, the na­tion will boast more than 1.9 mil­lion high-net­worth fam­i­lies (with in­vestable as­sets of more than $1 mil­lion). And to­tal in­vestable as­sets are pro­jected to hit 58 tril­lion yuan ($ 9.5 tril­lion).

But ac­cord­ing to the re­port, only a very small per­cent­age of the high-net­worth fam­i­lies (HNWFs) or in­di­vid­u­als (HNWIs) will cre­ate prof­itable op­por­tu­ni­ties

1.9

the num­ber of high-net-worth

fam­i­lies in China by 2015, ac­cord­ing to a McKin­sey & Co for the for­eign banks.

“The ma­jor­ity of the HNWFs, based on the $1 mil­lion as­sets thresh­old, are ac­tu­ally mass af­flu­ence. They are not the tra­di­tional tar­get clients of for­eign pri­vate bank­ing,” Le­ung said.

Mass af­flu­ence, ac­cord­ing to Le­ung, refers to the af­flu­ent mid­dle class that has emerged in China in re­cent years. They make

pri­vate good pay, own homes and cars and show a will­ing­ness to buy fi­nan­cial in­stru­ments such as bonds, se­cu­ri­ties or de­riv­a­tives for wealth gen­er­a­tion.

But that is not the tra­di­tional strong­hold of for­eign pri­vate bank­ing.

“They ( for­eign banks) are, let’s say, quite strong in fi­nan­cial in­stru­ments in­no­va­tion in over­seas mar­ket. But it is a to­tally dif­fer­ent story in China,” Le­ung said.

Be­cause China’s mar­ket is at its ini­tial stage of fi­nan­cial in­no­va­tion, the au­thor­i­ties are tak­ing a con­ser­va­tive ap­proach to fi­nan­cial in­stru­ments in­no­va­tion.

A highly st ruc­tured de­riv­a­tive prod­uct with an ex­pected re­turn rate of 15 per­cent sold in the United States would never get ap­proved here, Le­ung ex­plained.

“We are deal­ing with, mostly, first- gen­er­a­tion HNWIs. They are self­s­tarters, hav­ing made for­tunes with their own hands in the past decade, and are more than ca­pa­ble of mak­ing fi­nan­cial de­ci­sions them­selves,” said James Xi, gen­eral man­ager of a third­party wealth man­age­ment in­sti­tu­tion based in Shang­hai.

Many HNWIs seek to shift the man­age­ment of their money to banks, “but I do not think a lot of them are used to pay­ing con­sul­tants. We just don’t have that cus­tom in China”, he added.

More­over, for­eign banks have fewer client re­sources, com­pared with Chi­nese play­ers who have been op­er­at­ing in the mar­ket for dozens of years, with State-owned back­grounds and wide­spread branches.

In Septem­ber, three Chi­nese banks — In­dus­trial and Com­mer­cial Bank of China Ltd, China Mer­chants Bank Co Ltd and In­dus­trial Bank Co Ltd— re­ported prof­its from the pri­vate bank­ing sec­tor.

China Min­sheng Bank Corp said in its semi­an­nual re­port that per­sonal bank­ing clients had

in­creased to 12,300 by this June. As­sets un­der man­age­ment grew to 172.8 bil­lion yuan, up 35 per­cent from the end of 2012. A way out

But the for­eign play­ers seem un­daunted. Banks in­clud­ing UBS AG, Citibank and Stan­dard Char­tered Plc said they have no in­ten­tion of leav­ing China.

On the con­trary, many are reshaping their mar­ket strat­egy, with a reval­u­a­tion of their own ad­van­tages.

“For for­eign banks, the way out is to fo­cus on pre­mium clients and off­shore busi­ness,” ac­cord­ing to Le­ung.

“Our tar­get clients are high­net-worth in­di­vid­u­als with as­sets above $2 mil­lion and ul­tra HNWIs (with as­sets above $50 mil­lion). And the lat­ter are more im­por­tant to our strat­egy,” said Si­mon Jin, pres­i­dent of UBS (China) Ltd.

“Wealth man­age­ment has been the core busi­ness of UBS. We have been op­ti­mistic about the Chi­nese mar­ket and are ac­tively in­vest­ing here,” he added.

The Swiss bank­ing gi­ant be­gan pro­vid­ing wealth man­age­ment ser­vices to the China mar­ket six years ago, mainly through the UBS Se­cu­ri­ties plat­form.

With a lo­cally in­cor­po­rated, wholly for­eign-owned bank set up in Bei­jing in 2012, it was able to in­crease its on­shore busi­ness in China and di­ver­sify prod­uct of­fer­ings in­clud­ing struc­tured de­posits, QDII prod­ucts and lend­ing so­lu­tions for wealth man­age­ment clients.

“Our ser­vices and strengths are dif­fer­ent from other banks,” Jin said, stress­ing that rather than sell­ing wealth man­age­ment prod­ucts, UBS is pro­vides “client-cen­tric ad­vice” and in­te­grated ser­vices lever­ag­ing its in­vest­ment bank­ing and as­set man­age­ment ca­pa­bil­i­ties.

UBS Wealth Man­age­ment han­dles 210 bil­lion Swiss francs ($234 bil­lion) worth of in­vested as­sets in the Asi­aPa­cific re­gion. As for the China mar­ket, Jin said it is “still in the ini­tial stages”.

“We are at the ex­pan­sion stage now, and we will grow very fast in the next few years,” he said, adding that UBS plans to open more branches in China.

HNWIs in China tend to use pri­vate bank­ing ser­vices mainly for fi­nan­cial prod­ucts in­vest­ment, and con­sul­tancy ser­vices are less im­por­tant to them, Citibank said in an e-mail to China Daily.

Some high-net-worth in­di­vid­u­als don’t even know that more pre­mier pri­vate bank­ing ex­ists above VIP per­sonal bank­ing ser­vices. It will bring op­por­tu­ni­ties for Citi to de­velop more clients in this sec­tor through pro­fes­sional as­sets man­age­ment ser­vices, the bank said.

Trea­sury

in­vest­ment, in­clud­ing wine and fine art, which re­quires strong ex­per­tise and ex­pe­ri­ence, is a tra­di­tional strength of for­eign pri­vate banks, Le­ung said.

Non- mone­tary in­vest­ments, such as buy­ing mines in Aus­tralia or buy­ing rub­ber plan­ta­tions in South­east Asia, also are bet­ter con­ducted by for­eign banks, which are ex­pe­ri­enced in suc­ces­sion plans, pri­vacy pro­tec­tion and se­cu­rity, as well.

“Rich peo­ple in China are keen to in­crease their wealth through in­vest­ment,” Xi said.

“Worth not­ing,” he added, “is their aware­ness and will­ing­ness to in­vest over­seas, which has surged in re­cent years, with more peo­ple send­ing chil­dren abroad for ed­u­ca­tion, and em­i­grat­ing.”

China’s econ­omy has been boom­ing for years, but its growth is slow­ing down.

On the other hand, the trend for the Chi­nese yuan to ap­pre­ci­ate against the US dol­lar makes over­seas as­sets more at­trac­tive to China’s wealthy, he added.

In this re­gard, for­eign banks, with global net­works and long ex­pe­ri­ence in global as­sets al­lo­ca­tion, have an edge.

Mean­while, as China pushes for fi­nan­cial re­form and grad­u­ally loosens con­trol over cap­i­tal ac­counts, off­shore in­vest­ment will be­come even more pop­u­lar, Xi said.

The Peo­ple’s Bank of China said in a guide­line in early De­cem­ber that it will per­mit busi­nesses and in­di­vid­u­als to open off­shore ac­counts in the China (Shang­hai) Pi­lot Free Trade Zone, a sig­nif­i­cant step to­ward lib­er­al­iz­ing strict con­trols over cap­i­tal ac­counts and eas­ing in­fla­tion­ary pres­sure on the na­tion’s mount­ing for­eign ex­change re­serves.

“It could of­fer great op­por­tu­ni­ties for us to ex­pand our ser­vices, and we are closely fol­low­ing the de­tails,” said UBS’ Jin.

Of­ten, peo­ple with such needs for wealth man­age­ment al­ready have opened ac­counts abroad, Le­ung said.

Thus, par­ent bank­ing or­ga­ni­za­tions make money from Chi­nese clients but not nec­es­sar­ily the Chi­nese branches, he noted.

Some for­eign banks are low­er­ing their thresh­olds for open­ing pri­vate ac­counts in China as a way to fos­ter more prospec­tive big clients.

Stan­dard Char­tered has in­te­grated its pri­vate bank­ing depart­ment into a wealth man­age­ment depart­ment in China from this year, and low­ered the thresh­old for pri­vate bank­ing from $1 mil­lion to $500,000.

It makes sense to de­velop new clients from the emerg­ing new rich, Le­ung said.

But the core strength of for­eign banks is off­shore busi­ness. Based on the cur­rent sit­u­a­tion, they can op­er­ate it off­shore as well, with a co­or­di­nated team based in China, he said. Con­tact the writer at xieyu@ chi­nadaily.com.cn

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